Issue 1. Trading Discipline - Gerd Gwiss I would like to introduce myself very briefly.

I am involved in futures trading since 4-years. I am working as a broker for half-a-year in Vienna, Austria. The topic I would like to discuss is a very old one: "Discipline"! I made a lot of trades in very different markets. My trading philosophy is basically 100% technical. I'm a very big fan of technical analysis and technical trading systems. My very special trading vehicle is candlesticks combined with stochastics or sometimes a different oscillator, but I don't concentrate on the oscillators because they are more or less the same. I really concentrate on candles. I am also using Swing Catcher because I think it is a really excellent program, but I use it in connection with additional systems. Swing Catcher was the first software I used and I want to explain my experience and show some big mistakes that I made. I received the software and installed it immediately. I had it run very quickly. The only problem I had concerned the data feed from CSI (Commodity Systems, Inc.), not due to CSI, but due to my modem. At this point, I want to thank Dave because he really supported me in an excellent way! I had a view at the performance of the last month and I was really surprised. I decided to trade the German Deutsche Mark and Swiss Franc futures (in low risk trading mode) because they showed a wonderful profit (the first nonsense, because these markets are highly correlated as I knew, but I was blind already seeing the profit on my account). The first order was placed to buy DM. The dollar was around 1.49 and from the fundamental point of view, the buck was a buy but I decided to follow the system (that was ok). The dollar came down to 1.46 and my DM-position was perfect. One day after the long-DM, the system came up with a buy signal for SF and I decided to go long. I have to mention that it was ok because I strictly followed the system concerning entering the market and concerning the stops. Both positions were winners, but on the same day the German Bundesbank crossed my trading plans. Buba was intervening heavily by selling Deutsche Mark. I was stopped out on both positions with an absolute crazy fill on the Swiss Franc. The DM locked in a profit due to an adjusted stop, but the loss in the SF was bigger and I suffered a net loss of about $1500. I was shocked. My account then showed a balance of $400 credit. Now I recognize my second stupid mistake: I simply overtraded my account. Two positions in highly related currency futures in a $1900 account doesn't make sense! I stopped trading due to lack of money. As a poor student I could not afford to loose additional money. Iwatched the system and a friend traded some signals for his account. He made two loosing trades and then told me that the system is no good. After thinking about the whole problem, I came to the conclusion that he was absolutely wrong. He and I already made our third big mistake. You have to follow a system strictly for a longer time and not stop trading after two loosing trades. These trades are simply not significant. Then we watched the following signals, which were excellent and resulted in big profits, but we had no positions.

1

My friend revised his opinion concerning the system very quickly and became a big fan. That was the fourth mistake, because these few winning trades were also not significant. He started to trade the signals again and although he would have made profit on the next trades, he actually did not because he did not follow the recommended stops!!! That was the fifth mistake. He generally is no friend of stops, which is of course reflected in his account balance. After trading two years without using the system from the beginning of the before mentioned trade, he lost about $75,000. Of course, the system was called no good again after doing the before mentioned last trade using the system but NOT using the recommend stop. That was the next big mistake. He always shifted his inability to make profit. Although it was obvious that he made a wrong decision by not using the recommended stop, he said that the system is good for nothing. He then traded using his "feeling" and lost a lot of money. But of course, it was not his mistake. "The market reacted the wrong way," he told me, "they are playing against you with the target to get your hard earned money." I told him that this was by far the biggest nonsense I ever heard in my life and asked him why he does not stop trading if he knows this fact. He was not able to give an intelligent and satisfying answer. He is still trading and of course still loosing money. I won't continue, but believe me I could tell you a lot of stories which would make your hair stand. I really believe that a successful trader needs three things: 1. Important - A trading system to find buy & sell signals that fits to the trader, which he is comfortable with. (It need not necessarily mean a computerized system.) 2. More Important - Money management techniques. That means you have to define your risk before entering a position and then place the stop and do not change it once the market is trading near the stop level. If you get stopped out, wait for the next signal to step in again, but do not alter the stop 20 times. It does not make sense. Don't trade to big numbers in relation to the size of your account. 3. Most Important - Discipline, discipline and discipline! Trade the signals as they occur. Use the stops under consideration of the risk you are willing to take and do nothing else! This "nothing else" is maybe the most complicated matter overall. The most successful traders are those who comply 100% to the system they are trading. If the system does not show the results you are looking for, choose or develop a different system with a new approach. Don't make the mistake of having a system and not complying with signals! If you can manage your mental environment to follow these three points, you can bet on your trading success.

Amazing & Hard-to-believe it can happen Computer Problems - Peter Speck I feel compelled to offer you an explanation of the predicaments/complications I've encountered during the past two months chronologically: 1. Late December 92 - Purchased Trendx 2. Early January 93 - Purchased new 486/33MHZ/213MB etc, computer system and modem to run Trendx 3. Early to mid-January 93 - a. Modem wouldn't function; b. Modem (FAX Type) would not connect to CSI; c. Computer store had incorrectly internally set jumpers wrong on initial set-up - hence modem would not call out.

2

4. Returned computer to store for investigation and repair of modem problem - after several days of trail/error, changes, etc. to no avail got modem operational (mid-January 93 plus 3-4 days) 5. Retrieved computer from store - modem internal switches supposedly now operational and set correctly. However, CSI computer would not connect with my FAX modem and transfer data. After further consultation and resetting some commands recommended by CSI, still no go. 6. After several more frustrating days with numerous attempts with the FAX modem (FAX & comm modem more specifically). I finally removed the FAX/com modem and replaced it with a 1200 baud (commonly no FAX) modem I had at home. Low and behold, it worked and connected with CSI computer and downloaded data - a very bright day. (Now I'll not throw the $3,000 system out the window). (CSI indicated FAX TYPE MODEM wouldn't operate with CSI system). 7. Several days TRENDX worked, getting signals following with my normal manual analysis in parallel to gain insight as to TRENDX trading scheme. (One needs to do that daily to gain confidence before putting $$ on the line). Things were working for about a week. HAPPY! 8. Very early February 93 weekend, Sunday, operating TRENDX for familiarity, reading manual, trying different options - all of a sudden everything shut down - Bottom Line - Lost HARD DISK - everything is gone - high degree of frustration. "I bought this system and software to save time. All it has cost me is $$ and additional time devoted to get it operational, yet I still had to continue my manual analysis to keep up with the markets." 9. Took computer back to store - they replaced HARD DISK - assumed all was OK. I brought home and then - modem which had worked, again would not operate. Several days of further consultation with computer store and CSI to try to get operational, ended in fruitless effort and failure. 10. I had called Trendx, to inform him of my problems in obtaining old data and he indicated that he would send me additional software updated parameters and data. Installed update upon receipt. 11. Mid-February 93, I had to return computer to store to troubleshoot Modem not operating (note @9., I purchased a tape backup system, to backup all files, programs, data, etc., in case I again lost hard disk. Loss of all on hard disk results in insurmountable problems w/loss of data, software, etc. and time consuming to install everything). When hard disk replaced, several jumpers were not correctly installed/set, hence the reason the modem would not operate. 12. February 12, 93 - I retrieved the computer from the store and supposedly all is OK. I had them checkout operations w/CSI and download data before taking system home. I'm very frustrated and tired of dismantling system. What a nightmare this has been, and I'm sure other obstacles lie ahead. I've only been able to operate the TRENDX program for about 1-week since I've received it. I've not made one "DIME" so far, but I've spent >$4,000 for the system, software and data. The cost to me emotionally cannot possibly be valued and measured -but I am "fit to be tied." None of this is Trendx's "fault" all the circumstances of course are unfortunate. The hard disk failure is extremely unfortunate, but the other problems are human interface with components in the computer and lack of attention to details I'm sure, from people at the Computer Store. I'll have to chalk that up to "life" or "that's life." Quality of service is a rare commodity.

Back-Up and Hard Disks - Paul Kirchhoffer I'd like to share a little story and say a few words about a nifty computer product that may be of interest to the group:

3

Bart struggled to his feet the instant he heard the door open. He was barley able to focus his eyes, as a man in a white lab coat walked down the hall towards him. For Bart, it had been a very long night. As a commodity trader, he was accustomed to dealing with bad news. He tried to push aside thoughts of that recent string of limit days in lumber and those New York fills that came back outside the official daily range.This situation demanded all the courage he could muster. It was beyond the emotions of fear and hope and greed. This had become a matter of life and death. The man in the white coat paused for a moment and motioned for Bart to sit back down. There was no need for words. Bart knew instinctively his hard disk was dead. Major bummer, he thought to himself. Then slowly, the reality of the loss began to sink in. It wasn't just that his hard disk was gone, it was the fact that everything on it was also gone. There was all that price data - daily data, weekly data, monthly data and even tic data. There were program files and personal records. And then there were at least a half dozen of those Holy Grail systems - you know the kind with nosebleed equity curves and $3,000 price tags. The technician at the computer store told Bart that he was lucky because his drive was still in warranty. Bart didn't feel so lucky. The salesman who had sold him the computer hadn't spent much time explaining the concept of making regular back-ups or why they are necessary. Which brings me to the point of this little story - when your hard disk dies, what will you do? There are several ways to back-up your hard disk before disaster strikes. The simplest and least costly way, is use your floppy disk drive and a backup utility program. In addition to being very slow, the disadvantage of this method is that it requires you to be physically present to insert and remove a bunch of floppy disks. A better solution is to install a special cassette tape drive designed for just this purpose. Remember, when buying a tape drive, you get what you pay for. Some inexpensive tape units require that you pre-format the tape cassette first and then make your back-up. This can take several hours on a fair sized drive. Still another solution is to add a second hard drive just for back-up purposes. Hard drive prices have come down and it's the fastest way to back-up your data. If you choose this route, you can even get a special hard disk controller that keeps a mirror image of your primary hard drive on the second hard drive. With this type of controller, if your primary hard drive should fail, your computer will continue to function with no down time at all. The disadvantage to using a second hard drive is that your backup will always be with your computer. If, heaven forbid, your computer should grow legs, your back-up data will be gone with it. Which brings us to what I consider to be the ideal backup solution. It's called the removable media drive. These drives combine the best features of tape drivers along with the speed of a hard drive. There are actually hard drives that use removable media cartridges. They are available in 45, 90 and 150 megabyte sizes. Think of them as super-fast giant floppies. Simply pop in a cartridge and copy or manipulate data. After making the copy, you can pop the cartridge out for safe storage or you can put it into a second computer at another location. It's great if you like taking your work between home and the office. Good prices on these units and other types of drives can be found at Hard Drives International (800-9988028). And now that you're thinking about your hard drive, why not check out a utility program like PC Tools or the Norton Utilities. They contain programs to de-fragment your hard disk and to scan a disk marking and deleting any potentially bad sectors before they become a problem. Good trading and may your back-up always be with you.

Finding the WAY - Danny Nip In late November, after studying the Bible, was baptized and became a disciple of Christ. Little did I know that my priorities are much different now than they were back then. You know that I do not have the funds

4

to trade, or lack sufficient "investment" funds. I still owe about $7400 as of today. My lust for money and materialism has put me through some tough times, it'll be another year before I can get out of my debts. At the time of purchase of Swing Catcher, I assumed that there was a possibility that I could find the time to paper trade it during the morning. Little did I realize that my priority is GOD, and that I spend my morning studying the Word. It has changed my life considerably. I now have a full time job, which I didn't have at the time of purchase, and my life has been great ever since. Having an on-going and supportive relationship with your customers is certainly a great part of your business, and has contributed to its great success. My original intent of having somebody manage my funds is more appropriate, as I rarely have time to do these things now. God has worked wonders in my life, and I hope to stay in contact with you. Because of the kind of customer support that you provide, I can safely assume that your program is outstanding based also on the performance records. I have installed the program on my computer, although I haven't used it. Perhaps there will be a time, when I can trade for fun and enjoyment rather than for money and materialism.

Serious Problems with Globex - Dave Green The commodity exchanges have recently added markets that previously traded during the day only, to the Globex, for trading during the evening and late at night. Most of the data vendors and newspapers (Wall Street Journal, etc) are reporting the day session and Globex prices, combined together. In fact, the exchange itself ONLY reports the COMBINED session and I have been told does not even maintain or keep a record of the day prices! Quite possibly, a reason the exchanges do not want to report the day session separately is because they think by only maintaining combined prices it may force traders to eventually start trading the Globex. However, every trader I have spoken with over the past few months have said they have never and likely will never trade Globex, for following reasons: (a) Globex does NOT allow limit orders, good until canceled orders, or allow stop-loss orders, thus placing the trader at great risk because of no stop-loss protection; (b) Orders are good for one Globex session only, and do not even carry-over to the day session, thus forcing orders to be constantly replaced. For example, if a trade lasts 5 days, just 1 open-order is necessary for the normal day session for the 5-day period, but a total of 6 separate orders would have to be entered by both you and your broker to effectively trade both night and day, during the same 5-day period; (c) Very likely poor liquidity and subsequent poor fills, with great slippage potential. That's because there's very few speculators and private traders using Globex. Most of the volume consists of occasional large block trades from overseas banks, etc.; (d) It's mentally exhausting and stressful simply trading during normal business hours. Few traders (myself included) have the desire, time or energy to trade around-theclock! If the trader is not actually trading around-the-clock, but night session data is included in his data files, many trading systems are subject to incorrect trading reports, and more likely losing trades! For example, there have been some actual trades where the Globex/night data has a high price about 100 points higher (made late at night) than the high made during the DAY session. When running P&L Reports, the trading system may report incorrectly that either the target or stop-loss was hit, resulting in either a large loss or large winning trade, when actually neither target or stop were touched during the day session! The major difference in daily ranges can also cause incorrect signals, targets or stops, with many different and diverse trading systems and methodologies.

5

Some clients have told me that due to Globex/night data, on some recent real-time trades, a System may report a loss of $1,250.00 but the trader actually made $1,250.00 (a $2,500.00 swing difference) on the same trade (the opposite can also occur). In addition, the exchange reported opening price is almost always different than the actual day session open, sometimes by huge amounts, because the prior night-ending price is reported as the days open. Once again there is great likelihood of serious distortions in trades and P&L Reports, unless the trader is actually trading Globex/night session. The current day/night session markets are: JYen, DMark, SFranc, BPound, Canada$, US$ Index, TBonds, Eurodollar, TNotes-10yr, TBills. Other markets such as S&P and possibly other exchanges and other markets may soon be trading on Globex. Note: US$ Index is not on Globex, but has its own night session. Night session TBonds still distort the data but not quite as seriously as it will when TBonds also gets listed on Globex, because the Globex hours are much longer.

Globex System is Vexed by Low Trading Volume, Overseas Competition and Technological Glitches by Jeffrey Taylor 12/14/92 - reprinted with permission of The Wall Street Journal Nearly six months after its launch, the highly touted Globex after-hours futures trading system is plagued by low volume, stiff competition and technological glitches. The system, intended to be the world's first truly global electronic trading network, is a joint venture between the Chicago Mercantile Exchange, the Chicago Board of Trade and Reuters Holdings PLC. Reuters put up the vast majority of the estimated $70 million to get the computerized system up and running. The Merc and CBOT offer their most popular contracts - including interest-rate and currency futures and options - for purchase and sale after regular trading hours on Globex. But so far, after-hours trading is slow. Last month, Globex trading averaged only 2,771 contracts a night; that's a drop in the bucket compared with the 551,854 contracts a day that trade during the regular trading session at the Merc, and 596,709 contracts a day at the CBOT. And Globex's November average nightly volume was down 9% from 3,041 contracts a night in October. "It looks as if it's just nickel-and-dime retail (small investor) business so far," says David F. DeRosa, portfolio manager at BEA Associates, a New York investment firm which manages more than $16 billion in assets. To become the world's favorite after-hours futures market, "you want to attract institutional business, so that there's a big flow through the system; you want to get overseas business," Mr. DeRosa says. But Globex's low volume "shows they're not getting the trading they need from institutions." Leo Melamed, chairman of the Merc and CBOT joint venture board that oversees Globex, acknowledges that it is off to a slow start. "Clearly, there are problems," he says. "It's a complex system." But he argues that six months of Globex trading isn't a fair test. The system can't be declared a success or a failure, he says, until it has operated for about three years. Yet the six months in which Globex has been operating have shown that it faces big hurdles. For the system to provide any kind of adequate return on its startup investment, Globex trading volume must swell to many times its current level. And for that to happen, traders have to be confident that Globex will provide the kind of easy access that can already be found in busy futures pits both here and abroad. Even the CBOT, one of the partners in the joint venture, concedes that it sees Globex as nothing more than an adjunct to its traditional exchange-based trading. "There's no question that the commitment of the CBOT is to our open outcry method of exchange-based trading," says Dale Lorenzen, first vice chairman of the CBOT. "I just don't think (Globex) is ready to take the volume that we can generate with open outcry. Any electronic trading system is several years away from major success."

6

A lack of trading liquidity and stiff competition from foreign exchanges are the biggest hurdles facing Globex. Big investors in Europe and Asia typically use Merc and CBOT products such as Eurodollar and Treasury-bond futures and options contracts to offset the risks of their holdings in dollar-denominated securities. The Globex system offers these products after the Chicago markets close through a network of about 250 computer terminals in Chicago, New York, London and Paris. But the banks, trading firms and insurance co. that use futures contracts tend to send their orders to the biggest, most liquid markets they can find, which during off-hours in Chicago are foreign markets. For example, the biggest after hours market for Eurodollar futures contracts, a hugely popular product that tracks short-term interest rates, is the Singapore Monetary Exchange, also known as Simex.

Recurrence Trading System - Mr. Smith I purchased the Recurrence II Trading System from Avco Financial Corp for $2,500. What I got was a loose-leaf notebook of 50-100 pages and an IBM disk containing a small program to calculate retracement numbers. After I received the system, I was told by Avco I would have to lease software from Aspen Graphics and sign up with a real-time quote service to operate the system at a cost of between $400 and $500 per month. Nowhere in their advertising do they specifically say this. The retracement calculator program runs in a few seconds and produces a half-page printout. I mention this because their advertising emphasizes the software as being a major part of the system, which led me to believe I was buying a sophisticated software package which would give me trading signals. (I have been told retracement calculator programs can be purchased from several sources for just a few dollars). For all practical purposes, there is no software. The trading system requires the user to note trends in the ADX and stochastics, consider the effects of previous oscillator values, apply one or more of several filters, and determine if one or more rule exceptions are present in order to make a trading decision. All of this must be done mentally in real-time, working with 5-minute quote bars. As a 58-year old novice who has never made a commodity trade, I found these mental exercises overwhelming and beyond my capability. What all this leads to is that after about 45-days, I came to the conclusion I could not cope with this system and started making attempts to return it to Avco. I shipped it to them twice via UPS insured and they refused delivery both times. I spoke to Anthony of Avco by phone and he stated he would not take the system back (no reason given) but the call. The word "Guaranteed" appears in boldface type several places in their advertising. To me that means the product is guaranteed to be satisfactory for use by me as an individual. In this instance, it appears not the case.

Lets play astrology - Carol Murphy Many years ago during a cigarette break at a financial seminar, I over heard a very interesting conversation on Financial Astrology. For weeks I thought about the planets and the market. After all, for hundreds of years man has used the sky to sail ships (stars) plant food (moon) etc. If the moon can control the tides, perhaps it makes us bullish or bearish, since the body is 97% water. I purchased two Ephemerids, one Geo and one Helio (standing on the sun). I knew nothing about astrology. Out of curiosity, I started putting the location of the planets on my charts at major Hi & Lo's on all commodity charts. See examples of how some of it works. Chart #1 is Helio (Venus). The _:4 means Venus is 180° Jupiter (the money planet). _s 4 means Venus is 360° , as you can see within 4 days we have a

7

major change in trend. You can also see when _ is a 180° or 360° or 72° from itself, again we have a change in trend. Chart II is Helio _ and aspects to Mars (_) and Pluto ( ) It's not the holy grail, but you definitely get a C.I.T. with 4 days. I'm retired & have lots of time to monitor all of this and just love it. It's like a giant game. Special Symbols and Charts in Print Copy

'Gunning' Plays Can Claim Victims in the Futures Pit by Elyse Tanouye 6/17/92 - reprinted with permission of The Wall Street Journal Just a few minutes before trading closed on New York's Commodity Exchange one sleepy autumn afternoon, all hell broke loose. Another of the many games traders play was afoot. In the cooper futures pit, a surge of buy orders cascaded onto the floor. Normally such late activity barely budges prices. But on this day, 10-8, so many top dealers and left early for the London Metal Exchange's gala annual dinner that there weren't many sellers around to accommodate the buyers. Copper prices soared nearly three cents a pound. The few junior traders still at their posts quickly concluded that someone was trying to exploit the market's inattention to push cooper futures prices about $1.07 a pound, a level deemed crucial by traders who use technical analysis. A price move above $1.07, it was widely assumed, would trigger "buy" signals amount trend-watching commodity funds, prompting the automatic execution of a heap of standing purchase orders. Such ahead-of-time orders are known as "stops," which is why this game is called "gunning for stops." The idea was to induce a flood of buying above $1.07, whereupon cooper would soar even higher, at which point the trader who started the game could sell out at a profit. The game probably fails more often than it works, traders say. In this case, the price touched $1.07, but didn't rise any further; it fell back a penny at the close. That's the risk people run in gunning for stops, traders say. Yet the game can pay off handsomely, and it is much in evidence in many of today's commodity markets. Gunning can work because so much of futures trading nowadays is based on systems that use widely available technical indicators such as moving averages and momentum yardsticks with authoritativesounding names such as relative strength and stochastics. In some cases, traders can guess from market talk and by looking at price charts where the key levels are. And they know that traders usually place stops around those critical areas. Money managers and other futures traders have complained privately for years about floor traders engineering price movements to trigger stops and computer-generated signals to buy and sell. But in this and other cases recently, they suspect, very large players were trying their hand at the game. If so, they say it is a disturbing development. "This is a very controversial issue," says one commodity futures money manager. We're very, very unhappy about it." Who gets hurt by traders playing the game? Anyone whose stop was triggered artificially. Those people may be forced to take profits too early, sustain losses they wouldn't otherwise incur or take positions based on false price signals, traders and analysts say. And when those traders are money managers, their investors get hurt. Technical traders are particularly vulnerable to getting whipsawed by these short-term price swings, says Fred Demler, metals economist at PaineWebber Group Inc. Sumitomo Corp's Yasuo Hamanaka later confirmed he had placed buy orders at the end of the 10-8 session, but denied they were speculative. Mr. Hamanaka has a reputation as an aggressive trader. He made similar denials - met with skepticism - when he was rumored to be behind squeezes in the London market last year.

8

In recent years, Middle Eastern syndicates are thought to have used the stops-gunning strategy in precious metals markets. And some people think big U.S. commodity funds have figured out how to profit either from riding the coattails of other players using the strategy or by doing it themselves. Traders won't admit they gun for stops. And regulators say it's next to impossible to prove that a price move was the result of manipulation, which is illegal. But few people in the market deny that it goes on, and some say they've noticed it occurring more frequently in the past year. "It happens all the time," says a sugar trader. In the past year, he adds, he's seen more investors "getting stopped out" by a sudden-moving market that triggers their stop orders. That could simply be the unorchestrated result of a choppy, thinly traded market, he says, but people are blaming traders for gunning their stops. "When it's happened to me, I've been extremely angry," says George Milling-Stanley, precious metals analyst at Shearson Lehman Brothers. Trade recommendations he has made to individual investors have lost money, he says, because traders went gunning for stops. For example, suppose he thinks gold will rise and recommends clients buy it at $335 an ounce - adding that they should put in a stop-loss order at $333 in case he is wrong. Then suppose some traders gun the market down to the stop levels, which sells the investors out of their positions at losses, and the price subsequently rises above $335 as originally expected. "You feel like someone's stolen the march on you," he says. Jeff Nichols, a Boca Raton, Fla., precious metals consultant, says a well-capitalized floor trader can occasionally pull off such a move in small, thinly traded markets, particularly if other traders sense what's going on and join in. But in larger markets, such as currencies, it takes a lot of money to gun for stops successfully because the player has to be able to buy or sell contracts in significant quantities, Mr. Nichols says. Well-known commodities trader Richard J. Dennis says he tries to anticipate where technical traders have placed their stops and gauge the effect that activation of the stops will have on prices. "If you look at charts, you can make a reasonable guess about where the stops are," Mr Dennis says, adding that he uses this information to avoid those areas. "They're a little bit like land mines going off, and you don't want to walk into the mine field." Some Wall Street "rocket scientists" have honed the quesswork more precisely. They are able to identify which technical system is prevailing at the moment and what signals the system will give out at different price levels, Mr. Nichols says. These sophisticated traders then use that insight to devise trading strategies accordingly, he says. One futures money manager thinks stop-gunning traders neither guess nor use computers, but instead are learning through their brokers and other sources where the big orders are sitting. "I wonder if this were the securities industry, if (traders who gun for stops) wouldn't be in jail for this type of thing," he says. Brokers who disclose such information would be violating federal regulations and exchange rules. But there are more subtle ways the information leaks out, traders say, such as through winks and nods and euphemisms. "They don't come out and say "I have an order at six," says a former New York trader. "They say, I think there's good resistance at six." In the crowded trading pits, traders can also find out about stop orders when they catch a glimpseaccidentally or intentionally-of other brokers' order cards, says an analyst. Because they have little hope of a regulatory crackdown, gunning victims say they have learned to accept it as just another risk in trading commodities. "If you want to play with the big boys, that's the way it works," Mr. Nichols says. To avoid being stung, many money managers no longer place stop orders, says Jane Martin, executive director of the Managed Futures Association. Other market players, says Mr. Milling-Stanley of Shearson, have learned to protect themselves by placing stops further away from current prices. Experienced traders recommend moving stops when activity looks suspicious. Market users must be especially alert during

9

slow-trading periods, such as during banking, international or religious holidays, says Mr. Demier of PaineWebber. Still others try to take advantage of the strategy without actually playing it. Malinda Pinson, partner of Fundamental Futures, an Ankeny, Iowa, money management firm, says her firm watches for such things as gunning stops for opportunities to execute trades that it would have made anyway. "We have learned to wait until the technical traders' stops are triggered," she says. As the "big machine traders" start selling, her firm starts buying, she explains.

Trading Strategy & Commissions - Ashley S.C. Howes There are some simple facts about commissions that are often overlooked or ignored. If you are like me, when you see the published results from futures managers (in Future Magazine) and observe that for 1992: 76 funds were up, 141 were down, you wonder why the industry exists or think: "all the more reason to trade one's own account." All you need is $20,000.00 per contract and a method that will make 4 points a year in the DM and you are way ahead of 90% of the pros. What are they up to anyway? It's not that they cannot do it. It's that they make more money by trading for commissions. If a manager makes only $10 a trade - and many of them make many more - and manages a $100,000 account which trades 1 contract of the S&P, 3 wheat, 3 Euros, 2 DM and 2 Crude and each contract on average trades twice a week, he will execute about 100 trades a month=1200 per year=12% of your account equity is gone right there. And we didn't mention fees to the FCM, the agent who introduced the fund to you etc. So most of these managers are actually making 30% or more just to break even. That is why the managed futures performance tables are on the whole so lackluster. This is also why it is still true that it's reasonable to expect superior returns from disciplined futures trading. They are there, but they are being hidden in commission costs and management fees. The reason I wanted to write about all of this is because I want to introduce an idea. I have been a private trader for years and like all of us have had to learn the ropes, develop a method that works for me etc. One aspect of what I came up with is simple. I do not follow the markets intra-day any more, and my partner executes the trades. We have been making about 10% a month trading a couple of very simple models using PBS software. (We have other software, but PBS is the main one I use. PBS is quick, easy, the breakout signals are all up there on the chart in no time, and it is easy to add in your own signals based on oscillators, bar patterns, etc. right up on the screen, without having to program anything.) The fact that my partner executes the trades and I have no input intra-day means that there is impeccable discipline and the strategy is implemented professionally. We are currently entered in the National Investment Championship. For the first quarter, we were up about 25% and we are already up 50% in the second quarter as of the time of writing (April 25). As of January 31, I have been a licensed CTA. My partner, Mr. Thomas Stroud, and I would like to offer our services to other traders. However, I want to offer a service that I would want for myself, i.e., use strategies that I can follow at home, has minimal fees. At the same time, the reason I feel that it is good to offer this service from a potential client's point of view, is that I have found that having other people take care of the execution is extremely helpful for my discipline and the success in our account.) There are three ways that this can work: One - we raise enough money so that even with low fees it is worth our while to administer this fund; Two - we charge higher fees in the beginning when the

10

transactions are less in number, and then lower fees later on, going at some point to a minimal fee structure that covers basic expenses and overhead and only earning extra income on a profit-sharing basis; Three and this is the ideal, I think, if the fund size permits, we could function simply as the employees of the partnership. The commissions will be minimal ($12.00 or less). Each month the fund will pay out Ba fixed amount to cover expenses, salary, etc., but no additional management, commissions or profit-sharing fees. In this way, we can cut through the inherently anti-client set-up that exists in the managed futures industry such as it is and thereby provide a service that will give you, the customer, excellent returns. Another juicy bonus, since it is a partnership, the trading strategy and tactics can be shared and discussed. This will make the whole process informative and interesting, so that each partner can feel actively involved in the ongoing activity of the account. At the same time, since others are involved, nobody can arbitrarily start changing the system. We are open to numerous forms of strategy. The partnership could solely trade the models developed by my company, Stroud & Howes, or it could trade some signals from Swing Catcher, PBS or follow a newsletter's recommendations. Or a combination, combining some day-trading with some trend-following with some counter-trend models, to smooth out our equity curve. If any of you are interested in being involved in a partnership fund like this, please write and let us know, giving us an idea of what type of strategy and/or structure you would like to see and how much money you might be interested in placing with it. Remember, this is your fund and you can help to design it. One idea I had for the planning, I got from talking to Dave Green a year or so ago when I first bought Swing Catcher. He was thinking of participating in seminar on a cruise ship for a week or so. Maybe we should have a $20,000.00 cruise for one week, which pays for the cruise and the balance of the account goes in to start the partnership fund. With the lawyers on-board as part of the cruise, is essentially put together and most of the trading strategies introduced, picked and then agreed on during the course of the cruise. Guest managers can be invited, either to lecture or solicit our funds for their management service of our partnership. That was just one idea. Alternatively, I live in Europe and know of a couple of private chateaus that are for rent. We could spend a week in the French countryside and take a trip to Luxembourg for members to open accounts there, so that the fund can be set-up offshore, this could be part of the program. In addition, if anyone wants us to execute trades from Swing Catcher, PBS or a System Writer end-of-day model, we could do so on a simple fee basis depending on the number of trades per month, complexity of the model, etc. You might find that having someone do your execution, though you are still calling the shots is an excellent way to improve your discipline. I look forward to hearing from you about this and wish you all success in your trading. Mr. Howes can be reached at 57604 Forbach Cedex France

COMMENTS FROM THE EDITOR Reference the Globex article. I have been told Globex volume has improved a little since that article was written. However, it's still far too low for good liquidity and very few small/medium size traders have ever traded on Globex. That's a major reason why the CSI/TRENDX Portfolio only uses Day Session price data and ignores both Globex and Night Sessions, such as the Night TBonds.

11

The interesting submission by Mr. Gwiss really impresses the major impact discipline and money management can have on your trading. In fact, many expert traders claim discipline is even more important then the trading methodology used! The Wall Street Journal article on how traders gun the stops reminds us that by not actually placing the stop it can't be "gunned." However, by using a 'mental stop-loss' it results in much greater risk because the stop may not actually get placed due to lack of discipline. Another possibility is the market may move far beyond the mental stop resulting in a much larger loss that if the stop-loss was actually placed. The submission by Danny Nip reminds us that some things in life are more important than trading! The articles about computer problems should make us aware that the problems referred to are rare but can happen to anyone. The severity and magnitude of Mr. Speck's many computer problems in particular are extremely rare but does occasionally happen. Paul Kirchoffer's article would sure have helped Peter Speck, if Peter read it before-hand! The Editor hopes you enjoy this Premier Issue of CTCN. Thanks to all who made contributions.

12

Issue 2. Only Part of this issue in On-Line - The remainder of the issue will be added asap. Wisdom & Knowledge - Roger Roehrig We started our relationship in 1992 when I purchased Swing Catcher. I want to tell you of my experience as a young trader and hopefully as a new member of the CTCN. I began acquisition and trading without any experience for a German company in January 1987. Three weeks later I got my first client and money for trading in the stockmarket (S&P 500). The first money I earned I spent it all on books, articles and brochures, etc. I decided to learn everything about the markets. There was nobody who helped me to learn, so I became a do-it-yourself trader. Everything was cool in this time, because we have had a bullmarket in stocks. My first really bad experience came in October 87 on that bloody Monday. I lost all the money in the market and was really shocked and depressed. But this situation gave me one of my most important rules, I discovered later, that the trees never grow too high into the sky and the markets are not a one-way-road. So, I stopped trading and left the company and went out for a holiday in Spain. There, I had much time to think about what I really wanted to do. All I wanted to do was trade! So I went back to Hamburg, changed the company and started again, but I was so afraid of losing money, that often I stood apart of the markets. It took so much time to lose my fears, but slowly I listened to my feelings (intuition) and a small success in trading helped me during this difficult period. At this time, I read an article in a German commodity newsletter, concerning mechanical and trendfollowing computer systems. I was very interested in that and I spent money for a system called "MESA" and an additional program called "EPOCH." I had bad experiences with these programs, so I was generally disappointed in computer forecasts. I stopped the trading with these programs and decided to use my own program (intuition and psychology). The trick is that a trader always uses a system (consciously or unconsciously) but he has to find his individual system or method. I found this for myself as I started trading with Swing Catcher in 1992 and was surprised how precise it was and is! With Swing Catcher System, I need not ignore my feelings about market moves, so I combined technical research, technical forecast, individual intuition and some important rules for best results. My most important rules are: taking small losses - taking big profits - discipline on money management!! not to break rules and to know when to break rules! These are the results of 5-years trading experience and I hope I can share the wisdom and knowledge of other club members and traders.

Globex Data - Luis Lobo I believe the hypothesis about using non-globex data and excluding Globex/Night Session Data is correct. I was beginning to get some nonsensical signals when globex data was included in the financial data from CSI. In fact, one of my losses in the Japanese Yen could have turned quite profitable if I had been receiving globex-free data at that time. But one lives and learns. I was lucky that I only had one currency position at that time.

13

Gann & Fibronic Trading Technique - George Cooper This program, Advanced Get squares time and price to supply a reversal date, in this case, the 26th of May. It is usually within a day, one side or the other of the protected reversal. The program enables me to draw the trend line from the (7102) down to 26th of May. When the price breaks above both the trend line and the DMA Line (divergence measuring line) I then consider going long.

I usually draw a trend line hitting as many tops or bottoms as is possible to the G.E.T. projected reversal date. I would expect that there would be much more down move since the D.M.A. line is so distant from a (1085) minus B (1310)=(225 x .62=139.5 plus C (1193)=1333. The .62 retracement projection. 225 plus C,=(1193)=1418 for a 100% retracement if the 1418 projection is penetrated. I then multiply 225, the distance from A to B by 1.618 and add the result 364.05 to CDR, 1193. The result is 1557 for a 1.62 retracement if the 100% is broken. I use this method when G.E.T. projections are off the chart, as they are on sugar at this time. Charts in Print Copy.

A Unique Way to Reduce Commission Costs - Ashley Crowell The booklet by George Angell "The Essential Secrets of Day Trading" in which he says: "A little-known method of cutting your commission cost is to join an Exchange." This doesn't mean that you have to trade on the floor in Chicago or New York. But it will give you an opportunity to trade like professionals at a very low cost. Now, the price of some exchange seats can be in excess of a half million dollars. There are less valuable seats selling for a fraction of that cost. Take the MidAmerica Commodity Exchange, a division of the Chicago Board of Trade. The MidAmerica's seat price varies. Right now, it is considerably less than $10,000. Once you own the seat, your only obligation is to pay the $1,000 annual dues. As a MidAm member you will be entitled to commissions as low as $8.00 per round-turn on non-MidAm contracts. If you want to trade MidAm contracts, you would pay just $1.00 a round-turn if you accomplish the trade in the pit or just $3 or $4 if you call in your order and have a floor broker fill the order for you. For any active trader, purchasing a membership on an exchange - even if you don't plan to be a full-time pit trader - makes a lot of sense. For more information contact: MidAmerica Commodity Exchange, Memberships, Chicago Board of Trade Building, 141 West Jackson Blvd., Chicago, IL 60604 Angell's text continues with: "Another very inexpensive membership is that of the Chicago Rice and Cotton Exchange, another affiliate of the Chicago Board of Trade. CRCE memberships have changed hands for just several hundreds of dollars. The real cost of the seat, therefore, comes from the cost of the annual dues which are payable on a quarterly basis. At $1,000 a year, MidAm dues are just less than $85 a month - hardly the cost of two or three trades with the average broker. Lastly, the purchase of a seat membership is an investment. The value of the purchase price could easily rise in value . . . Huge capital gain opportunities exist for the intelligent purchaser of exchange seats."

14

Trident System - Andrew Pustay I just want to preface my comments with letting you know that the TRENDX Program continues to operate flawlessly. I know it's been awhile since we touched base, but I want to bring you up-to-date about what we talked about in reference to the Trident System. I know we had many discussions in the past about the Trident System and how difficult the algebraic formulas are in terms of the P3 qualification, at least for me. What I've done was to sidestep that qualification procedure and look just for the Trident P1, P2 and P3 formation in conjunction with the TRENDX signal to go long or short and therein, I believe, lies the road to profitable trading. Two recent successful trades which gave off just that type of signal was a short position in Wheat in January and a long position in Corn in March. The signals don't often line up but when they do it is hard to ignore and something that I will continue to watch for as an entry into a successful trade. I believe that this Trident pattern as it sets up with the TRENDX signal deserves further study and research. You may want to pass this info along to your other TRENDX users, especially those who may have the time to do the necessary research.

Good Timing - Paul Brown Great idea Dave, this new Commodity Traders Club News. I wish that there would have been a letter like this when I started trading. One thing that I have had the misfortune lately to do is over trade. By this, I mean risking too much capital when trading. It is very easily done when you get caught up in the everyday routine of trading. It will reduce your overall efficient because you can't follow a slow or weak trade as long as you could, if you were capitalized correctly.

CSI Gets an A+ by Paul Brown During my trading adventures so far (8 months) I have found that receiving daily data from CSI is very convenient. There is never usually more than a 30-second wait and the data is very reliable. I have also purchased Quick/Plot Quick/Study programs. It is a very good bargain for $99.00. It will do an array of things like moving averages, weighted RSI and there own CSI trend. I have found it very useful and worth the money!

ROLLOVER CALENDER - Rick Lorusso This easy-to-use commodity contract rollover calender was developed by member Rick Lorusso as a convenient way to keep track of the recommended contact months and the dates contract rollovers/switcovers should be done. Calendar in Print Copy

15

Issue 3. Amazing & Hard To Believe, But True: I Had 50 of 55 Winning Trades But Still Lost Money! - Jim Ford I'm a money manager and private trading advisor (non-registered) who had about a dozen accounts under management during November 1991. At the time, I was trading these managed accounts using a combination of several indicators and chart analysis. Plus a degree of subjectivity and judgement. My trading was in a number of markets, including TBonds, S&P, Live Hogs and Currencies. Everyone talks about the importance of winning trade percentages. Many traders think if they can achieve even 55% wins they will make good money. The idea of someone having 90% wins seems inconceivable. Most traders would think 90% wins was an impossibility. No one could imagine that if 90% wins was possible, the brilliant trader could possibly lose money in the process of 50 out of 55 winning trades! During the 30-day period, I made a total of 55 trades and had 50 winning trades. In spite of that amazing feat, I still was a net loser for the month. How is that possible? First in importance is that I did not have adequate discipline and did not follow my trading plan. My many winning trades were mostly very small winners. Most of the winning trades were between $50.00 and $300.00. In addition they were all one- lots. However, I had too much confidence in the 5 eventual losing trades and doubled up on those positions...resulting in double exposure. I compounded matters by not actually placing my stops but using so called "mental stops." I then lacked the discipline to get out of the eventual big losers when my small mental stops were hit. I held the contracts in the hope they would eventually go my way. For example, my methodology called for a stop equalling say $300.00 but because it was a mental stop and not actually placed with the broker, I let the small loss become much worse (to $1500.00) before finally getting out. In addition, the fact I decided to trade two contracts (due to over-confidence) on 4 out of the 5 losing trades, but one contract on most all the winners, resulted in much larger losses on the losing trades. For example, a loss of $3,000.00 on one position ($1,500.00 times two contracts). However, if I was following my plan, I would only have had one contract and only a $300.00 loss on that position, or ten times less! That occurred to the same or somewhat lesser degree on all 5 losing positions, so that my losers (mostly two-lot trades) added up to about $10,000.00 negative. However my 50 winning trades were mostly small winners (one-lot trades) that added up to about $9,000.00 positive, including commissions. Thus, even with 50 of 55 winners during a one month period, I still ended up losing about $1,000.00 for the 30-day period! If you factor in the cost of my expensive on-line Bonneville Quote Machine and some other expenses, I actually lost close to $2,000.00. I know this is all hard to believe, but it really happened to me and can easily happen to anyone who doesn't follow a consistent trading plan and does not have sufficient discipline. The 50 of 55 winners will be very difficult for me to ever duplicate again. I have been trading with about the same frequency and similar techniques from time that occurred Nov 1991 to now (1 2/3-yrs). But I have never even come close again to that amazing winning percentage. In addition, from what I hear and read, it appears that it's next to impossible for other traders to achieve 90% wins out of 55 trades.

16

I'm still not sure how I did it and I likely could never repeat the achievement again, even if I continue trading for the next zillion or so years. I don't know what is more amazing, either my percentage of wins or my losing money in spite of it. Probably the fact it was possible to lose money after achieving 90% wins is the more amazing thing!

Catch a Trending Market - George Hallmey This one comes from the KISS school of trading systems - designed for the part-time trader who hasn't time or inclination to constantly monitor the markets and probably is still computer illiterate! All systems are trend following - it's just that the length of trend may be long or short. My intention was to find a system that catches the long swings, filters out as many go nowhere whipsaws as possible and can be monitored without the use of a computer and with the minimum of time spent studying chart moves. W.D. Gann inspired the use of swing charts as a filter for indicating trending movements. He used a combination of time frames, the most well known being 3 days, 7 days and his quarterly swing chart. Gann taught that the longer the time frame used, the more reliable the signal given. My analysis uses a 14-day trend reversal. How do you plot it? Simply mark on some chart paper a vertical line when today's price is higher than it was 14-days ago and keep drawing on up until today's price is below that 14 days ago when you show the line coming down again. What could be simpler? (see chart) Chart in Print Copy How then is a swing chart used? First, it gives a broad indication that the trend could continue in the direction of the current swing. Support and resistance areas are clearly shown and once the swing passes previous swing highs or lows greater weight is given, Gann teaching that new highs should be bought and new lows sold. However, as with all long term trend following systems - first pick a market with prolonged trending action. The British Pound is my current favorite - frequently embarking on long term trends with a minimum of whipsaws. Using the swing chart to place trades, the system is always in the market. Over three years prior to the 1992 bull, then spectacular bear run, the system has produced 48 trades with an impressive 2:1 win loose ratio. This producing a profit of 29.5 cents or $18,437.5 per contract. However the maximum drawdown was 19.5 cents - more than most would stomach. By adding a simple rule of setting a maximum stop loss of 2 cents, the maximum drawdown became 8 cents with profitability boosted to 49.5 cents or $30,937.5 per contract. After deducting $100 slippage and commission per trade, this easy to monitor trade system shows how a simple technique can produce impressive profits.

The Importance of Doing What's Right - Mike James from New Zealand Like most people, when starting out trading, I focused on the selection/prediction aspect of trading. Most traders spend their time analyzing the market to predict where it is going instead of developing low risk ideas in which the potential loss is small. Spend time developing low risk ideas, instead of trying to study every aspect of the market. Although a system of some sort is important, it is by far the least important aspect of being a profitable trader.

17

Profitability is solely dependent on money management and discipline. Center yourself calmly through exercise, diet, meditation and generally leading a balanced lifestyle. Let go of your attachments to the outcome of the trade and look at the trade as an objective event. Concentrate on sticking to your entry and exit rules for each system and the profits will take care of themselves. Your management of the emotions of greed and fear are vital. Markets move due to fear, greed and ignorance as much as any other reason. You have to realize that as a trader, during rough times, as much as 70% of your trades will be losers. Profit will generally come from a relatively small number of trades. True winners make a point not to let their ego (don't dwell on large profits of open or closed trades), emotions, tips or gossip get in the way of what their system tells them to do. To beat the market go about your business in a disciplined way. DO NOT start to think that "I am smart and can easily make a million." It will cause you to forget to use the wise, patient and conservative RULES you need to follow to make a profit. Your loss of confidence is the greatest loss you can suffer, so don't overtrade or step in front of a freight trains. Stalk the market as deadly game or else you will become its prey. Mark Douglas in his excellent book 'The Disciplined Trader' insists that you trade with the goal of doing the right thing (sticking to rules!!), not making money. Paul Tudor Jones sees his strengths as a "trader who is able to take loses quickly and thinking defensively." Make time to study and organize a trading plan for each and every trading day. The markets you hold a position in are the ones to concentrate on. In Jim Slomans book 'The Adam theory of Markets' he says, "To succeed in the markets we must surrender. Never ever let any opinion about the market get in the way of trading."..."Analysis is great, but when analysis and reality diverge, we must always go with reality." "Knowledge is great, but when knowledge and reality diverge, we must always go with reality."..."We must allow ourselves to mirror the market, follow it surrender to it. We must be willing to let go of what we think we know about it so that we can see it directly."..."Price is reality. Price reflects everything. Price is all we want to look at because price is what the market is doing." Professional traders know that money is important, but unlike hobbyist, they focus on the market. Don't get greedy and count dollars, ignoring what the market is telling you. To make it you have to level your emotional peaks and valleys. That requires dedication. Patience is the key word. My experience is that the fewer the number of trades, the more profitable the method. It goes without saying that you must not second guess your system. Take every trade according to the rules. Now comes the important part - how to handle the inevitable drawdowns. Back testing has told you what kind of a maximum drawdown you can expect. If you can't emotionally or financially handle at least this much drawdown, don't trade the system in the first place. And don't be greedy and overtrade, buying or selling too many contracts (you should have rules for the precise amount of contracts to trade) in an effort to make a lot of money in a hurry. Under capitalization is one reason so many are losers. Once you have a system that works, don't change it. If you have other ideas, develop another system!

18

If your goals are not met or if you feel tired or stressed -- STOP and reevaluate the situation. Either close out all positions or let those in profit run their course without adding to them Richard Wyckoff gave the following advice, "There are several clear signals to pull out of the market and take a break. The first is a technical warning - the situation in which your analysis gives unclear, confused signals. The other two are emotional - relying on 'instinct' rather than research and a growing or chronic indecisiveness about executing trades." And don't forget the importance of exercise, of the mind and body. The importance of friendship and making time for these friends. The importance of balance, taking time out to watch the flowers grow, not just working/trading. That only achieves a goal in a very narrow focus and achieves nothing but leads to unproductively and unhappiness. Be good to yourself; don't be too hard on yourself. Areas you can improve on simply provide you with valuable feedback. Anything you do gives you experience. As a result, you can look at your decisions and resolve to change them in the future, using them as a learning experience, rather than accepting the failure judgmentally, by thinking 'I have failed.' Victories, I pat myself on the back, often. I dwell on them as they are the building blocks of my future accomplishments.

Proper Mental Attitude - Walter Mandl from Canada I've been a futures trader for 15 years and although that's a short period of time relative to other fields, in the futures industry that's a long time. The message I wanted to relate to the readers is the importance of the proper mental attitude when it relates to futures trading. I found out by reading and through my personal trading account that a good mental attitude reflects a good trading account and visa versa. Futures trading extremely highlights the best and worst in people. When a trader wins a certain amount, he goes on a natural high, far in excess than normal producing behavior. This can cause the trader to make large purchases or go on vacations, not realizing that at the next trade they might not be able to afford that purchase or vacation. It will eventually send the trader in such a depression that their ability to trade in a proper positive way is all but lost. The point I wanted to make is that to lessen destructive behavior you must have a plan. The plan must include when to enter and exist markets, whether it be for profits or losses, but also have a plan to conservatively spend profits. This must be done so you don't produce ever increasingly natural highs to defend bad behavior which eventually will lead to losses in the trading account.

Incredibly Demanding, Detailed and Complex Requirements to purchase "adequate" Trading System Software - B. Fitzsimmons I am searching for some adequate software. Here is list of requirements. If your system cannot perform the following, don't bother sending me a demo disk, for my records, just send a letter saying your system cannot perform as needed.

19

If your software can meet these specifications, send me a brochure, demo disk if necessary, a salesperson's name and how I can get in touch with him. Plus, your system's or statistical guru's name and how I can get in touch with him. This is no joke. I have an MBA in Management Science, been a stockbroker, studied the futures market and technical techniques for the last year, designed but not built my own system for futures, want to start investing in futures or options ASAP. Criteria in order of importance: 1. Stat tests or procedures included: a. J. Welles Wilder's 1. DMI - ADX 2. RSI, KST or like double-smoothed Stochastic 3. if possible Reaction Trend System, or some other tracking, not trending system 4. if possible Swing System, Volatility System b. MACD c. Commodity Channel Index or MII Price Channel, and std. dev. capability d. Rudimentary Charting Methods e. K%D Stochastic f. Some type of Momentum statistic, also Rate of Change statistic g. Statistical Methods, including Exponential Smoothing, linear and non-regression, if possible ARIMA, multiple decomposition and XII (now using SPSS for Windows) h. independent modules to test degree of: 1. Volatility 2. Open interest (seasonally adjusted, if possible) 3. Volume (seasonally adjusted, if possible) 2. Some type of feed from Lotus and/or CompuServe or like data utility to translate data files to your System 3. Some type of historical investigation, evaluation or profitability system to test different decision rules against history to be included with evaluation system: a. system to handle multiple, complex decision rules b. if possible, capability to manually or batch change parameters for statistical techniques, e.g. DMI has 14 day moving avg., change to 12, 9 or 5 and price channel width, RSI overbought, Oversold Parameters, by Batch Commands

20

c. if possible, comprehensive Command Language with batch capabilities, I hope I can build feeds from/to other programs 4. good graphical capabilities (have a SVGA monitor) 5. good DBMS, ability to store multiple commodities by daily, high, low close or weekly, close time periods, for several years 6. if possible, some capability to on command evaluate data files searching for option opportunities, or arbitrage opportunities 7. if possible, package works with Microsoft Windows We'll I think that's it, the if possibles amount to a wish list. Good luck, I don't want to be writing spreadsheet macros for the next year. I have a 486/33 Mhz Computer, Hard Disk, Color Monitor, floppy drives 3.5 or 5.25. Sorry, I will not pay for demo disks or manuals. If you are unable to tell me what your system does, or how it matches my specifications, it's your problem --not mine!

Product Review on PowerBasic 3.0, Much Faster Market Research is Now Possible - Clifford Murphy I would like to comment on computer performance improvement resulting from a system upgrade. An IBM-XT operating at 4.77 Mhz, was replaced with a 386DX-40 with a math coprocessor. This hardware upgrade resulted in a 18.2 fold speed improvement on math intensive BASIC programs. Microsoft GWBasic was replaced by me with PowerBasic 3.0, a BASIC compiler. This software upgrade resulted in a 11.5 fold speed improvement on the same math intensive programs. To eliminate any misunderstanding, the combined hardware and software upgrades resulted in an over 200 fold speed increase. Needless to say, this has opened up new vistas for market research. My 386 system is a standard system with a math coprocessor added. PowerBasic 3.0 is a BASIC compiler that performs like an extremely fast GWBasic with enhanced features. Features that should satisfy the most demanding programmers. I am speaking here, in particular, of the advanced debugging features. An additional benefit of PowerBasic 3.0 is that the limit of 61K that GWBASIC places on the maximum amount of program and data that can be loaded into memory at one time in PowerBasic is increased to 162K. PowerBasic 3.0 documentation is good and the program has performed well during 2-months of heavy use. PowerBasic 3.0 can be obtained from the publisher, Spectra Publishing, 1030D East Duane Ave, Sunnyvale, CA 94086 (813) 625-1172, or purchased at a substantial discount from a mail order company.

COMMENTS FROM THE EDITOR Jim Ford's hard to believe, but true contribution will be truly amazing to many traders. However, many professional or experienced traders probably find it less amazing than you would think.

21

That's because very experienced and knowledgeable traders have likely had the same type of occurrence happen to them, though likely to a much lesser degree. They have had periods of good success as far as percentage of wins is concerned, but still lost money due to the reasons referred to in Jim's contribution. However, as mentioned by Jim, it is extremely rare for any trader to have anywhere near 90% wins for a lengthy period covering over 50 trades. That truly amazing feat makes the fact Jim still lost money seem ever harder to comprehend! I have talked to Jim and a trading associate of his who I know very well, about how Jim accomplished his 90% wins and they can not actually explain it. That's because a lot of the trades involved a certain degree of judgement or subjectivity. Unfortunately, subjectivity can not be used successfully by others or used with a mechanical trading system. This reveals how poor money management and lack of discipline can bankrupt even the best traders in the world. If this can happen to excellent traders like Jim, can you imagine how easily poor money management can ruin less skilled or mediocre predictors of the markets! George Hallmey's article reveals how simple techniques using Swing Charts can be highly profitable. It is correct that W. D. Gann did in fact use Swing Charts quite extensively in his trading. As referred to by George, one of the problems with Swing Charts is that stops are frequently too large for most small or medium size traders. However, as alluded to by George, assigning a somewhat arbitrary stoploss to make the risk less has very good potential. Gann refers to Swing Charts a number of times in his Trading Course, and in his valuable book "How to Make Profits in Commodities." The book is very likely Gann's best book and many traders (myself included) say it's the best book ever written about commodity trading...the 412-page hard-cover book is available from: Trading Tools Co., Box 1, Altoona, WI 54720 for $35.00 (+ $3.00 US S&H, + $15.00 Foreign S&H). How to Make Profits in Commodities book not only covers Swing Chart methodology, but also goes into great and highly valuable detail on cycles, seasonals, resistance and support methodology, money management and discipline. This excellent book places great emphasis on discipline and the importance of always using stop-loss orders to keep losses small, so you can recover your equity thru eventual winning trades. The book was written in two parts, in the 1940's and 1950's by Mr. Gann. The type of markets traded then and commodity prices have changed greatly since then. However, the principles and lessons taught by Gann are timeless and are as applicable in the 1990's and they were in the 1950's. The interesting submission by Mike James about the importance of money management, discipline and emotions and other mental aspects of trading, really hits home. I recall many trades I made myself or that were referred to by clients, where we either lost money or made less than we should have, due to discipline, etc. The importance of the proper mental attitude and having a trading plan, as referred to by Walter Mandl, is very significant. Mental attitude can often make the difference between being a winner or loser. That is true not just with commodity trading, but also true with other areas of life. The letter written by Mr. Fitzsimmons about his specifications and requirements for Trading System Software is as mentioned by him, "not a joke." He sincerely believes he must have and also use all those

22

complex and specific capabilities and technical indicators. If not, he will not buy the system, and apparently doesn't think he can be successful trading unless all his demanding, specific and complex requirements are met. The problem is his requirements are far too specific and involved. The software package (if it in fact exists), and the subsequent analysis and usage requirements, would be far too complex and involved to easily operate or trade with. Due to the complexity of his requirements, I doubt if anyone could possibly trade successfully using it. It is also interesting to note that most trading experts and experienced traders will tell you the many technical indicators on his wish-list simply do not work consistently in real-time trading. They are referred to as "canned" indicators and have been studied extensively over the years. Lots of computer runs have been done on them by many well known commodity experts. Unfortunately, all the results of the testing I have reviewed using the indicators Mr. Fitzsimmons refers to, including magazine articles and trading books, and including my own research of "canned" indicators, has been very disappointing. The many "canned" indicators for the most part correlate highly with each other and all tend to go positive or negative usually at about the same time, and usually with the same dismal results. The results are inconsistent, have lengthy losing periods, and drawdowns are usually far too large for the average trader to withstand. There's one rather humorous observation about the demanding expectations. He refers to software that meets his stringent and complex requirements as merely "adequate!" He is not a CTCN Member, but I have published it because I believe Members may find his letter and the subject matter interesting. The Product Review by Mr. Murphy shows how fast the latest Basic Compilers are compared to old programs like GWBasic. PowerBasic is no doubt a good product. However, QuickBasic by Microsoft is still likely the leading Basic Compiler and is used by many traders who have the need and occasion to use a Basic Programming Language. To use these Compilers, a certain degree of computer and programming skill is required. I personally have been using QuickBasic for many years and find it easy-to-use and more than adequate as far as features and speed are concerned. I am still using the old version 3.0 because it seems to be faster and have more memory capacity than the more recent upgrades. There have been a number of upgrades since 3.0, but I still prefer the old 3.0. The last page has a message about the importance of having a trading plan. I took the exact same wordage to a local Awards/Trophy type of store and had it etched into brushed aluminum and attached to a hardwood backing. It's hanging in my office as a reminder. The Page 8 message is a photocopy of my actual wall plaque. In Print Copy - The plaque reads "If You Fail to Plan . . . You're Planning to Fail" Thanks to all who made contributions to this July 1993 issue of Commodity Traders Club News.

23

Issue 4. Bollinger Bands as a Filter - Dr. Michael Miller In our ideal world there would be a method for eliminating trades that had a high probability of generating a loss. From June 92 thru July 93, real time trading using Swing Catcher Daily files generated profits of $14,362 on 52 trades and $10,862 on 61 trades in German Mark and Swiss Franc, respectively. One might consider it a foolish endeavor to try to improve a system that has generated profits in excess of 100% per year, but the use of Bollinger Bands clearly eliminate some trades that would have produced loses. Bollinger Bands are upper and lower envelopes around the 20-day moving average. The bands are based upon 2 standard deviation units of the commodity. Prices tend to remain confined with the upper and the lower bands. Any move outside the band indicates a short-term overbought (sold) condition. Consequently, it would not be recommended to initiate a new position at this time. Charts in Print Copy The above chart represents March 93 German Mark for the month of January. On January 25, Swing Catcher generated a long position. The following trade if taken would have generated a loss of $1,387. Clearly, the price is above the upper band and one would assume that the DMark is overbought. In order to quantify the overbought/oversold situation, the following formulae are used: long positions--(upper band-price)/price short positions--(price-lower band)/price In the above example, the upper band is 62.50 and the closing price is 63.00. Consequently, (62.563.00)/63.00=-.79 This number quantifies how far above (or below) the price is from the band. Further research needs to be done in order to determine the optimal filter level. The following represents all trades that occurred when the price was outside the Bollinger Band for both Swiss Franc and German Mark. In summary, 16% or $4087, in losing trades would have been saved if one had avoided making a trade while the price was outside the Bollinger Band. Charts & Table in Print Copy

Review of Buran's Grand Combo - Matthew Chiang I recently responded to Bob Buran's promotion and was impressed by his "record book" of trade statements. I also reviewed the video tape (preview but no methodology disclosed), and I talked to Bob himself before I decided to buy the system. I believe Bob is an honest guy, and he was helpful in answering my questions. I was very concerned with drawdowns and consecutive losing trades, so I specifically asked Bob on this aspect, and his answer was "once in a blue moon."

24

I then bought the System. However, when I ran the software and studied the logic, I found that the system was not what I had expected. Suffice it to say that Bob's Grand Combo system works similar to a volatility breakout system (VBS). Like any VBS, Grand Combo can get a lot of whipsaws if the market is non-trending, but overall, consecutive losses are mild and manageable (there are exceptions, of course). For each trade, Grand Combo has a volatility-type and statistically sound stop-loss, but the program is not specifically engineered to reduce risk in this aspect, except an advise to diversify. I have used Essex's ACE Currencies (a VBS system) and it performed poorly in this aspect (7-9 consecutive losses, could you believe this!). Plus, Futures Chart's Mini-Trend Setter also has significant consecutive losses (3-5 while trying to catch the major change in trend). So Grand Combo is better than others. Overall, I should say Grand Combo is average to above-the-average on loss management - typically 2-3 losses in a row, sometimes as much as 4 losses, but they are not that frequent. Then you have 2-3 or even 4 wins to patch up. So what's the catch? Grand Combo has a weakness I cannot accept. Unlike other VBS or trend-following systems, Grand Combo has very tight profit targets. I was rather surprised that for some markets, the profit target is typically some 30-50 ticks, and you will be lucky to get over 100 ticks (depending on market, of course, the BP has more ticks, for example). I ran some historical tests, and found that most markets made money, as are claimed. But I was not that impressed because most of the trades made very small profits, and you have to trade a lot to make enough money. The average profit per trade (again, depending on markets) is $300-$500, some are over $600 and a few are over $1,000. The losses are similar. I also dislike the idea that Grand Combo pays no attention to underlying market trend. It simply trades breakouts on either side. You could end up buying near market tops or selling near market bottoms. I always struggled whether to obey the counter-trend signals or not while in a defined trend, or seeing a top/bottom is near. Even if the signals are in trend, you usually end up buying/selling near swing highs/lows. This is common to VBS. But unlike other VBS, Grand Combo does not attempt to ride the trend. It is content to take small and quick profits. Most trades are typically short term, from 2 to a few days. That's why the average profit is small. Even though the tests have made paper profits, I wonder if I could trade the system with such attention and frequency. Bob and the brochures do say that you don't need to watch the market, it is true. But with such tight profit targets and trade frequency, I don't think I can afford a full service broker to watch the trades for me. A plus about Grand Combo is, while wins are small, losses are also small, only occasionally do I have losses over $1,000 per trade (Grand Combo does not trade S&P or its like). After paper trading the system for 5-6 weeks, I decided to give it up. I pay much attention to drawdowns and consecutive losses, because I am a novice trader with limited experience and trade capital. I don't yet have the nerve nor the pocket to take 2-3 losing trades in a row while scalping small profits on others.

25

It would be different if I have some big winners to cushion the losers, but I don't see this a frequent event in Grand Combo. I prefer trading for short to medium term (a few days to weeks), and perhaps have some that can ride the trend. Also, you need around $25,000 to trade Grand Combo effectively because it's diversified among 30 markets. Somebody suggested that Bob's good results were not achieved 100% mechanically, and judgment calls were involved. There has been some controversy over this and other issues (on system drawdowns) in Club 3000 recently, and Bob has spoken a few times to defend his case, I believe one allegation is false. I do not want to comment on this, as I respect Bob as an honest and good trader, but I would hesitate to put down real money trading his system, unless I cannot find another better one. The principle behind Grand Combo is sound, and I think it works, but not for every style. It would be very suitable for very short-term traders who require a lot of action, and perhaps more suitable for over-nite traders with 50 to 60 tick targets.

Observations & Stop-Loss Technique - Brian Radke The following statements are my opinion only: In thin, wild markets, such as "Bellies," do not enter "on the open." It is not unusual to see 40 to 70 point opening ranges in this market! Try to time your entry to catch as much favor in your direction as you can. A little over a week ago, I took a "Swing Catcher" signal which later proved to be right, and entered about the time of the day the lows were usually "in" by. The market slapped me with a $600 loss in about an hour (I was trading smaller than the recommended stop), but I believed in the signal and re-entered. This is a vital key to any new trader. You must not become gun shy in markets such as these. If you have done your homework (or even if you haven't and you own "Swing Catcher"), you should begin to have a feel for the market you are attempting to trade, and re-enter after being stopped out. That re-entry was a winner! It was simply a matter of believing and not being scared. Futures are not for you if you are searching for 100% winners. But again, don't feel you have to enter on the open. The following is a little stop placement yardstick I use in some markets. It has just experienced some good results. To avoid redundancy, this idea is based more on the open and closing prices to aid in stop placement. Also, I try not to use daily or true range as this again would be redundant, as most traders have thrust or breakout systems already in place although you could use an average daily range as a multiplier. This is not a system for entry timing! Please refer to Feb. Bellies from 93/07/16-93/07/26. This only works during a trend and is not designed to determine the direction of the market, rather simply a guide to good stop placement. Look also at soybeans, gold, cotton and whatever else you wish. I have this programmed on a spreadsheet for ease of use. The following is for a "bull" trend. Begin using after a confirmed swing low and once you have entered long. It is extremely simple. In this idea positive or negative is not the point, treat all figures as positive. 1. Subtract yesterday's open from today's open= 2. Subtract yesterday's close from today's close=

26

3. Add the resulting numbers from #1 & #2 together and divide by 1.8 4. Subtract the answer from #3 from today's close. Place your open order stop at this point. Reverse the process for short positions, i.e. add to today's close. When today's stop is much below yesterday's (above in a "Bear"), leave your stop where it is to protect profits. This often signals the end of a swing! Don't be afraid to re-enter if the trend continues however. Markets such as bellies are known to bend your eyebrows often. Hang tough. Variations: 1. For short positions add your result to today's open. 2. Use a balance price (0+h+l+c)/4, minus a percentage of today's range 3. Use a 22 day (or any length you wish) average range in place of the 1.8 multiplier.???? I'd like to see your readers variations! Why 1.8. Ask your readers if they can determine why.

TRIDENT . . . A Trading Strategy - Brian Radke I too, like many seem to have a weak spot for "ringed high or low" systems, and that is what Trident is. I believe the mesmerizing effect is due to the ease in which anyone can look at a chart and see without question, P1, P2 and P3. I am not about to slight Charles Lindsay, as it is very apparent that he is very articulate and intelligent. I've literally, without exaggeration, spent well over 100 hours on my computer trying to make this type of system work in many markets consistently. "Trident" is based on the "zero sum formula." This algorithm has been used for decades by statisticians and mathematicians as a measuring tool, and a reader should not be confused into thinking that it is or was designed for commodities as a market system. It is foremost a yardstick, and one should not get overly excited about its predicative capabilities. It is very easy to see where all of the rest of the system, i.e. CP, EP, SD, etc. come from. They are all derived from looking at the personality of the markets and applying fail-safe in the form of equations. I have no problem with this approach, but it is very apparent that the system becomes very cyclic in nature. Leading cycle researchers always relate the same dilemma, cycles seem to disappear as quickly as they appear, and no one can seem to predict a market's swing high or low with any consistency in many markets. This is why there are exceptions (P2=I3 etc.) in the rules of these types of systems. Read the first few chapters of the book and then the last few. You can see that the author has almost totally abandoned the ringed high, ringed low, approach, replacing it with "factor analysis" which is more similar to where our many oscillators of today come from. Trading "Trident" must encompass all of its tools. One must use B2 & B6 and most importantly the variance rules. Even with that done, you will miss many moves and constantly be second guessing your next move, because of the subordinate nature of the minor swings. Look at Jan-March 1992 Cotton. "Trident" made fantastic three day trades then came unglued at the seams in April. Even having said that I can say I enjoyed the book and it is very good reading.

27

FINDINGS: Use DP and TRP as an oscillator and not to form a price window. When trading minor swings, any change in measurements are helpful. Since a ringed high or ringed low is not confirmed until the next day it is too late, so one must try to tilt the odds looking at today's prices. I had a system in place long before reading "Trident" that is surprisingly like DP & TRP. In this system, I do not have to wait for confirmation of a P3. I have it programmed on a spreadsheet and my computer does all the daily crunching. It is not by any means perfect, but I'll share the portion of it that is similar to "Tridents" DP-TRP. TRY THIS: Take nine days of prices, with today being day #1. Now construct two opposing Tridents using max and min. prices over a specific time frame, (9 days in this example). The multiplier used in "Trident" (0.625) can be changed! I have various figures "tweaked" for various markets. You'll need to create 4 columns; column # 1=call this DP #1 (or whatever you wish).=This is the lowest low of days 3, 4, 5 & 6, (remember today is day #1), minus the highest high of days 6, 7, 8 & 9. Multiply this by 0.685. Then add the highest high of days 1, 2, 3 & 4. column #2=TRP #1=Lowest low of days 3, 4, 5 & 6, minus the highest high of days 1, 2, 3 & 4. Multiply this by 0.795 then add the highest high of days 1, 2, 3 & 4. column #3=DP #2=highest high of days 3, 4, 5 & 6, minus the lowest low of days 6, 7, 8 & 9. Multiply this by 0.675 then add the lowest low of days 1, 2, 3 & 4. column #4=TRP #2=highest high of days 3, 4, 5 & 6, minus the lowest low of days 1, 2, 3 & 4. Multiply this by 0.795 then add the lowest low of days 1, 2, 3 & 4. What to look for: In a normal market column #1 should be below column #2 and thus #3 below #4. Instead of looking at the actual number each column offers, I choose to forget about the "window" and look exclusively at the relationship of the columns. On the day that #1 goes above #2 AND #3 goes above #4, a minor swing top is occurring. Note that #3 may be above #4 for a few days before #1 goes above #2 and vice versa. On the days that #1 falls below #2 and #3 below #4 a minor swing bottom should be occurring. Use this as a reversal system very short term (even day-trading). Couple these crossovers with 4 day highs and lows and you have a fair to average system, i.e. #1 goes above #2 and #3 above #4 and today's high is a NEW FOUR DAY HIGH, sell the next open. The opposite is true of course for long trades. DRAWBACKS: This type of system trades blindly at times and gives no help during a strong trend. It does not work well in all markets with one set of multipliers. It should not be traded without looking at daily support/resistance and momentum. I have many more facets built into my system but am offering this much to hopefully inspire someone to crunch the numbers for themselves, and maybe get some new ideas to a very old problem. I would not feel at ease trading this system alone, although it can be brilliant at times and I do look at this when I get a computer generated signal I feel uncomfortable with. I have two other systems to handle the facets that "Trident" type analysis overlooks, and the three together are very helpful.

28

I strongly encourage anyone to spend the time and effort to research on their own. System writers are not always smarter than the average trader, rather they usually have spent countless hours staring at a computer screen to come up with new and workable systems and hoping to find that "right combination." What do you suppose might happen looking at Swing Catcher Harmonic files????

FutureLink Review - James Weber - Canada This article is written to assist prospective subscribers select a commodity futures quote service, and to elicit some feedback from current users. When I decided to turn my hobby into a full-time career, I checked out several quote services. My location near Winnipeg, Latitude 50 degrees North, ruled out telephone and hand-held quote services. My trading did not require "live" quotes, nor did the size of my account justify the added expense. The choice easily narrowed to only two vendors. I chose Futurelink because it had connections I was familiar with - Futures Magazine, Futures Update, FutureSource - and because the service supplied my basic requirements. FutureLink provides futures and futures option quotes for all U.S. Commodity Futures Exchanges and also the Winnipeg Commodity Exchange. The New York markets are on a half-hour delay basis, updated every 10 minutes. The rest are "snapshots" every 10 minutes. FWN supplies current news updates from around the world relevant to all futures, as it breaks, to assist in making decisions. FWN also has regular reports from each exchange separately for most commodities, so traders can be aware of what is happening. Several important technical indicators are calculated and transmitted after the markets close each day. Daily, weekly and monthly bar charts for each commodity and contract month are updated daily. An overlay indicator assists in checking back on prices, volume and open interest. Recommendations and market analysis are provided by selected analysts. Supplementary commentaries and current weather maps can be added at extra cost. A custom screen can be set up to keep track of positions along with profit and loss factors. Another custom page can be set up to follow specific commodities through the day without having to go to each page. The entire program is simple and easy to use, has most information required for regular trading, and is well recommended. There are times when one might like quotes more often, a wider range of technical indicators updated through the day as needed, move overlays on the charts, faster reporting of news at critical times, and access to stock quotes, but of course these would be more costly and available through other services available through Oster Communications. Some computer programs are available through Futurelink to enable end of day quotes to be used in various spreadsheet and charting programs. Support is provided through a toll-free number. There seems to be sufficient staff, all knowledgeable, very helpful and courteous. In most situations, I have found this to be a very good service. The problems I had were in receiving the signal. Subscribers must supply their own satellite dish and computer. The receiver itself is purchased from FutureLink and imported with appropriate duties and taxes paid. Once purchased, it is yours. The recommended receiving dish, a four foot offset, is also available through FutureLink and may be cheaper than purchased locally even with duties and taxes. Subscribers should compare before committing. This dish is equipped with a simple feedhorn which has a clear plastic bubble on the receiving end. This bubble fogs up at any opportunity - cloudy days, rainy days, misty days and overnight. The signal cannot penetrate this fog. Either you wipe it clean several times a day in poor weather conditions, find some way to cover it, or do without a signal.

29

I installed the dish myself. It seems local installers have these in their catalogs but have had little experience with them. On questioning them about the foggy bubble, I was advised occasionally to remove it and not to be concerned about dust, dirt or bugs making webs. I have my doubts considering the vagaries of the signal. This dish is recommended because it picks up the KU signal very well. FutureLink is not available on the C band, only KU band from Satellite K2 and difficult to get from this latitude and region. Apparently it is also available on the ANIK satellite, but I got very poor reception when I tried it, not to mention the expense of importing and returning the trial receiver. While C band signals are forgiving and allow for some degree of misalignment, the KU band signal is not. At this latitude your dish must be right on the signal - exactly! If there is any deviation - at all - there is loss of signal and you might get the quotes but not the news stories or charts. For better or worse, my dish was struck by lightning, frying the dish, the receiver, and the I/O card in my computer. On questioning, installers scoff at protecting your dish from lightning. You be the judge. I was out of business for several weeks getting straightened around. I went to an Alpha 10 dish with an all-weather protected feed horn. If there was any room for deviation with the other dish, there isn't with this one. It must be exact. Be prepared to adjust your dish after a severe storm, large rapid temperature changes, and in deep sub-zero weather. Some days the signal does not come clear until after the sun is up for awhile. Forget about news stories during a heavy snowfall or rainfall. The signal receiver is virtually trouble free. Your computer can be a basic XT or AT with a hard drive, but increasingly there will be more sophisticated transmissions such as color weather maps so you will need a more advanced unit. Although you can use the computer for other duties you must run the resident program 24-hours a day to avoid missing any information pertaining to the commodities you follow. Occasionally the program stops dead with no data units getting through. It wasn't a problem until an updated program was sent out. It can happen anytime during the day or night. I am assured it is not the program's fault. Luckily it is relatively easy to remedy. At first, I used to call FutureLink about the poor reception on certain days as I didn't understand that clouds in the sky or frost in the LNB creates unsatisfactory reception. It was not very reassuring to hear that everyone else in Canada was getting satisfactory signals. There seemed to be no explanation as to why my equipment was functioning unsatisfactorily. By chance, I learned that some people north of me were using the ANIK satellite and were getting very good signals. Well, I got worse when trying it. Releasing the names of subscribers close to me to contact for discussion about the FutureLink reception seems to be a breach of confidentiality. I have to conclude there aren't any, no one is using it to trade, no one cares about the reception, or they are making the best of a poor situation. I really like the FutureLink program and until I am ready to advance to more sophisticated programs, I would like to keep it. However, I am not happy with the reception. If anyone is considering subscribing to the service, or already has it, and would like to discuss it with me for western Canada, I would welcome their calls or correspondence. Perhaps someone has some useful

30

suggestions for me to use. I would appreciate any input. Now really, can I be the only one with these problems?

Using Ensign/Bonneville/CSI Data Formats, Data Conversion - Frank Seitzinger I can use my Trading System as early as 3:34 PM, after the markets close, by converting from my Bonneville Quote Machine, from their data format to Swing Catcher's CSI data format. I use Swing Catcher's Utility/Edit menu selection 7 from the main menu. Then press F2 key and then press the F key to edit a QMaster file. Next, select the file number to edit. Then simply change the file name to conform with the Ensign/Bonneville data format, for CSI/Ensign conversion. In the Ensign System Setup Program, be sure to change the CSI to your new file name. Plus, add lower case c to the historical update time, i.e.: (1545c), for Ensign to convert data to CSI format with your CSI data file of choice. I subscribe to Trend Index Trading Co. monthly parameter-on-disk Service. When I get the disk I install both parameters and included data files for the easy way to be sure all my data is correct and I have the current parameters.

P&L Report on Bob Buran's Grand Combo System - Matthew Chiang I choose only 17 markets because I did not have time to follow more. Out of the 17, I only choose around 4-5 for actual trading. Of the remaining 10 markets that Grand Combo trades, there are 3 markets that I don't have data on: Platinum, NYFE, Unleaded Gas. Cocoa's data is so bad, I discarded the results. Since Genesis data is not 'clean', and that I do not follow the 10+ markets, I did not attempt to correct any error in the data files. Even for the 17 or so markets that I follow, I am uncertain if the data is clean enough.

Sometimes the error is very obvious and I can correct them daily. Other times the errors are not that discernible, and I don't even know where they occur. Therefore, the test results may not be a true reflection of the system's performance, but I think they are close. From $60.00 to $80.00 round-turn slippage, and $30 round turn commission is what I am experiencing now, because I don't trade that often to get good attention. I ran some more tests today and have come up with the following list (appearing at the top of next page): Chart in Print Copy (NOTE: These figures make NO ALLOWANCE for slippage & commission, which has a major impact!)

EDITOR COMMENTS The excellent research done by Mike Miller on Bollinger Bands reveals how a filter can effectively be used as a way of making another methodology work even better. In this case, Mike is using Bollinger Bands as a way to bypass some losing trades, by avoiding trades if price is outside the Bollinger Band.

31

Mike's methodology seems to have excellent merit as a way to make his system work better. The techniques are also likely applicable to many other trading systems. Matthew Chiang's comprehensive contribution and review about Bob Buran's Grand Combo goes into great detail. He must have spent lots of time working on it. From what I understand and have been told by very reliable sources, Bob Buran is likely the number one trading system vendor (based on both sales volume and dollar amount of sales, during the time period he has been selling systems) of all time. System Writer/Trade Station may have sold more copies but they are not Trading Systems, per se. They come under the classification of 'Toolbox' type of Programs, where the user can design his own system using the programming shell. Grand Combo/Trabos is a stand alone system that does not require the user to design the methodology or make algorithm modifications. I believe Buran's System was available to the public for the first time less than 2-years ago. From what I gather by talking to numerous clients of Bob's and from very reliable sources, an amazing number have been sold. It is interesting to note that very few opinions on Buran's methodology have been written. A large number of commodity traders have purchased Bob's Grand Combo/Trabos, yet very little has been written about it. The readers of CTCN would be greatly interested in reading more reviews of Buran's methods. Trading Observations and Stop-Loss Techniques submitted by Brian Radke are very interesting. Brian says that re-entering a trade in the same direction, even after being stopped-out at a loss, can be very profitable. That seems to be true, and in fact I have noticed it seems to occur often. However, one problem with reentering after a big loss, is the fact many traders lack the discipline or nerve to actually do it! Brian's stop-loss methodology could be quite valuable. It deserves to have some extensive research done on it to determine its validity. Does anyone know why Brian is using a division factor of 1.8? Brian Radke's in depth research based on Trident Strategy, reveals he has put a tremendous amount of time and effort into researching Trident. He has shared with us some very detailed technical methods that may get the Trident Strategy to work better. It looks like James Weber spent lots of time and effort trying to get FutureLink to work properly (apparently unsuccessfully). It seems very surprising that Jim says he 'likes the FutureLink Program' (second paragraph from end of his review), in spite of the many problems and great aggravations he seems to have experienced. However, Jim also states he is not happy with the reception, which of course is the most important item! Note: I experienced similar problems involving DTN. The most serious problem was losing data due to weather conditions. Frank Seitzinger's ability to convert to CSI Data Format from Bonneville/Ensign should be applicable to many other software programs that use CSI Format. Matthew Chiang's spent a lot of time putting together his detailed Grand Combo P&L reports. They do NOT include any allowance for slippage & commission, which unfortunately is a major factor in commodity trading! Matthew say's he averages $60-$80 slippage and $30 round-turn commission per trade. Upon updating Matthew's P&L data by taking into consideration his (low-end) slippage and commission deduction of $90.00 per trade, the figures change as follows:

32

Total trades 766 X $90.00 for slippage & commission per trade=-$68,940.00 deduction. Thus, instead of Net Profits of +$31,857.00, the adjusted Net Profits becomes negative -$37,083.00. Quite a significant difference! Some trading systems only deduct $50.00 (rather than Matthew's recommended $90.00/$110.00) per trade, for slippage & commission. However, even if we only deduct $50.00 per trade for slippage & commission (766 X $50.00=-$38,300.00), from the +$31,857.00 Profits, we still arrive at negative Net Profits of $6,443.00. The accuracy of the Grand Combo P&L reports submitted by Matthew, is not and can not be assured. I am sending a copy of this Newsletter to Bob Buran and asking him to check the P&L reports for accuracy and make comments, if he desires. If Bob responds, his reply will be published in the next issue of CTCN.

33

Issue 5. Fundamentals Alone are not Enough - Ken Galloway Enclosed is a true story of my recent experience in commodity trading. I hope it will be informative to your subscribers. Fundamentals alone are not enough. Although most traders use technical today, some fundamentalists do surprisingly well. My discretionary day trader was employed with an old family company that had all the facts on hogs, cattle and particularly pork bellies. He knew how many hogs there were, when they would be slaughtered, and how much hogs and bellies were in storage. Amazingly, within 5 months my account increased from $1728 on Feb. 1st to $26,115 on June 30th. Naturally, I was very impressed. I had been trading commodities on some options since 1978. In my first few trades I made about $18,000. It was only beginners luck, because in the next 14 years I had a net loss of about $150,000. In Canada, I am allowed to make 100,000 in capital gains without paying income tax. Similarly to rules in the United States, I could not claim my loss because I had no gains. I understand that Americans can at least write-off $3,000 per year against other income, and claim some costs of courses and trading programs. The 1/4 million, income tax-free opportunity was happening. The pain of loosing so many thousands of dollars using Tradex 21, Commodity Trend Service, Robbins, Jake Bernstien, Seasonal Trades, Various Managed Funds, CTA's and a dozen other brokers (and of course, plenty of my own trades) was soon to be erased from memory. Technically, I had already paid income tax on my losses, because it was tax-paid money used for trading. Pork bellies had come down a long way. Personally I was very disturbed that my broker wished to hold short positions. Using my simple computer charting program, "Wilder's One Day At-A-Time," I noted the stochastic was very low, and the MACD was confirming a change. Trusting my broker, and obviously too greedy, I reluctantly stayed with the fundamental plan. The government livestock report came June 30th after the market had closed. It was all bad news. We were short 6 contracts of July and August pork bellies. My broker phoned and explained that the market would probably open limit-up on Thursday July 1st. It surely did. Bellies were limit up for 3 days, and by July 6 I had lost 6 x 3 x 800, or $14,400. Naturally, I was absolutely livid. My broker assured me the government report was over done, and that there would be a sharp correction. Then the Missouri flood, jump in soybean and corn prices, and Russian purchases put the finishing touch to my account, and I am left with only $411. That's a $25,700 fundamental mistake ($34,000 Canadian). So, what should I do now? Give my pork belly trader another chance? Why should I dream that things could be better in the future? I am 65 years old, so there certainly isn't a lot of time to replenish my losses. Swing Catcher may be my best chance for now. After all, the trend is my friend (maybe !)

Experiences of a French Trader - Gerard Savry I begun to study futures in 1986 with a oscillator and plans to trade Stock Indices. My first trading system was Magnus, a methodology created by Michael Chisholm, for S&P 500 and OEX options.

34

The system promised that for $895, I would make lots of money! If the daily and weekly stochastics smoothed (%K/%D) with 3 units go in the same direction and the daily pointed in a new direction, 25 to 30% to buy, and 75 to 80% to sell. Then buy a call or go long and vice versa. It's God in a trending clear market, not good in very erratic markets...too slow and signals comes late. I have read many books and gone to seminars and what can I think about all that is available out there? 80% of the systems are good for a moment, but not all the time. 90% of the traders can't follow a system, and they lose money. Not a month goes by where I don't receive a Holy Grail system information packet for making a fortune from Windsor Books. We can get many ideas about trading stocks and commodities, or making a fortune, by building our own unique and personal system. With shared ideas and techniques with other traders we gain time and avoid mistakes. This CTCN Newsletter is very valuable and I thank Dave for creating it. I'm impatient to get it. Members can contact me with a letter c/o CTCN or fax (My English is not perfect). I am interested in having contact with members who have experimented with Trident and Options Investment - a Hotline with great 'false' information. My fax number in France is 33.134.28.01.47.

Product Reviews - Scott Russell Here are a couple of reviews of some products out on the market for futures traders. Before I get to them, however, here is a brief history of my trading career. I started trading at the beginning of 1990. My first approach was to trade the seasonal patterns outlined in the Seasonal Trades Portfolio by Frank Taucher. The results were pretty mediocre, mostly due to my meddling with the system and making many beginner's mistakes (buying when I meant to sell, forgetting to cancel good till canceled orders ... etc.). During the last few years I also purchased several of the popular systems, including Swing Catcher and PPS (Pattern Probability System by Curtis Arnold). Again the results were somewhat mediocre, this time mainly due to the lack of time to consistently follow the system. Thankfully I didn't make all the mistakes! The big mistake that I did not make, and why I am still trading today, is that I did not overtrade. Not making this mistake will allow you to make all others and still be around so that you can learn more from them. And now to the reviews: It includes all the popular indicators, functions and studies that a trader could want with the ability to modify any of these. The program contains some very simple systems and gives the user the capability to either modify these systems or create and backtest one's own. As I mentioned earlier, the program runs through Windows. This makes it pretty easy to use for those that are already familiar with the Windows conventions, and in its basic charting mode hardly needs a manual. The graphics are very good and include a zoom mode to easily investigate any area of the chart. SuperCharts, from what I understand, does most of the things that its big brother System Writer does only at a more basic level; this is especially true in the system writing department where SuperCharts capability is limited to much simpler systems. The manual also falls a little short in the area of system writing and I have spent hours re-writing systems in order to get them to do what I want them to, sometimes with no success. More examples and a little clearer explanations would help. I use the CSI data in my Trendx (Swing Catcher) directory to update my charts and the historical data in my Trendxhd directory for back-testing - very simple.

35

I have not used any of the other charting programs on the market so I can't compare; but for the price, the flexibility, and the educational value, I would say that SuperCharts is a very good bargain. Day Trading With Short-Term Price Patterns and Opening Range Breakout by Toby Crabel. Book $279, video $29. Although I am by no means ready to start day trading on my own, the subject always sparks my interest. So I took the plunge and forked over the cash for both the book and the video. The best way for me to describe the book is to quote from its own introduction: "This book began as a series of research reports presented in the Market Analytics Monthly Market Letter. The book is divided into five sections; titled 1) Opening Range Breakout 2) Short Term Price Patterns 3) Contraction and Expansion 4) The Integration 5) Other Useful Patterns. Each chapter appears in the original form of the research report. While I hope to have minimized any problems which may arise from the article format, the reader should note that there may still be certain redundancies and omissions which have gone uncorrected." The book is full of short-term pattern studies and the results they produce in various markets. There is a wealth of short-term system ideas that can be used individually or combined to produce what should be winning systems. If anybody is developing or already has a day trading system, this book should be in your library. The video attempts to do just that. Combine several of these ideas, along with a money management system, into a short-term trading system. The video itself is kind of plodding and could easily have been done in half the time. (Since I was skiing on my Nordic-Trac though, I did not mind too much.) Whether it actually does this is not for me to say since I haven't tried to trade it. I have tried to program the system into my SuperCharts, but due, perhaps, to my own bungling have been only partially successful. What I was able to do was program in some of the components of the system separately, and back-test them. These tests do show that some of these components are valid short-term indicators. Ok, that does it. I haven't (as may be evident) written anything more complicated than a grocery list in probably 15 years. What some people won't do to get a free upgrade!!

Review of Data Services - Matthew Chiang I am a subscriber to Genesis Data Services. It's data is not that "clean," so I started looking for a more reliable quote service a few months ago. After comparing prices, dial-up costs, early access surcharge and other facilities, I decided to focus on delayed quotes from Signal, DTN, Bonneville (BMI) and Future Source, which, despite the large start-up fees, give a much better cost-per-quote and availability ratio than any dial-up service. I live in Vancouver, Canada, and I decided to try Signal FM first. The major reason being that Signal is transmitted via FM, which means much less fuss and installation problems. All others require KU-Band satellite and none has a local office in Vancouver, and I have no knowledge on satellite reception. Signal is therefore an obvious choice. There are 2 versions of Signal receiver, Enhancer (stores 900+ quotes) and Enhancer Plus (stores 12,000+ quotes with 4MB RAM). I obtained the Enhancer and set it up with the accompanying software within 20 minutes. Signal is transmitted from Mount Symour, the highest mountain in Vancouver, and I can see it from my house. So I should enjoy high fidelity signal, much like my FM radio system.

36

Much to my chagrin, I had to move the receiver and the antenna around the house to get the best reception, and I still had missing data. I purchased a FM signal booster from Radio Shack but it wouldn't help. Reception got worse in the evening, during rainy or cloudy days, which is a common problem with FM transmission. The Signal downloading software also has a problem, such that not all the quotes can be downloaded (all can be displayed though). I set the software to collect around 60 symbols, each with 2-3 contract months, a total of around 200 commodity-month downloadable quotes per day. But the software would download around 60-70% and spent "hours" looking for the missing quotes from the Enhancer. I had contacted Signal a few times and a few suggestions were offered, but none worked, so I sent the Enhancer and the software back after trying for 3 weeks. I was more convinced that FM or satellite transmission are all unreliable. So I focused on BMI which is transmitted via Rogers Cable in Canada. In terms of cost-benefit, DTN seems to be offering the best value. A third party company also has a spectrum of add-on software for you to convert DTN data into other formats, and it also allows simultaneous downloading and conversion to other format, while still using DTN under DeskQview. You can use your favorite software together with DTN, provided it runs under DeskQview. I was tempted to subscribe to DTN, had it not been of the FM problem. I was surprised that BMI has a local technician that could be a phone call away. I did not know until he personally delivered the receiver. If you have a hardware or BMI software problem, he could actually test and troubleshoot on-site, with a 800 phone link to US! Signal via Cable TV data is clear and stable. The only trouble I had was when Rogers technicians went on strike, they sabotaged the FM transmission network, which caused me 2 down days. The BMI guy took 2 receivers to my house trying to get a better reception over the weakened signal. BMI officially endorses Ensign 5 technical analysis software, which is bug-free and has all the studies and requirements that a demanding trader needs. Its system's writing section, however, is a minus-minus. Instead of easy language or human language, it uses mnemonics typical of assembler or low-level programming languages. You have to manipulate the memory registers and write simplified yet braintaxing mnemonics that only a hacker would enjoy. Otherwise Ensign 5 is a good choice, especially that it can convert data into CSI and MetaStock, and each directory can store unlimited number of contracts (Both CSI and MetaStock has 120-contract/directory limits). It can also store tick or intraday data, as well as daily or weekly ones. Cost is $1,250 + $10/month. Since I am using Swing Catcher and backing it up with Relevance III and Super Chart, I would not require Ensign 5 or its like. I therefore use BMI's own quoting software: Market Centre 5. At $195, it's a good bargain: quotes + news + portfolio (simplified trade recording, up-to-the-tick P\L, total commission, margin amount and account balance) + simplified tick, 5, 15, 30, 60 minute, day, week, month charts! Market Centre 5.0 is an early release, and full of bugs. But I can still use the basics. Version 4.0 (without the charting function) is mature and working well, and their technical support is excellent. I called them up 5 times since I installed the software, and they helped me come around the problems and sent me new release via modem. Meanwhile, they stopped the billing clock until the next release. BMI delayed quote costs $49 per month, plus a one-time setup fee of $500. A 12-month contract is required.

37

Market Centre 4.0 and its successors have an ASCII transfer function that allows transfer of data at a specified time interval (be it 5-minute, 30-minute or daily), so that you can convert into and run other analysis program. However, it has no conversion utility and I am looking for a cheap solution (any help?) to convert into CSI and MetaStock formats - ASCII comma delimited, with symbol first (such as BP3U, S3X), followed by date (e.g., 08/25/1993), O,H,L,C, Vol, OI. The order is user definable, and you can include 20 other fields. Quote Butler costs $695 and is too much money. If I can't find a ready solution, I will try to write my own utility so that I can stop my dial-up service soon. I was told by BMI that a few of the dial-up services use BMI as their source and resell to the public, while limiting the number of contracts, access time, and charge more or less as BMI. Given all these support, and the final shape of Market Centre 6.0 to come, I think it is much more desirable than any end-of-day limited dial up service. (Provided the ASCII conversion utility is ready). If you have a satellite reception problem, try BMI via cable. There are already many software out there that use BMI data feed, if you are not sure, check with your software supplier.

Day Traders Take a Fast and Costly Route by Stanley W Angrist - 8-31-93 - reprinted with permission of The Wall Street Journal Every day is not a payday for most traders. Day traders are investors who open and close market positions within the same trading day. They hope their market insights, trading skills and speed of action will allow them to take some profits home each day. In reality, most day traders find that what looks easy on paper is hard to do in the market. Consider Jeffrey Needleman, a wholesale stamp dealer from Ann Arbor, Mich., who has been investing for 25 years, most of that as a day trader. He says that during the past 10 years he has run a $10,000 account into more than $100,000 in a few months "7 or 8 times" but always manages to collapse it back to below its starting value in a few weeks. "When you have 30 or 40 winning trades in a row you begin to believe you are onto something and so you start to overtrade and the market takes it all back," explains Mr. Needleman. Most market professionals shun day trading, arguing that the costs of getting in and out of trades that usually produce only small profits and some inevitable losses will eventually deplete the equity in the accounts of all but the most skilled. But traders like Mr. Needleman don't much care about expert opinion. He says he is neither a high liver nor consumed with a desire to have great wealth. What he likes, he says, are the "big video game aspects" of day trading. When brokerage firms ask what his goals are, his stock response is that "I just want to have a wonderful time losing my equity." Other investors explain their affection for day trading in more expected ways. Kent Taylor, an Austin, Texas, investor who traded stock options before he began day trading futures full time in August 1992, says, "I like to go to sleep at night and not worry about the market 'gaping open' against me." An opening gap is when market prices begin the day at a substantially higher or lower level than the previous day's close. Day traders can play in all the financial markets, but most of them deal in futures contracts, especially financial futures such as the contracts based on the Standard & Poor's 500 stock index or on currencies, such as Swiss franc.

38

A futures contract is an agreement to buy or sell something in the future, say 62,500 British pounds for each contract, at whatever price prevails on the exchange. Investors who believe prices are going lower sell future contracts, while those who believe prices are going to rise buy futures contracts. Two things determine whether an investment is attractive to day traders. One is liquidity, or the volume of trading. The other is volatility, or the size of price moves. When the volume of trading is heavy the bid-ask spread for an investment is small, meaning day traders can profit on small price moves. For example, the S&P 500 contract usually trades with only a $25 to $50 difference between what sellers will accept-the "bid price"-and what buyers will pay-the "ask price." The second requirement, volatility, means the investments must move enough during the day so that the traders will be able to overcome their costs and still be left with a profit. Linda Raschke, a full-time trader and a sometime day trader, says day trading isn't something that can be done everyday. "You do it when the volatility is there," she says. More than any other individual investors, day traders see their activity as a business. They believe that if they do their homework they will spot a significant move in the market before the rest of the trading world, capture a part of that move, and then exit with a profit. Anthony Eck, 39 years old, who trades out of his home in Austin, says that getting out quickly is an absolute necessity. So is a strict control system that limits both profits and losses. Trading mostly currency contracts, he will risk no more than $125 a contract. His average loss generally is no more than $50 and his average profit is a minuscule $62 per contract. While many traders would scoff at such numbers, Mr. Eck says that 71% of his trades have been profitable since he started trading about a year ago, making his trading profitable overall. Tom Meadows, who has been day trading full time only since March, hopes he can make a living doing it, but so far his losses exceed his profits. Mr. Meadows, 50, a former software manager in Austin, says day trading is appealing to him because "I like the idea of having my finger on the pulse of the American economy." Day trading requires constant attention. In addition to the frequently changing bid-ask spread, day traders also must cope with the time differential required for brokers to fill their orders. It's a business where seconds count. Mr. Taylor, who trades mostly currency and the S&P stock futures, says he places his orders by phoning clerks stationed in booths along the periphery of the trading pit. He says the clerks can execute an order and report the price to him in less than a minute from the time he picks up the phone to place his order. Although all day traders claim they kiss the losers good-bye fast, the general lack of success for most suggest they might be a bit slow on the exit. David Morse, trades from his home in Atlantic City, N.J., says he has been far more successful at the blackjack tables, which he visits after the markets close, than he has been in day trading. After 10 years of trading, "I would give a pint of blood to be able to trade successfully," he laments. Brokers love day traders because they can generate huge commissions. But brokers openly encourage few clients to trade. "If I saw more success stories I might be more willing to encourage people to try," says William Mallers Jr., president of First American Discount futures broker in Chicago. A day trader can generate as much active a day in commissions, he says as $1,000.

Gann on Astrology - Eugene O'Sullivan While the charts still resting in Pomeroy, WA show numerous astrological marketings, the only written manual concerning Mr. Gann's financial astrological methods were in correspondence to some of his

39

clients, and this came a year or so before his death at 76 years of age. Here are excerpts from these Gann letters: Letters of W.D. Gann - Active Angles and Degrees: By live or active angles is meant Prices and Time Periods where the Longitude of the major planets are or where the squares, triangles, oppositions are to these planets. The average of the six major planets Heliocentric and Geocentric are the most powerful points for Time and Price resistance. Also the Geocentric and Heliocentric average of the five major planets with Mars left out, is of great importance and should be watched. You should also calculate the averages of eight planets which move around the Sun as this is the first most important odd square. The square 1" gives 9, the square of 3 and completes the first important odd square, which is important for Time and Price. Examples of live, active angles: at the present writing, Jan. 18, 1954, Saturn Geo, is 8 to 9 degrees Scorpio. Add the square or 90 degrees gives 8 to 9 degrees Aquarius and equals the price 308-309, for May Beans. The planet Jupiter is at 21 degrees Gemini, which is 81 degrees in longitude from "0" the square of 9. Subtract 135 degrees from Jupiter gives 306 or 6 degrees Aquarius. This is why soybeans have met resistance so many times between 306 and 311-1/4. The price resistance levels come out strong around these degrees and prices and the Geometrical angles come out on daily, weekly and monthly, but the power of Saturn and Jupiter aspects, working out Time to these price resistance levels, is what halts the advance in Soybeans. 24 Revolutions of Time and Price - The earth makes one revolution on its axis in 24 hours, moving 360 degrees in longitude. One hour of Time equals 15 degrees in longitude, and for one hour of Time, we use one cent of Price. This is for highly active markets but can be used for weekly and monthly time periods, as you can see by the Master Chart. The longitude of the Planets and the longitude of the average of the Planets determine the Resistance Levels as the price moves around each cycle of 24 cents per bushel. You mark on the Master Chart all low prices with a red circle around them and place around all high prices a green circle. Then note the angles of 45, 60, 90, 120, 135, 180, 225, 240, 270, 300, 315 and 360 from each high and low. Then check the Longitude of the Planets and the Longitude of the average of the Planets to see when the Price reaches these degrees or aspects and meets resistance. Example: Dec. 2, 1953, May Soybeans high 311-1/4. This equalled 18 degrees 45' in Pisces, close square or 90 degrees of Jupiter, 135 degrees to Saturn and 180 degrees of the averages, and 120 degrees of Uranus. 300 Price equals 30 degrees Virgo. 302 equals 30 degrees Libra. 304 equals 30 degrees Scorpio. On Jan 18, 1954, the planet Saturn Geo. is 8 degrees 30' Scorpio, and 15 degrees Scorpio gives a price of 303, therefore when May Beans decline to 302, they will be below the body or longitude of Saturn and will indicate lower. At the same time, using the Earth's annual revolution of 365-1/4 days to move around the Sun, a price of 308-1/2 is 0 degrees or square to Saturn. As long as the price is below 308-1/2 it is within the square and in position to go lower. But by the 24th revolution, when the price breaks below 304, it is in the bear sign Scorpio, a fixed sign and will indicate lower prices. Study and analyze all options of all commodities in the same way as we have analyzed May Beans.

40

Remember, when these Resistance Points are met you must give the market time to show that it is making tops or bottoms and getting ready to make a change in trend before deciding that the main trend has changed. You can buy or sell against these resistance levels and place a stop loss order. Having before you all the information outlined above, you would certainly have gone short of May Soy Beans on Dec 2, 1953 and cover your shorts on Dec 17 at 296 because the price was down to the 45 degree angle from 44 on the Monthly high and low chart. 24 Cent Moves or More - It is very important to watch the action on the daily and weekly chart when the price is up or down 24 cents from any high or low, 48 cents, 72 cents most important because three times 24, 96 cents, 120 or 5 times 24; 144 of great importance because 6 times 24 - very important. You can also use 1/2 of 24, which is 12, and watch 36, 60, 84, etc. which equals 180 degrees or half the circle or cycle. May Coffee - March 19, 1954 - High 8729. Using a scale of one point to one degree, 8729 equals 29 degrees Gemini. Using a scale of 30 points to one degree, equals 7 degrees 30' Aries. Using one cent to one degree, equals 27 degrees 16' Gemini. The dollar value is $28,171.00, which equals 11 degrees 45' Capricorn. The average price of 5 options on March 19, 1954 was 8663, which equals 28 degrees Aries, or 60 degrees from the Heliocentric Jupiter. Heliocentric Jupiter is 20 degrees 35' Gemini, which means that the price of 8729 was at this degree. Heliocentric Uranus is 21 degrees 52' Cancer and the price at 21 degrees Capricorn is opposite to this. April 16, 1954 is 276 months from April 16, 1931, low 435. Using 50 points per month, the 45 degree angle crossed 8715 on March 19, 1954, and the Sun has moved 8253 degrees from April 16, 1931. Add this to 435 gives 8688 as the resistance angle. March Coffee - October 1, 1936 low 300. Time to April 1, 1954 210 months at 30 points per month, the 45 degree angle crosses at 5600, and at 40 points per month, it crosses at 8700. 1931, April 16 to March 19, 1954 - Geocentric Saturn moved 285 degrees 38'. This would give a price of 8572. 1936, October 1 to March 19, 1954 - Geocentric Saturn moved 231, which would equal a price of 7230. 1940, May 15 to March 19, 1954 - Saturn moved 181 degrees 35', which gives a price of 6990 and using 45 points to one degree would give 8715. 1940, August 19 - Saturn moves 173 degrees 23'. At 45 points to one degree, this equals 8760 price. HELIOCENTRIC SATURN - 1931, April 16 to March 19, 1954, Saturn moved 287 degrees 15' which equals 17 degrees 13' Capricorn, price 8632. 1936, October 1, Saturn moved 225 degrees, which gives a price of 7150. 1940, May 15, Saturn gained 179 degrees 44', price 5940. 1940, August 19, Saturn gained 176 degrees 14', price 5842. HELIOCENTRIC PLANETS, March 19, 1954 -Jupiter 89 degrees 35' equals 29 degrees 35; Gemini. Saturn 214.44 equals 4 degrees 44' Scorpio. Uranus 111.52 equals 21 degrees 52' Cancer. The average of these 6 planets is 164.17 or 14 degrees 17' Virgo.

41

GEOCENTRIC PLANETS - Neptune 204.35 equals 24 degrees 35' Libra. Pluto 144 equals 24 degrees Leo. Mars 221 equals 11 degrees Scorpio. The average of the 6 Geocentric planets is 173.26 or 25 degrees 26' Virgo. One-half of Jupiter to Saturn Helio is 152.09 or 2 degrees 9' Virgo. The average of Saturn, Jupiter, Uranus and Neptune is 155.10 equals 5 degrees 10' Virgo. 1/2 of this average is 17 degrees 35' Gemini, Jupiter, Uranus 1/4 is 100.43, equals 10 degrees 43' Cancer Heliocentric. 1/2 of Geocentric Jupiter to Uranus is 93.48 or 3 degrees 48' Cancer. IMPORTANT DATES EACH MONTH - 1st, 15th, 18th, and 19th. The present market is running close to these dates. The extreme high was 9 months from June 19, low 2 months from Jan 19 low, 6 months from Sept 15, 1953 low and 5 months from Oct 19 high at 5860. GEOCENTRIC MAPS MOVEMENTS from low prices on Coffee. 1931, April 16 to August 7, 1953 - Mars has made 12 round trips. 1954, October 29 - Mars will be opposite or 180 degrees from its place on April 16, 1931. 1936, October 1 to September 19, 1953 - Mars made 9 round trips of 360 degrees each. 1954, Dec. 9 - Mars will be 9-1/2 round trips or opposite its place Oct. 1, 1936. 1940, May 15 to June 12, 1953 - Mars made 7' round trips or complete cycles. 1954, April 9 - Mars is 7-1/2 cycles or opposite its place on May 15, 1940. Due to the retrograde position of Mars, it will again be 7-1/2 on July 7 and on Aug. 17, 1954 or the third time in opposition to its own place, which is very important. 1940, Aug. 19 to Sept. 15, 1953 - Mars has completed 7 round trips. Note low on Coffee on that date. 1954, Dec. 4 - Mars 7-1/2 round trips or opposite its own place on Aug. 19, 1940. If Coffee starts to decline between March 22 and 24, 1954, it should continue down to around April 15, when the adverse aspects of Jupiter to Saturn and the Sun to Neptune are completed. From these dates, you should watch for the possibility of a rally up to April 26, 1954, when Jupiter is 120 of Neptune and the Sun 130 of Saturn. This might cause a quick rally followed by a sharp quick decline. By studying all of the data outlined and applying it to Coffee, you will learn more about trend change causes. March 20, 1954 - W.D. Gann - Apply the same rules to grains or any other commodity and by study and practice you will learn how to determine a change in trend from a strong to a weak position to a strong position. Remember that you have signed an agreement not to reveal these rules and instructions to anyone, and by keeping these secret discoveries confidential for your own use, you will later receive the very important CE AVERAGE, and the MOF FORMULA which is only taught to students who have taken the same course as you have and we do not reveal it to students who take the minor courses and pay less money. Chart in Print Copy

EDITOR COMMENTS

42

The excellent submission by Ken Galloway reminds us how difficult it is to use fundamentals in the commodity markets. In addition to the problem of proper interpretation, there is the concern of the insiders having the knowledge before you and I. For example, the large slaughter house operators may know beforehand that a large number of animals will be coming to market next week. That will subsequently depress the cash market prices. He can then hedge or sell Futures before the public traders realize the excess meat supply is at the market. Similar valuable and early insider information is available to large grain processors, metals dealers, oil firms, food merchants, banks, etc. It is very unfortunate that Ken lost about $150,000 trading commodities over a 14 year period. However, it's interesting to note that Ken has not given up like many others would. That reminds me that persistence and determination are the keys to success in life. We must keep on trying, and never give up, on commodity trading or other areas of life. Gerard Savry's contribution teaches us that many systems work in a trending market but fail when the market goes sideways, choppy or changes trend. That is why we should look for systems capable of actually evaluating the trend of the various commodities and then picking the actual markets to trade that have been pre-qualified as likely good trending markets. We all would like to believe there are profitable systems for trading non-trending, volatile or choppy and direction-less markets. However, the truth is that it's much easier to make money trading a good trending market rather than a trendless choppy market. It only makes sense that would be true. The Product Reviews done by Scott Russell are very good and informative. Scott has done a good job pointing out the major features and benefits of the systems and products. The review of data services by Matt Chiang points out once again the problems many traders have had with on-line quote services. Your Editor also had many problems with a couple different on-line data services he tried in the past (DTN via satellite, FutureSource via FM, and Signal via Cable TV). With DTN the problem was constant loss of data due to weather conditions, such as snow, rain, fog and even heavy cloud cover. Those weather related problems did not occur with Signal for Cable but there was still considerable data loss, mostly missing ticks. The Signal and FutureSource problems cause was unknown and was never resolved or cured. My experience with FutureSource was some years ago and perhaps is working better now. However, the DTN and Signal problems were fairly recent. Also, many other traders have told me about identical or similar problems involving them (also FutureLink). Unless you truly need or want an intra-day quote service I would advise against it. In my opinion, and for various reasons I will outline in a future issue of CTCN, most traders are better of with an end-of-day service via a modem, such as CSI in Florida. The interesting article appearing in the Wall Street Journal teaches us that day trading is very difficult. In fact, the article is more optimistic about your chances to do well in day trading than is actually the case! Remember, overnight position traders normally go against other position traders, but day traders likely are competing directly with the Floor Traders, who have a huge advantage over off-the-floor day traders. Such as paying no commissions, access to the actual prices at least 30 seconds or more before the on-line quote service sends it to you, and the fact they may know what their colleagues standing next to them are going to do next. Plus, certain other presumed advantages and edges they have other you. If they don't have the 'edge', why do you think their Seats are worth almost a half million dollars!

43

Gene O'Sullivan's long submission written by W. D. Gann is quite involved and extremely complex but very valuable if interpreted and used properly. Unfortunately, that is true with much of Gann's writings. Gann's work is quite unique, and works great at times, if done properly, but requires lots of studying, research, interpretation, hard work and imagination. Thanks to all who made contributions to this issue. Notice: Please consider making a contribution to our next issue. You may not realize the value of your knowledge and experiences. However, I am sure you can contribute something of value to the members. Issue 6. Elliott Wave Theory - Owen Cramer In Elliott Wave Theory, the largest waves within a price move are often referred to as impulse waves. These would be either wave 3 in a 1-2-3-4-5 sequence, or wave c in an a-b-c sequence, in both cases these waves or movements are usually the most powerful in the direction of the trend. The following is a discussion on this pattern and a vehicle to use when a trend has started and you want to get into a market. The first step in identifying an impulse pattern buy signal is a four day low. This means that the intraday low of the latest trading day must be lower than each of the intraday lows of the previous days. It may be lower than more than three, but it must be at least lower than most recent three. The second requirement after a four day low is that an up-close must be achieved. There may be more than one up-close in a row. Also, the up-close may be achieved on the same day as the four day low. The final pattern set up after one or more up-closes is a down-close which does not make an intraday low, lower than the original four day low. There may be more than one down-close in a row. Sell entry signals are the reverse of buy entry signals. The preconditions for a sell entry are a four day high followed by a down-close followed by an up-close, without a violation of the original four day high. This indicator or vehicle can be used to initiate long and short positions, but it is recommended that you use it in conjunction with an overbought or oversold oscillator. You can also use it with a moving average. Through optimization you may find that you can dramatically increase the reliability of this indicator in a particular market.

My Trading Software and my Portable Computer Trading Station Setup William J. Armstrong First, I will report about my trading experience with my Swing Catcher System. Since June 10, 1993, when I took my first position in the market based upon a signal from Swing Catcher, thru mid-October, I have made 13 trades, 11 of which have been winners. They are actual trades generated by the system, not paper trades, and 11 trades went as the system predicted. I have been trading commodities for 18 months and this is by far my best record. I recommend Swing Catcher for the following reasons: 1. First and foremost, it works. 2. Support is excellent; the monthly update of parameters is essential. 3. The system reviews the main commodities and ranks them on profitability. 4. The system gives targets (I have given a lot of open profit back to the market). 5. The system is easy-to-use, the manual is complete and you don't have to watch the market all day. 6. Finally, and perhaps this should have been first on the list, Dave Green is honest, truly cares about his trades and works hard to provide good value.

44

One of the criteria I looked at in selecting a trading system was portability, because I like to travel. I have set up a portable trade station that fits into my computer case. I have a Toshiba laptop T4500C with a Hayes 2400 baud pocket, external modem. As an accessory, Toshiba offers a Fax/Modem chip to put into the laptop. CSI can not assure accurate data transmission with a combination fax/modem. This may change soon, in which case the external mode will not be necessary. As Trendx/CSI Portfolio users know, in the QuickTrieve Program under User Constants, you set the telephone number to be dialed by the modem. In my travels from one hotel to another, you modify the telephone number to be dialed to comply with the hotel dialing-out procedures, usually a 8 or 9 to get an outside line. One problem that presented itself early in this process was the fact that there is usually a 4 to 6 second delay before the dial tone comes on after you dial 8 or 9, at which time the first 3 or 4 digits of the CSI telephone number are lost and the connection fails. CSI has allowed for this by use of commas, each comma equals a 2 second pause in dialing. For example, if your hotel requires a 9 to get an outside line and there is a 4 second delay, you program the following in the user constraints: 9,,,1-407-392-0572. You can determine the delay by dialing 9 yourself and counting the seconds for the tone. I usually add a comma for good measure. I spent 2 weeks this summer trading from the beach using my portable trade station.

O stands for Orange Juice in October - Robert D. Edwards I started trading February 28, 1980. On my broker's advice I put on position trades of going long Oats, and some other grains and watched as every day I lost money. In a couple of weeks I took my losses in the grains (actually sold Oats on the low of the year--how embarrassing). I have never been a position trader since. I am a short-term, 1-3 day trader. After some initial success, I was so excited I quit law school at the University of Illinois, two weeks before the end of the 1980 spring semester. I had to quit because I couldn't stop studying commodities long enough to get ready for finals. I have never made big bucks trading and although in recent years I am starting to make some headway, I still am an overall net loser in commodities. However, I attribute the lessons I learned in commodities to helping me make an excellent return on my mutual fund accounts. It also taught me how to take calculated risks and to believe in myself. This allowed me to start and run a very successful business. I feel commodities has rewarded me several times over. Still, I would still like to be able to make some real money in commodities as well. I have gotten to the place where I can tread water for months and stay in there without making or losing hardly anything, although I am trading every day. I'm told this is good. If you are around to trade tomorrow, you are in a position to hit that home run. In the last few years I tread water until I hit the home run. Then I forget everything I know--the rules and methods go out the window and I remain reckless until I give it all back. Hey, I am playing on their money, I must tell myself. When the profits are all gone I get serious again and start working methodically and get back on course. I'm expert at working out of messes. But handling a winning trade drives me crazy. To get rid of the anxiety I try and take my profits quick, way too quick. Well, I do my own independent research and anyone who doesn't will never, I repeat, never be successful. As a true entrepreneur, I am my own person. I trade solely on my own advice. Oh, I gather information

45

from sources, but I never take anything at face value. I do my own research. If my research agrees, then I will go for it. I assume fundamental information is already factored in and am more likely to trade opposite what the news would tell me to do. I am a 100% technician. I enjoy having a system like Swing Catcher because I like to bounce off the trades this system gives me, against my own research. Like any trend-following system, Swing Catcher does great in a trending market and poorly in a choppy, trend-less market. I do best trading in a choppy market because I never let my profits run anyway, remember. In a choppy, sideways market, the intelligent thing, is to do the opposite of what the trend-following system signals tell you to do. I would venture to say there are more choppy and sideways markets than there are trending markets. Within a trading range, I will go long at the bottom of the range and then reverse and go short at the top of the range, and I do it quite effectively because I place double reverse stops to go with the trend if there is a breakout up or down. Still you need to find those trending markets because they will let you hit the home run. Most successful traders have only 40%, 30% or lower winning trades, but the occasional home run puts them way ahead. You have to get that occasional home run. I will therefore, give you some insight on a possible home run I see and will be trading in my own account. Again, this is my own independent research and I am not giving advice. If you are asking, I am telling you not to take this trade. But watch and see how it works out, just for fun--going long orange juice in October 1993. Long November 93 Orange Juice - I am a seasonal and cycles man, a pattern trader, a technician. I start by looking at the long-term monthly charts and then go to the weekly charts and finally to the daily charts. Beginning in 1967, you will see Orange Juice started out low in the beginning of the year and then rallied until December. Don't take my word for it, get a long-term monthly chart out and look it up right now as you read this. You will see that March was the low of the year and then going up in April/May, we went sideways until the big move up at the beginning of October. Bingo! In 1993 we hit a major 15 year low in Orange Juice in February and went up until the beginning of July and then went sideways. Then at the end of September, OJ has broken out to new highs, closing on 9/29/92 above the old 131.00 high in the November contract. I am going with the breakout and see the first objective on November OJ of about 145 with a possible ultimate target of 170 to 200 by May 1994. For confirmation of this pattern I studied all the years from 1967 to present and picked out the years you had either a Nov or Dec low of the previous year or a major low in the first quarter of that year. This is what I consider the seasonal upward trending year. However, when you start out at a high in January and fall most of the year, then you are in a contra-seasonal trend and you should not go long in October because the trend is solidly down. Still, it is amazing that in many of these down years, orange juice would have an upward correction in October. Now for the years in which there is a seasonal upward move (like 1993), the results are as follows: 1967 - As mentioned before, going long October 1st would have caught a big move. By staying long until mid-December, one could have made a move from 38 on the October contract to almost 64 on the January contract. 1968 - September was the break-out up month but ended with a major correction allowing October to be a major up month from $63.50 to $74.00. However, November was a killer down month followed by another big up move in December. This started a high January 1969 that began a counter-seasonal 1969. Again, even in a counter-seasonal year which had nearly all down months, Oct. was an upper. Then 1970 was another down year which should be ignored because it is counter-seasonal.

46

1971 - After going up Jan. through May, there was a correction with a strong up move in Sept. and yes an October straight up move which ended in a November new high. This was followed by a counter-seasonal 1972 with a major low in Oct. followed by a good rally into November. 1973 - Another perfect seasonal move up with a July and Aug. correction allowing a Sept. rally, a strong October upward break-out and November high. 1974 & 1975 - In both of these years September was the big break-out month so October was a correction month. However, buying the October low allowed a nice rally into Nov. 1976 - Being a contra-seasonal down year, this year was ignored. 1977 - This year was a strong up trend for the whole year. With a high in Sept., there was a correction in October with a new high in November. 1978 - A sideways topping year saw a major correction and low in September, allowing a major rally in October. 1979 and 1980 were down years and ignored. In 1981 a strong January rally made this a basically down year and a contra-seasonal year that should be ignored. The same goes for 1982. 1983 - The classic year. From a Feb. low, a big rally followed with a Sept. breakout and correction, leaving a strong Oct. rally into Nov., another correction and then a big rally carrying into May 1984. This made 1984 and 1985 contra-seasonal years to be ignored. 1986 - A classic year again. With a Sept. break-out and minor correction, October was a solid up mover carrying into December. 1993 closely resembles 1986. 1987 - Another excellent upward year but Sept. was the break-out month and after an October rally, November was the big up month. 1988 - At already high prices, this was a topping year with July and August rallies. Still, after a Sept. correction down, October was a good month to buy. 1989 - It was another contra-seasonal year with Sept. a major downer. The markets bottomed at the beginning of December 1989 for an explosive rally into January 1990. 1990 - This made 1990 a counter-seasonal year and October was a big downer. Still, the last week of Sept. and the first week of October on the weekly charts was a small upward correction before a big drop. 1991 - A classic pattern with October the big break-out month, after a rally the last couple weeks of Sept. 1992 - A contra-seasonal year brings us up-to-date. 1993 - In late September, we are breaking out to the upside in preparation for a big October explosion. Could this be a repeat of 1986? I think it might! Of the twelve upwardly moving years that followed the seasonal patten, October was the month to go long every single time. With the 15 year low early this year and the nice rally we have seen since, this looks like a classic year. Right on time, the market is now breaking out on really strong volume this week. Lets watch and see how far it will go. I would be curious if any other readers can divine an upcoming seasonal trade which can be backed up by historical data. I always try to check out the seasonal tendencies on both a monthly and weekly basis prior

47

to initiating trades. Although there may be over a dozen other filters which I might employ, this is the starting point. If I was writing a book on technical analysis, seasonals would be covered in chapter one because it helps one get an overview of the market and establishes the framework of a trade. On a very short-term basis, there are many other technical factors which were used for timing of the entry point. However, that is another article. Suffice it to say that everything looks good so far. With any luck, I might be able to make this an intermediate term trade of a week or more. Who knows? Wouldn't it be great if OJ locks limit up for several days in the near future! With this market, that's always a distinct possibility.

Money Management Questions & Guidelines- Daniel M. Frieders I am using Trading Recipes System Testing & Money Management Software by RW Systems, which I purchased last Spring. I've not been able to come up with a formula of my own which showed any kind of a consistent profit. However, I feel it was still a good investment as I understand money management, which should be the first concern of any trader. Here's my point, if I have a $10,000 account and Swing Catcher System signals a buy in corn and a buy in silver, should I buy one corn and one silver? Or, should I buy a number of each based on a percentage of my margin account? i.e.: The margin value of all open positions will not equal 50% of margin account and at the point that the 50% mark is reached no new positions will be taken. Good money-management guidelines are as important in increasing an account size as they are in protecting it. So therefore, I use 4 to 7% of account size to determine the number of contracts when taking a position. Whereas, if I only take one contract each time the system says take a trade, my account size will take forever to amount to anything. I hope you will find this of some interest and the subject can be discussed further. P.S. Robert (Bob) Spear, the developer of Trading Recipes, is a super guy and great to talk to.

The 'Best' Ways to Make Money - Dr. Satish Arora It took Bob Buran 6 years to make 1/2 million dollars trading futures. I believe he then made 5 million dollars selling his Grand Combo/Trabos Trading System in 6 weeks! Larry Williams made millions teaching people how the commodity market works and his hotline (he charges money for this service) made $27.00 per trade. Jake Bernstein made millions selling books and hotline 900 numbers, but his track record stinks. George Angell, Welles Wilder, Stanley Kroll, Bruce Babcock, Futures Truth, Futures Magazine, Dennis, Andrews, Lou Mendelson, Quote Services, Investment Educators, Charles Chen, etc. They all made money selling books, magazines, hotline subscriptions, etc. In my opinion, none of them have anything worth a dime.

Addendum and Follow-up to my Previously Submitted Orange Juice Article - Robert D. Edwards

48

The morning I sent Commodity Traders Club News my Orange Juice article, I expected November O.J. to add to its 132.30 close by spiking up on the opening. However to my surprise, it opened the morning of 9/29/93 a couple dollars lower. Each day that followed, O.J. would sell off each day on the close. My broker kept goading me to change my "mental stop" into a physical one, so I finally placed the sell stop under the 129.50 support that had developed. Well-placed stops are a financial necessity, especially when trading O.J., the "pork bellies" of the soft commodities. Well I was stopped out and the market continued a little lower, showing no strength at all. A couple closes above 130.00 had previously made me want to go long. With closes now mounting below 130.00, I was wanting to go short. However, it was hard to go short O.J. when my "official" position that Dave was going to print in this newsletter said I was going long! I was quickly regretting having ever written the CTCN article. I believe that had I not written the article, I would have taken profits in my long position when it rallied briefly over 132.00 and would not have held out until the stop kicked in. I could smell a rat from the time the markets opened down on 9/29. Finally on 10/12/93, I decided to short Nov. O.J. if the contract closed below 130.00 on that date. At 1:00 p.m. that day I opened up my Commodity Trend Service charts which I got a day late due to the 10/11 holiday, and read Joe Van Nice's Market Sentiment comments on O.J. Van Nice reported there was bearish divergences on both the daily and weekly charts and commercials had added heavily to their short positions (you can't win for long fighting against the powerful commercial interests). "Market Sentiment is reaching a bullish extreme." These comments confirmed that "gut feeing" I already had. I immediately phoned my broker to sell November Orange Juice but my broker informed me O.J. is included in the crop report coming out after the close. SO I DIDN'T SELL! Well, the report turned out bearish and with all those bulls trying to stampede out the door at one time, well, suffice it to say the market opened about $8.00 lower than the previous day's 129.25 close. From the $121 area the market rallied to the day's high of 123.00, down $6.25. Selling up against that big gap looked easy, but I was paralyzed from acting. Soon thereafter, O.J. broke below 120.00 and finally hit a low of 109.25, down $20.00 for the day. Had a person sold on a 120.00 stop, around 110.00 would have been a good place to cover and then go long with a 112.00 buy stop order. The low of the following day was 113.55, so a 113.50 stop would protect the profit on the long purchased at 112.00. I never place stop orders to get into positions but more and more I can see how a properly placed buy stop will get me long on a short-term breakout and a sell stop will get me properly short. When gold recently traded above $400.00, I was afraid to pick a top to go short. However, a stop placed at $399.90 on the December Gold contract would have gotten me short at near the top of the move, but only after the market had turned down. I am trying to come up with the perfect price to place a sell stop to get me short the December T-Bond contract which upon hitting it, the market will quickly fall several more points and allow me to then place a buy stop to protect the short. Since I tend to take profits too soon, a buy (sell) stop order when I am long (short) will help me add a position when I am starting to be successful on a trade. I can then day-trade that second order and leave the original order on to help allow my profits to run. I would appreciate hearing from other readers about their use or misuse of stop orders.

49

Essex TradeFAX Free Trial - Robert Edwards I received a free 3-day trial to Essex Trading Co. TradeFAX ph. (708) 416-3530 for voice or ph. (708) 4163558 for FAX. Has anyone out there had any experience with Essex's programs or FAX service. The results of those 3 days of trading in the agricultural markets were very impressive. All orders to open positions are placed by use of buy or sell stops. I have since started hypothetically placing stops in several markets and am finding it may improve my trading.

Superstar Trader John Henry Credits Psychology for His Financial Success - reprinted with permission of The Wall Street Journal Even by the wild-and-wooly standards of commodity futures trading, John W. Henry stands out as unusual. He attended five California colleges in the early 1970s without ever graduating. He devised a card-counting system for playing blackjack and dabbled in parapsychology. And he eventually applied the ideas of such thinkers as Carl Jung and J. Krishnamurti to choosing his own commodity trading strategy. None of this has stopped Mr. Henry from becoming a superstar trader. Last year, Mr. Henry's biggest investment fund soared 62%. And thanks to his hefty share of investors' profits, Mr. Henry earned more than $50 million in 1991-a sum that Financial World magazine says ranked him as the sixth highest-paid person on Wall Street. The only certainty, he believes, is that trends tend to repeat themselves. And so do people's reactions to them - a notion he developed from the Indian philosopher J. Krishnamurti and the author William D. Gann. As Mr. Henry puts it, "Man is mechanical in certain scenarios." For example, he says, people who get slapped "tend to get upset." Mr. Henry is a trend-follower, making his money by leaping on market moves already in progress, with huge, leveraged bets on everything from soybeans to currencies. But for all his eccentricities, the 42-year-old Mr. Henry is all too typical of many big-time traders who rack up a few years of spectacular returns, get showered with money by large Wall Street securities firms, and then suffer losses that stagger investors. This year, with more than $900 million under management, he had losses of as much as 45% by the middle of May after trends in currencies and international bonds turned suddenly and slammed his portfolios. Although Mr. Henry has since come back strongly, rebounding 22% in June and another 26% in July, he is still down 2% to 3% for the year. And Merrill Lynch & Co., which has poured more than $150 million of its clients' money into several of Mr. Henry's futures funds, plans to cut back his role in Merrill's commodity trading pools because of the severity of his trading losses this spring. Mr. Henry trades out of a three-story glass and stone office building nestled in a secluded, wooded glade on the Aspentuck River in Westport, a wealthy suburb an hour's drive from New York City. A round-the-clock trading staff is there to execute buy and sell orders in 70 commodity markets that spew from minicomputers programmed by Mr. Henry to spot market trends. Although he maintains a home in nearby New Canaan, Conn., Mr. Henry lives in Boca Raton, Fla., apparently for tax purposes, where he is building a new house near the local polo club. Threat of wearing Jester's Hat - Employees are reminded of his demanding and exacting attitude. In a window outside the trading room stands a multicolored jester's hat, which Mr. Henry brought back from

50

Paris. "He threatened that if anyone made an error in trading, they would have to wear the hat for a day," says Kenneth Tropin, president of Mr. Henry's firm. The former top Dean Witter Reynolds Inc. futures executive was hired by Mr. Henry in 1989. Mr. Henry says he would not have been successful in financial markets "had it not been for my studies of psychology and philosophy." He adds, "If you don't understand yourself to some degree, it's difficult to make money," crediting such self-knowledge with helping him ride out market downturns. "What you're really pitted against in the market is your own self, how you react to what's going on in the markets," he says. Unfortunately, he says, his penchant for intellectuals "paints a picture of a money manager who's a weirdo. But at least, I was able to translate the search for what is not tangible into something tangible." Thin, pale and wraithlike, Mr. Henry prefers reading books to dealing with people. And he says some Wall Street brokers prefer that he stay away from clients because he describes the volatile ups and downs of his trading style so frankly. Indeed, his accounts have fallen by 35% or more on at least three occasions. In 1976, Mr. Henry was yanked into the commercial world after his father died and he began managing family farmland in Arkansas and Illinois. An early foray into hedging a soybean crop lured him into commodity trading, where he did so well that brokers in Memphis urged him to trade for other farmers as well. After studying 100 years of grain price trends, he devised a formula and began trading in 1981 from an office near his home in Newport Beach, Calif. The fund that catapulted Mr. Henry into the top ranks of traders, Financial and Metals Portfolio, has been sold heavily by several Wall Street firms since it reported price gains of 252% in 1987, 84% in 1990 and 62% in 1991. In the two years ending in December, the fund's assets multiplied tenfold to $619.2 million, or more than two-thirds of Mr. Henry's total managed assets of $906.8 million. However, Financial and Metals began 1987 with only $1.2 million under management. In a footnote to its annual report, Mr. Henry says that year's results were "inflated" by the timing of additions and withdrawals. Financial and Metals scored its sizzling 1991 returns mainly by selling the dollar short (selling borrowed dollars in hopes of profiting from a price decline) and owning French, German and Japanese bonds. When the Federal Reserve lowered U.S. interest rates late in the year, the dollar fell, and foreign bonds soared producing a 45% gain for the fund in December alone. However, those trends reversed sharply in early January, leading to the 45% decline. Mr. Henry says this year's hugh drop wouldn't have occurred if it hadn't been preceded by the December runup. But the drop was keenly felt by newer investors as they "took it more seriously" because they hadn't experienced earlier drops in the fund, he says. One big securities firm, he says, cut the leverage - or efforts to boost returns by using borrowed money - on his accounts in half near the bottom of the decline, thereby missing out on half of the rebound. In addition to Merrill, Financial and Metals has also been sold to clients by several other brokerage firms, including Dean Witter Reynolds Inc., usually in commodity "pools" that divide their assets among different traders. Merrill has given Mr. Henry more money than any other trader. Fees in such pools are steep. Individual investors must pay Mr. Henry an annual management fee of 6% of assets; institutions and pools pay 4%. Brokers who sell the pools may get 6% in one-time commissions plus another 2% annually in "production credits." On top of that, Mr. Henry gets to keep 15% of profits. And investors may also have to pay as much as 10%. By comparison, investors in stock mutual funds pay fees totaling only about 1% annually. Mr. Tropin argues that Mr. Henry's fees are justified by the fact that he usually uses borrowing, or leverage, to control assets three to four times the amount under management.

51

Merrill asked Mr. Henry to come in to discuss the reasons for his big losses. Unlike other traders who may fidget, fret or consider changing their trading system, Mr. Henry calmly explained what was happening and expressed confidence that he would bounce back. He was assured of bouncing back after the springtime bloodbath. Still, Merrill doesn't plan to use Mr. Henry in the same proportion of its commodity trading pools in the future because the latest "drawdown," or loss, was his most sever in both size and length of time, according to one Wall Street executive. At Shearson Lehman Brothers Inc., managing director Charles Nastro says Shearson did "a lot of soulsearching" before deciding to continue using Mr. Henry as a trading adviser. He adds that Henry may be unsuitable for clients who don't "have the stomach" for big losses, or don't want to pay the high fees. But Dean Witter, which has put more than $150 million in clients' assets into Henry-run futures funds, is standing by Mr. Henry.

My Unique Trading Methodology Programmed into CompuTrac Snap - Gerry Stonehouse The following computer algorithm I have programmed into my CompuTrac/Snap Software. It was fairly easy to do and I believe the formula works very well in certain markets but not that good in dull, sideways or choppy markets. It seems to work best in volatile and trending markets, such as Lumber during most of 1993 and the past several months in particular. My method relies heavily on the ADX indicator and on Welles Wilders well known Parabolic Stop. My actual computer code is as follows: Computer Code in Print Copy

Market Wizards on Money Management Daniel M. Frieders The best writing I've ever seen on the subject is the chapter on Tom Basso, in the Market Wizards 2 book. No one should trade without first reading Tom's comments.

EDITOR COMMENTS Owen Cramer's explanation of Elliott Wave theory is informative and valuable. Owen's article reminds me that though waves definitely exists in the markets, there's a major problem with correct identification. Most traders use subjectivity and judgment to identify Elliott Waves. It's easy to look at charts using 20-20 hindsight and count the waves, but doing it correctly in actual trading is MUCH more difficult! The submission by William Armstrong must make many of us envious that Bill was able to sit on the beach and make great money trading the markets, using his trading system and portable computer. Notebook size computers are now extremely popular. That's because they can do most everything a large desktop can do but are usually weigh less than 9 pounds and can run on re-chargeable battery power. Your Editor recently received his new IBM ThinkPad 350C Portable Notebook Computer, but had to be extremely patient and wait 3 entire months before IBM was able to ship it out, due to their huge order backlog. Most of this issue of CTCN was written using Word Perfect and my new ThinkPad.

52

The incredibly detailed research done by Robert Edwards, using Orange Juice Market, demonstrates the importance of extensive research and seasonal studies. His work closely resembles the work done by W. D. Gann. In fact, the layout and verbiage is very similar to Gann's detailed and valuable work. Dan Frieders' questions and comments on the important subject of money management reminds me that frequently it's even more important than the technical side of trading. Many times I have heard about traders losing or making money, mostly due to poor or good money management. In reference to Dan's question...the money management Portfolio Manager built into his system will tell him how many contracts to trade based on his account size. A good rule-of-thumb is to not risk more that 5 to 10% of account size on any one position. We should all realize that in spite of Dr. Arora's brief and highly negative submission, some traders do in fact make excellent profits. I believe he may be wrong about Buran's sales and the time frame in which he made all that money selling his system. According to some very reliable sources, I have been told Buran appears to have made (approximately) between 1 to 2 million dollars selling Grand Combo, etc., in about a 1-1/2-yr time period. That is less money and greater time than Dr. Arora indicates, but still astonishing sales. Likely more money in system sales, in a such a short time frame, than anyone else has ever accomplished. A published personal track record and extensive, expert and incredibly good professional marketing efforts did it. Robert Edward's follow-up to his OJ article is most appreciated. Because Bob was incorrect in predicting Orange Juice would go up in price, he naturally was a little hesitant having his original submission published. However, it was fairly easy to persuade Bob to let it be published and for him to write an addendum. That situation should be beneficial to CTCN members. It also teaches us that in spite of intensive and valuable market research, you still can be wrong on predicting the market direction. That's why using stop loss orders at all times are so important! The Wall Street Journal reprint about John Henry again demonstrates huge profits can be made trading commodities but there's inherent drawdown potential. Even one of the largest and most successful traders of all time like John Henry can have a 45% decline or drawdown in one month, but conversely can also have a 45% gain in one month. Reference to Gerry Stonehouse's submission and his use of the ADX indicator, and Dan Frieders recommendation of Market Wizards 2 book. I have talked to some traders who like using ADX as a longterm trend indicator. I have also heard from several traders that the Market Wizards 2 book is excellent. Information Wanted Frank Morgan would like to hear from anyone with positive or negative experience with Cross Current by Steve Briese or Dollar Trader by Dave Fox. Issue 7. How To Select a Trading System - Ashif Jumma The selection of a winning Trading System is a process a lot of technical traders go through. Some seem to have no problem, while others get tied in knots even after spending a small fortune. Some of the checks I would use to select a winning system are:

53

1. I would look at two or more independent reviews. I would not rely on back-tested computer-simulated performance results. Only forward tested performance results without the benefit of hindsight would come close to real-time. 2. Note the number of parameters of the system, the less the better. 3. Check to see how often does the developer optimizes the system. An over optimized system is unlikely to work in the future. 4. Commission and slippage. A profitable S&P 500 day-trading system trading aggressively using a $50 commission and slippage might in real-time turn out to be a loser. 5. I would prefer a 'white box' system. 6. Paying more money does not necessarily mean you will get a better system. 7. A trade-by-trade performance report will give a better picture of drawdown than the monthly or yearly performance. 8. The system has to be time-tested. I would like to see a system be around for 2-years to consider it. 9. The developer himself should be trading the system. There preferably should be a real-time account with account statements available and/or references. 10. The system should be based on sound market principles. 11. If a vendor is turning out different one commodity systems periodically, like one for Coffee, another for Pork Bellies, third for T-Bonds. I would be very careful of curve filling. I would prefer a system that trades different markets. 12. Finally, I would compute the drawdown to see if I can handle it, the money required to trade the system, time required to trade system and the objectivity of the system. I would also paper trade for at least 3-months before risking my money on it.

Risk of Ruin and Dealing with Probabilities ... The Importance of Doing What's Right - Mike James Thank you Robert Edwards for your frank dissection of your orange juice trade, which appeared in the October issue of CTCN. It reminds me that it doesn't matter how much time and effort we put into analyzing the market, the market will choose to do what 'It' wants to do. Obviously, the market doesn't set out to cause any particular trader to loose (although it may seem like that to you sometimes!) when you put on a position. It's the trader himself that decides the potential loss, by use of a stop. You may say that this is not true, due to such events as limit moves and gaps. However when initiating a position, if you ALWAYS define where the market has to go to (your stop position), to prove your current market position to be incorrect, BEFORE you put the trade on AND then either: 1. Enter the stop when you put the entry order in or; 2. Watch the market and IMMEDIATELY this price is hit, phone in the Exit order - either a market order or a 2 or 3 tick stop - and let nothing deter you from this action even for a split second.

54

Your risk is defined rather than being unlimited i.e., the stop order will get executed as soon as the market allows it (probably immediately), rather than when you decide it's time to get out. If your anything like me, I prefer option 1. It helps me to sleep better and makes it more difficult for me to sabotage myself. I've tried option 2, and besides raising my stress level, I didn't ALWAYS end up doing the right thing i.e., in this case exiting at my pre-defined Stop point. As Robert Edwards says, right at the beginning of his letter "If you are around to trade tomorrow, you are in a position to hit a home run." To do this you must use stops, and I would suggest be reluctant to risk more than 1-2% of your account equity on any one market position. That isn't much, so smaller accounts may have to look at using mini-contracts or a system that uses very tight stops. If you think that's too small, take a look at risk of ruin calculations. Whereas your expected return increases proportionately to the leverage, your risk of ruin increases exponentially. So one of the worst things you can do is overtrade. Any trading system lives with the possibility that independent of market conditions, it will self destruct. Computer Analysis of the Futures Market by LeBeau & Lucas covers this and other points well. For example, a $25,000 account has a 9% chance of bombing out, if your system has 40% winners and a 2:1 profit/loss ratio. (A reasonable system?) However,if the same account with a 2:1 profit/loss ratio only has 35% winners your risk of ruin increases to 35%! I'd guess that sort of figure is unacceptable to most people. The other point I'd like to offer, is that you need to be very careful that you don't 'own' the trade - (Stops entered in the market help here!). I'll repeat that it does not matter how much time and effort we put into analyzing the market, the market will choose to do what 'it' wants to do. After all, when we put a trade on, aren't we just dealing with probabilities? Even if our system gives us 60% winners, a rare gem indeed, what we're saying is that the system will loose 40% of the time. So wouldn't the biggest mistake we could make, be to take a market view that's fixed, when we already know that we're going to be wrong A LOT? I've already offered the quote below in an earlier issue, so Dave may choose not to repeat it. In Jim Sloman's book 'The Adam theory of Markets' he says, "To succeed in the markets we must surrender. Never ever let any opinion about the market get in the way of trading." -- "Analysis is great, but when analysis and reality diverge, we must always go with reality." -- "Knowledge is great, but when knowledge and reality diverge, we must always go with reality." -- "We must allow ourselves to mirror the market, follow it surrender to it. We must be willing to let go of what we think we know about it, so that we can see it directly." -- "Price is reality. Price reflects everything. Price is all we want to look at because price is what the market is doing." Everyone would like tomorrow's issue of the Wall Street Journal, just once. But in the meantime, when we trade we must realize that we are only dealing in probabilities, not certainties. So in a nutshell, surrender and go with reality!

Why Shorting Options Makes the Most (Sense) Cents, 90% Wins Are Possible - Robert Edwards

55

I recently read that 90% of options expire worthless and about that same percentage of option buyers lose money. This coincidentally corresponds to the roughly 90% of commodities traders who also lose money. I feel that the easiest way for the average trader to join the ranks of the winners is to sell options, to short puts and calls. If 90% of options end up worthless, one would expect that if options are sold, and the short option positions are held until near expiration, one would collect virtually the entire premium on about 90% of the trades. Well, those are phenomenal statistics. But based on my personal experience, it is now rare that I ever take a loss on out-of-the money options I sell. There are never any "sure things" but utilizing a carefully planned strategy which accounts for virtually any contingency, I think there is a way to come up with an option selling plan, that if properly implemented, will bring results much better than 90% winning trades. I am working hard to try and refine my trading methods to try and accomplish this. Let me reveal some background information and then describe what I see as a golden opportunity now unfolding. The background information is very important as there are many pitfalls that must be avoided in order to be successful. I keep adding to my knowledge every time I put on a trade. I am writing so like-minded traders can contact me and we can learn together. A few years ago, I only had to look at my own trading account to conclude that trying to make a profit from buying commodity options was a rough road to travel. I was consistently losing. It was then that I reasoned that I should do "naked" call and put selling. I decided to try a new approach. Now, every time I felt I should buy a call because I thought the market was going to go up, instead I would sell a put. Instead of buying a put when I felt the market was going down, I would sell a call. My results instantly and quite dramatically improved. I had a lot to learn though, and continued to lose money because I combined futures contracts to do covered writing when the market would go against me. Whenever I covered a call by going long the underlying futures contract, often the market would immediately turn lower and the loss on the futures contract exceeded the gain from the decay of option premium. I was an overall winner on the options I sold, but lost a great deal of money on the futures contracts I purchased as a defensive measure to protect the options which seldom needed protecting. Today I only combine futures contracts with my option writing, in very limited, special circumstances, and I near totally balance the number of contracts to become what they call 'delta neutral'. One of the secrets I have found is to sell options that are "less rich" meaning further out of the money. Well, I went to the library a few years back and started doing research, manually back-testing several strategies. I immediately recognized that there was definitely something there. But doing the testing by hand became so tedious and hypothetical I gave it up and went back to day-trading. A year ago I began intensively studying the markets to try and find a winning strategy. My study revealed that selling options had several advantages. I just love getting paid up front with an immediate profit the day I sell an option, and then my task is to try and keep as much of the money as possible. Also, option selling allows one to do more long-range planning and does not require near as much scrutiny and close attention as buying and selling futures positions. And option trading is much more forgiving. I have done the most stupid mistakes when employing my option strategies and somehow was able to make a net profit.

56

Believe me, if I can't make money selling options with the time decay working in my favor, the guy trying to buy options and fight the time decay is in real trouble. The option seller is like the gambling house. One has to be well capitalized and willing to make small, slow profits. But those gains add up. In search of a perfect strategy, I started from a premise that I wanted a market that spent a lot of time going sideways. I like trading Live Cattle options because when the market sells off, it usually springs back. There is good underlying support from traders to always go long cattle, taking advantage of the backwardation that is often present in this market and the generally upward bias of cattle prices. Up moves are seldom straight up with ample backing and filling of prices. There are rhythms and cycles present and the support and resistance levels are clearly defined. There are few false break-outs as there is usually follow-through when a support or resistance level is breached. Most of what follows relates to Live Cattle options but the information is generally applicable to other markets as well: Let me begin by setting up the conditions of my personal method for option trading. You might be able to learn something from this that will make you a better trader. I would love to hear some suggestions which might help me improve my methods, heaven knows there is plenty of room for improvement. When I originally sold uncovered calls and puts, I began by selling a call and a put at the same strike price, known as a short straddle position. I was taking the opposite side of the trades of persons who were buying a put and a call, waiting for a violent reaction. I was hoping the market went to sleep. To help expedite this, I decided to sell sleeping markets that were going nowhere. What I didn't realize was that with a dead market, the volatility was low and thus the premiums I got from selling were at reduced prices. When the market finally erupted, the values of both the puts and calls increased. That increase in volatility killed me when I was shorting volatility at the bottom when there was no room to diminish further. Therefore, to do well selling options which always involves shorting volatility, it is important to sell right after a strong move has occurred. After the market advances a few days, the call premiums expand and that is an excellent time to sell. I like to sell right into that strength. When the markets decline I like to sell puts, selling right into that strength of increasing put premium, as well. Suppose December Live Cattle is in a trading range from $72.00 to $78.00. Then suppose that the market is in the middle, say at $75.00. If the market rallies to the top end of the trading range and then one sells outof-the-money calls, and then the market retreats to the bottom of the range and one sells out-of-the-money puts, if the market returns to the middle, one can have an extremely wide range of prices where a profit is assured. I like to sell calls first because I find selling puts more tricky. This is due to the fact that markets drop much faster than they go up, about 3 times faster I think. By waiting for a rally before I sell calls, I get the benefit of the fact there are more buyers of calls when the market is rising than when it is falling. Selling into strength allows one to sell to traders rather than local market makers, who virtually control the pits when liquidity is low. You also want to sell into strength because when the market turns at a top, the premium diminishes very fast, because the call buyers are trying to quickly take profits the same time you are trying to initiate your

57

short trade. There is an order imbalance and only a market order is filled and that can be several minutes later at a very unfavorable price. It is better to sell a little early rather than late. The same holds true with puts, you want to sell into price weakness when the put premiums are the highest. This goes back to being short volatility. You want to be a lion tamer, putting your hands around the jaws of a wild, ferocious lion, selling options when you can still hear the roar. When things are quiet premiums disappear. I call these options 'sleeping bears'. Let sleeping bears sleep. If you should awaken them they will rip you apart from both ends as the puts and calls both gain premium. When a market is limit up (down) is the best time to sell calls (puts), as the premium of the option continues to rise. The next day the option premium shrinks down, virtually guaranteeing a profit. Often the panic buying of options causes a high during the day of the locked limit move and if you time it right, you are making a nice profit even that first day with the market still locked limit. I have found that selling an option in the last hour of the day works out best for me. Option traders, the next day wait around trying to figure out which way the market is going and often don't trade for several minutes after the market opens. Price fills are usually very poor. They also often lag the market which gives them an excuse to either fill you at a lower price than you theoretically deserve or not at all. On the other hand, during the close I believe that someone is there to try and keep the markets orderly so there is more credibility in option fills by the locals at the end of the day because prices are going to be printed in the newspapers and the trading prices have to roughly correspond to the estimated values of the options. The fills have to be in the ball park at the end of the day, whereas during the day the options market is free to trade about anywhere. That is just my theory. I like selling options 7 to 8 weeks before expiration to maximize the time decay of premium and try to get out about 1 to 2 weeks before expiration. Because the options expiration of the meat and livestock options often correspond to a meat report date, I never like to be in at the end when someone gets to find out the results of the report and then decide at the end of the day whether or not to exercise the option if it is in or very near the money. Near expiration, volatility can actually increase rather than decrease. When I have recouped about 2/3rds of the option premium I look for a place to take profits. Many times this has made the difference between a winning and losing trade. Numerous times the market rallies and the puts are almost worthless. I take my profits and then the market tumbles a couple limits down and those puts are now worth as much or more than I paid for them. But I don't need to worry, as I already took profits. I have predicted the wrong trend direction many times but because I was able to take profits or a small loss during a correction, I am able to get out of the losing positions in good shape and the winning options more than make up for the losses. As I described briefly above, I like to sell calls and puts at different strike prices. This is called a 'short strangle'. I leg the position on by doing one side or the other, depending on market conditions, my bias of where I think the market is headed, and several other factors I consider. I already mentioned how I usually like selling the calls after a counter-trending rally and then later selling the puts. If on the other hand you think cattle is going to trend up shortly and you don't mind getting long the market, you can sell puts and effectively get a lower price than you would have gotten equal to the premium amount received.

58

That would occur if the market trended strongly lower and the put was exercised. If however the market reversed and went up, the put will lose value and although you did not get exercised, you make money that way and that is all that matters. This time of year (Fall) is a good time to sell April puts on any weakness as I wouldn't mind getting long the April contract if the market trends lower and the option is exercised. On the other hand, the downside is limited on the April contract due to the fact seasonally April cattle has in recent years rallied to $80.00 or more during the January through March or April rally. You win either way. Today as I write this (10/15/93), December Live Cattle options have 7 weeks to expiration. Cattle has just rallied from lows and a very oversold condition. Today, December cattle closed at 74.70, very near the last swing high just around 75.20. The contract should begin to run into some resistance. With the couple dollar premium that December is trading over October, when October goes off the board next week and December takes over, it is already a couple extra dollars higher than cash. Either cash has to rally to the futures or the futures will need to come down. I believe the futures will come down. Feeder Cattle has a lot of problems in the cash market which should also negatively impact on cattle prices. I am looking for sideways to possibly higher prices near-term with a final break into December when cattle has to compete with turkey for Thanksgiving and Christmas. This slackness in demand comes at one of the worst times, when seasonal slaughter numbers are up. Although I will be selling calls lightly at this time to initiate the position. If we bottom early, I will be a very aggressive seller of December and later February puts should the market retest the bottom soon as I expect it to. I want to be effectively long the market by January 1, 1994 so I can take advantage of the first quarter rally. I am experimenting with some different strategies right now, so I am not strictly following my basic scenario. But for the readers I will go through a dry run of what I anticipate will happen in the coming weeks. I will keep the numbers in single units, but a person with sufficient capital can double or triple these numbers while more conservative traders could cut these positions in half. Since Dec Cattle broke above the resistance today at 74.20, the next resistance is around 75.20 and it is likely we will see that price on Monday. However, there is a down-trending line which could contain the contract right at today's closing price of 74.70. So what I would do is to sell a set of two 76.00 Dec. Live Cattle calls into today's close, placing a limit order during the last hour of trading with a cancel replace at the market if I am not sure I got filled, about 15 minutes before today's strong close. One should have been able to do this at a premium of about 75 cents or more today. As long as Dec Cattle does not go off the boards above 76.75, I will be in a profit situation, less the commission of course. However, this would require that December makes a new high which is of course possible, but it is unlikely that it will happen immediately with a move straight up with no correction. Upper resistance will begin to mount above 75.00. If the market can close at 75.20 or higher, I would sell an additional set of 2 Dec. 76 calls at a premium of $1.00 or more. If the market never reaches 76.00 I pay absolutely no attention to the premium I may be losing on paper, as my account is well margined. I do not get concerned until the options begin going into the money as I intend to keep these options close to the time of their expiration. When the market reaches 76.00 which I doubt will happen, but if it did, I could double my original position. Since I have already sold 4 options with a 76.00 strike price, I would now sell 4 77.00 calls and 4 78 calls.

59

If the market appears that it is going to close at a price of 76.00, I am concerned only about the 4 original 76 strike calls as they are the only ones going into the money. To balance out 4 calls one would roughly buy 2 futures contracts based on a delta of about .50, meaning the option premium of the calls rise 50 cents when the futures price rises a dollar. However, I have gotten burned so many times buying 2 futures contracts to balance this and gotten stung, that I will only buy one now, leaving myself only half balanced. I have somewhat cured this problem by buying earlier on a stop, say at 75.25 or 75.30 stop. Then by the time the market reaches 76.00 I can stop myself out of the 75.30 futures contract if the market takes a dive. I don't want too many futures contracts going long, as I want to be able to still improve my position if the market retreats. What I would do if the market started rallying past 76.90, the approximate break-even for the two 76 calls sold for 75 cents, and the two 76 calls sold for over a dollar. That is not an easy question to answer. I guess I would have to hang tough and maybe say a little prayer. If sufficient time passes, before we hit these prices, I will have the time to remove some options at little or no loss, reducing my exposure and allowing me to sell ever higher priced calls. If we reach these levels very near expiration, the time premiums are greatly reduced and the 77 calls will be making money and the 76 calls sold for over a dollar will be making money so I will still net a profit even when I was selling calls and the market kept going up. A move into new market highs in the December Cattle contract would just be a tough break. I would call it a worse case scenario. I believe the market will find resistance at today's close, or somewhere above 75.20 and it will quickly begin dropping, putting me in great shape. Then as the market tests the lows, I would sell puts. If the market goes sideways, and the chances of the 76 or 77 calls getting into the money, becomes very remote, I would sell more 76 or 77 calls, making sure I get at least 50 cents premium, and hopefully 70 cents or more premium for any options sold. If the market drops, I would more aggressively sell puts as I want to be long the market going into the new year. I want to be long cattle going into February so in late November or early December, I will begin selling February puts on any weakness. It may ultimately turn out that I will have to move up a strike price, and be further out of the money as I may be selling options that are too close to the money. Some readers may not be aware that in the nearby option month, the odd priced cents options trade so there is an option strike every dollar rather than $2. I believe the Wall Street Journal still prints only the even numbered strikes, causing many traders to ignore the odd numbered strikes and greatly reducing the volume, open interest and liquidity in these odd numbered strike options. How it will come out, only time will tell. As I'm still trying to figure this out, I would gladly accept any suggestions readers may have about this trading strategy as well as hearing about an options selling method that someone else has found successful.

Trading Paradoxs - Dr. Satish This is what I have discovered and you should know about if you want to trade commodities: 1. They will never fill you long, if prices come down and touch your entry price and then go up. 2. They will always fill you short, if prices come down and touch your entry price and then go up. 3. They will never fill you short, if prices come back up and touch your entry price and then go down.

60

4. They will always fill your long, if prices come back up and touch your entry price and then go down. 5. In T-Bonds, in the first 10 minutes after the release of any report at 8:30 am New York time, even if prices go through your entry point, they will deny you a fill if there is profit after that fill. 6. However, they will always fill you if there was a loss after that fill! Where is the F.B.I...Brokers don't prevent this rape, all they do is come after the rape has taken place and harass you to go over the whole thing again and again, and torture your agony.

Viewpoint of a Commodity Trade - Roy W. Longstreet The Right Stuff - Contrary to popular opinion, the most important factor in trading profitably is not "knowing" where the market is going. Nobody knows for sure exactly what a given market will do next! The most important thing is to have a plan of attack that will allow you to successfully cope with the uncertainty that is an inherent part of trading or investing in anything. It is a well-documented fact that the world's most consistently successful investors and traders (in any market, including stocks, bonds, commodities, etc.) do not have any inside information and do not know what will happen next. What they do know is that they have an excellent chance for success in the long run if they can develop the discipline to stick to their plan. Their "secret weapon" is that they have survived their mistakes long enough to develop a good clear common-sense trading plan. Any they survived long enough to learn that even though their plan isn't perfect, it is more profitable to exercise the discipline to stick to the plan through thick and thin, than to deviate from it after some losses. So you see, this discipline to follow a plan even when the chips are down, so crucial to success, comes from the confidence that comes from experience. If you do not have the time and/or inclination to develop your own trading plan, develop supreme confidence in that trading plan and the discipline to stick to that trading plan, then the odds will be stacked against you. That is, unless you can join forces with someone who does have the time, inclination, plan, experience and discipline to trade successfully. "There are those who sit and wait for the world to change for them. Some few guess correctly that they are the ones who must change. In commodity trading, one usually gains by yielding, by admitting that he needs help, that here is a better way."

Surprising Differences in Data - Randy Stucky The bar charts that follow on next page contain data that I have obtained from 3 different data sources, Peter Aan's data, Trend Index Trading Co data, and Genesis Data Service. They are all CSI continuous contract data files. All 3 have the same price patterns but different absolute levels. Note: Peter Aan says his is initially high to avoid zero prices - says it works OK, except if a system uses a "% of price" formula. See Chart on next page. Editor Comment: As long as you maintain the same data, the actual old price level is normally not important when analyzing back data, as long as its done consistently and current prices are correct. Chart in Print Copy

EDITOR COMMENTS

61

In the last issue of CTCN, Dr. Arora said that in his opinion, 14 well known participants in the commodity business have nothing of value to offer. Of course, he is entitled to his opinion, but I must strongly disagree with him. Many of the parties he referred to have things of great value they offer to traders. For example, Jake Bernstein has written many books dealing with psychology of trading and trading methodology, including great research on seasonals. I have read some of Jake's books and found them extremely informative and of excellent value. Larry Williams has also contributed much to traders' knowledge, especially with his many educational trading seminars. Welles Wilder is one of the pioneers of commodity technical analysis and wrote one of the first books about various technical indicators that can be used to trade commodities. Futures Truth Ltd has done extremely useful work involving the highly complex and difficult day-to-day tracking of hundreds of trading systems. John Hill, John Fischer and George Pruitt are extremely knowledgeable and of the highest integrity. They have done a superb job reporting on all those trading systems, with a small staff and limited budget. The ideas on how to select a trading system submitted by Ashif Jumma has some excellent suggestions. In particular, I believe you should only buy a trading system providing it is in fact a fully disclosed 'white box' system. That is because discipline is a major problem. If you are going to trade a system correctly you need to have confidence in it by being aware of the principals behind the system and the actual algorithm. An undisclosed system makes the discipline problem we all seem to have, much more severe than is involved with a disclosed trading system. I also strongly agree with him on his point #6 that paying more money does NOT mean the system is better. In the past, I have received calls from traders who told me they bought System X over system Y because X was $3000.00 and Y was $1000.00, so therefore X must be 3 times better than Y! That premise is completely incorrect. The cost of the trading system seems to have little or no bearing on its actual value. Lastly, I would like to comment on Ashif's point #11. The fact most systems are only designed for a specific market or market group gets me very concerned. A system based on sound principles and NOT heavily curve-fitted, should as a general rule work in all markets, not just specific markets. At times a system will work much better in certain markets, but that is because that market happens to be performing in a way that benefits the system, such as trending well or volatility that happens to conform to the system's algorithm. Also, at certain times the same or other markets will perform poorly due to the contrary happening, i.e.: non-trending or very low volatility, etc. Generally speaking, a trading methodology should 'work' in ALL markets, as all the markets have basically the same or very similar price behavior, except at times different trends or volatility. I challenge anyone to look at a series of old daily bar charts, with the price scale not shown, and identify which market belongs to which chart. It is impossible to do, unless just by luck you happen to remember a certain price pattern evident on a chart, based on 20-20 hindsight. Mike James has written a very informative discussion about preserving your capital and risk of ruin, and how the market will do what it wants, regardless of how good our analysis is. It was also very nice of Mike to compliment Robert Edwards submission in the October issue, in which Bob admitted his very thorough and extremely good research on Orange Juice price direction turned out to be incorrect. Robert Edwards latest submission on trading commodity options will be extremely valuable to option traders. Bob's point that about 90% of options expire worthless, I believe is correct based on what I have

62

heard in the past. Therefore, it only makes sense that 90% of the puts and calls that are written make money. If in fact that premise is correct, there is a potential gold mine involved here! Dr. Satish's criticism and paradox examples involving trade executions are I believe exaggerated, but it is in fact true that the fills or lack thereof, will go against your more often than not. Issue 8. Clinton/Kennedy: Amazing Stock Market Similarities reprinted with permission of The Wall Street Journal Flip on your radio. Do you hear "Moon River"? Check the marquee at your local movie theater. Is "West Side Story" playing? Well, it's not 1961 in the real world, but in the stock market it's late 1961 revisited, says Ned Davis. Are Striking Similarities a Great Opportunity for Huge Profits on the Short Side during 1994? Mr. Davis, a Nokomis, Fla., stock-market researcher who is respected for his technical and historical insights, sees striking similarities between the stock market's behavior so far under Bill Clinton. Chart in Print Copy Similarities Began Early The similarities began during the election campaigns of 1960 and 1992. As it looked increasingly likely that a young Democrat would replace an older Republican, stocks dipped. Once Mr. Kennedy and Mr. Clinton took the reins, stocks reversed and began to climb. During Mr. Kennedy's term, stocks topped out in December 1961, drifted sideways for a few months, and began to tumble in April 1962. A nasty bear market dragged the Dow Jones Average down 27%. Is history about to repeat itself? Mr. Davis thinks so. He points to a flock of similarities between the market climate then and now. More Similarities In 1961 stocks were selling for over 20 times the prior 4-quarters' earnings. The same is true today. The high stock prices, in 1961 as today, had pushed the average dividend yield on stocks down to well under 3%, a traditional warning zone. By almost any measure, both 1961 and 1993 are among the most expensive markets in history. And in both cases, the high valuations had persisted for an unusually long time - a year or more. "People who are saying we're safe now (from a market decline) are pointing to low interest rates," says Mr. Davis. But, he adds, "interest rates were much lower then," and that didn't prevent the scorching 1962 bear market. In November 1961 inflation was running at less than 1% (vs. perhaps 3% today), the interest rate on Treasury bills was about 2.5% (vs. just over 3% today) and long-term Treasury bonds yielded about 4% (vs. about 6% today). Foreign Affairs Dominate Over The Economy Both Mr. Kennedy and Mr. Clinton came into office intending to concentrate on domestic affairs and get the economy moving again. Mr. Davis says. But both had to devote considerable time to foreign crises. Mr.

63

Kennedy had to deal with the Berlin wall and the failed Bay of Pigs invasion in Cuba. Mr. Clinton has wrestled with problems in the former Yugoslavia, Somalia and Haiti. Mixed Technical Indicators The stock market today, as in fall of 1961, is characterized by mixed technical indicators and "a lot of churning," Mr. Davis says. Technology stocks were leaders in both markets, and in each case the pipeline was gushing with newly issued stocks.

Gann Techniques Trading Course - John Brown I suspect there are a great many traders who feel that some of Gann's techniques have something to offer for chart analysis. Learn How To Use Gann in Actual Trading - Traders then wonder exactly how to apply these methods in a way to actually profit in actual trading situations. I would recommend Dave Green's Gann Techniques Trading Course as a good source of practical applications of Gann tools. Principals of Gann for Reasonable Price - For a very reasonable price of $75.00, this spiral-bound book (Angle Tool included) offers many chart examples which illustrate entry and exit strategies based on principals from Gann's methodology. Useful in Real Trading Situations - This course offers for the trader a concrete and practical approach to using Gann's tools that might be far more useful in real trading situations than some of the more esoteric (and far more expensive) applications which are offered for sale. Editors Note: Gann Techniques Trading Course can be purchased from Trend Index Trading Co. Telephone 715-833-1234. FAX 715-833-8040

A Successful Momentum Based Method I Use for S&P Gerry Stonehouse I developed this mechanical approach to using a momentum indicator as a way to get on board a market that was starting to accelerate its trend. I then programmed this using Snap by CompuTrac. Charts in Print Copy

Surprising Data Differences - Randy Stuckey Here is another bar chart which displays the surprising difference in continuous type data between 3 data sources: CSI, Peter Aan, and Trend Index. Chart in Print Copy

Profitable Performance of Swing Catcher System - Martin Thomassen from Germany Here is a copy of the real-time performance of my Swing Catcher Trading System, as maintained on a spreadsheet, trading the recommended 35 commodities. Out of those 35 markets we are always following the best 18 commodities, based on the Trend Ranking module, which is built into the trading system and accessed from the main menu. Successfully Trading Only the Recommended Markets We are only trading the commodities which are ranked in the top 18 on the Trend Ranking list, and in Conservative Trading Mode. Note: 'Kons' is German for Conservative.

64

A copy of my detailed spreadsheet which has all my real-time Swing Catcher trades follows: (Please excuse the fact that the copy is not very clear). Chart in Print Copy

My Experiences with Various Trading Systems - Dr. Satish Arora Larry Williams turned $10,000 into $1,000,000 but he could not repeat it again. The next year his performance was unmentionable. Charles Chen made 1300% in 1989. After that year he does not even talk about his performance anymore. Good Records Before The Sale but Big Losses and Negative Figures After The Sale - Mike Chalek made hundreds of thousands of dollars by selling his Dual Thrust and Talon Trading Systems. They had very good track records before the systems were sold, but big losses and negative figures after the sale of his systems. Data Dot System worked well before its sale to the general public. After the sale of the system it did not work anymore. Essex Trading Co sold many different systems, and they may have made many millions of dollars selling systems but none of them have worked after their release. The Get System by Tom Joseph did not make money after it was sold. About Profit Taker System...the developers are the ones who are taking (making) all the profit by selling the system year after year. Volatility Breakout System located in Colorado, worked well before it was sold. After the sale nothing worked and they made lots of money and then went out of business. Don't waste your money on Taurus System by Michael Chisholm. So far it has only made money in the hypothetical track record. Red Line System did not work. Money Was Made by Switching From System Sales to Toolbox Type of Programs - Bill Cruz from Omega Research spent 10 years working on various trading systems for Pork Bellies, Live Cattle. S&P, TBonds, only to find out they didn't work after the sale, so he stopped selling them. He then developed System Writer and Trade Station and he has made hundreds of thousands of dollars selling them, but not a penny from actually trading the markets. George Angell sold many different systems for hundreds of thousands of dollars. None of those systems are making money now. None of the many books sold by Windsor Books has made any money for the book buyers. Jeff Rickerson made money selling his Market Optimizer System, not trading it. Is Gann Methodology Too Subjective? Some 'Gann people' have given up trying to trade Gann's methods because they found it too subjective. In my opinion if a system has a good track record prior to being sold to the general public, after the sale it then falls apart. Keep on subscribing to Commodity Traders Club News if you want to make money.

65

Random Thoughts on Trading and System Design Part 1 - Adam White When designing a trading system or trading methodology, some curve-fitting is unavoidable. Nearly every trader has had the frustrating experience of seeing a "can't lose" trading method fall apart when it is applied in real time. Carefully Designed & Tested System Should Bring Success - The system can be carefully designed with the best of intentions. It seems to incorporate all the elements of a successful system. It controls risk and lets profits run. In testing it shows tremendous profits in nearly every market you intend to trade. You have back tested, forward tested, and analyzed statistical measures that are supposed to ensure robustness. You have even paper traded for a while, adhering strictly to your trading rules, and the paper trading has been reasonably profitable, although not up to the standards of your test results. Did Market Conditions Make It Less Successful? You can rationalize this by saying the markets have been tough lately and difficult to trade. You make money for a short time but then, incredibly, you experience a loss that exceeds any of the losses that your system saw in five years of testing and six months of paper trading. The drawdown continues, and eventually you stop trading the system. This often-repeated scenario is almost certainly the most common trading experience among system traders. Ironically, the introduction of personal computers and sophisticated analytical software has not contributed to the solution of the problem but has probably made it more likely to occur. With Advantage of Hindsight, Markets Appear More Orderly Than They Are - It is extremely easy to sit down in front of a screen and devise a trading system that seems, in hindsight at least, to be unbeatable. Most oscillators, for instance, look like they call market bottoms and tops pretty well. Most trend-following indicators hug major trends very nicely, With the advantage of our hindsight, markets usually appear to be much more orderly than they are, so buying dips in an uptrend, for example, seems to be an excellent strategy. Effective Looking But Overly Curve-Fitted - Any trader with a PC, some data and some analytical software can devise an effective looking trading system with very little effort. The problem is that, more likely than not, the system will be overly curve-fitted and useless for real-time trading. Defining curve-fitting isn't as easy as it may seem. It's a bit like art appreciation; it's hard to describe what you like, but you know it when you see it. In fact we curve-fit lots of data in our non-trading endeavors and think nothing of it. After all, if you stop and think about it, the line between experience and curve-fitting is a very fine one. Examples of Curve-Fitting - A couple of examples may help define curve-fitting. Let's say you're a creative sort of person and you devise five new and different technical indicators that you hope will generate profitable trading signals. You program them carefully, and display them one at a time against several favorite markets. Much to your chagrin, you find that four of the indicators seem to have no relationship to the markets at all. The fifth, however, follows prices very nicely and often seems to anticipate major moves. You decide to use the fifth indicator and discard the others. Curve-Fitting Without Realizing It - Believe it or not, by choosing the study that best agrees with your perception of what a technical indicator should do, you have curve-fitted. You might reply that this is the method by which virtually every trading system, whether mechanical or discretionary, is invented and you would be correct. After all, there are trading systems that work, and they have been put together by observation, not by luck or guesswork.

66

Some Curve-Fitting is Appropriate - Some fitting of a trading method to price movement is natural and beneficial. To the extent that we do this and still retain flexibility and the ability to handle future events, curve-fitting is entirely appropriate. There is a vague line that is all too easily stepped over, however, and to cross that boundary brings certain failure rather than success. We find it difficult to come up with an exact definition and perhaps the line is so fine that there isn't a clear definition of where experience and common sense leave off and unproductive optimization sets in. Two Mice and a Maze Analogy - Here is an analogy that may help to explain the phenomenon. Construct a maze that is relatively intricate and that requires a fair amount of twisting and turning to get to the center. Train two mice to navigate the maze. The first mouse learns that if it turns left twice, then takes five steps, then turns right three times, takes two steps, turns left once, and then turns right twice it will be at the center of the maze. The second mouse learns that at every junction it first turns left, and if it bumps into a partition it should turn around and go the opposite way. The first mouse, once it has learned the pattern, negotiates the maze flawlessly every time. The second mouse is slower, although it eventually arrives at the proper destination. Contrary to How it Appears, the First Mouse Does Not Have The Advantage - The first mouse seems to have an obvious advantage. It finds its way to the center of the maze with ease, while the second mouse, handicapped by a much simpler navigation system, struggles and makes many wrong turns before finally reaching the goal. The second mouse clearly seems much less capable than the first mouse. A Similar Maze but A Difference - Now let's build a new maze...make it similar to the first for a few turns, but different thereafter. The first mouse will proceed confidently for a while, but will soon be hopelessly lost and disoriented, much like some traders we have observed. The second mouse won't notice the difference between the first maze and the second. The mouse that had previously seemed inferior plods along and treats every twist and turn in the new maze the same simple way. Slowly and inexorably the second mouse will find its way to the center, no matter how the maze is configured. Rewards Providing the Maze Doesn't Change - The first mouse either performs perfectly or terribly because it has been taught an overly curve-fitted system, while the second mouse has learned a crude system that enables it to get to the center every time. The first mouse will perform extremely well and will be rewarded as long as any maze the mouse encounters is substantially the same as the original maze that it memorized so capably. The second mouse will be slow but it will eventually be rewarded no matter what changes you make to the maze. Trade Successfully With Crude Methods - The principles in our analogy hold true when trading systems are applied to the maze of futures prices. If we are going to navigate the markets successfully, we must create relatively crude systems that will work no matter what maze is created by tomorrow's prices. Make Your Trading Less Complicated - We should be very careful about how we use computers to test and modify trading systems. Changes that merely improve the numbers without adding to the logic of the trading plan should be questioned. Try to find ways to make your trading less complicated and more adaptive to changes in market conditions.

67

In Futures Trading the Correct Answers to Questions seem Contrary - One of the underlying reasons why it is so easy to fall into inadvertent curve-fitting is that in futures trading the correct answers to even the simplest questions seem counter-intuitive. New Traders Wrongly Want To Trade Contra-Trend - For example, one of the most basic decisions a trader makes when first conceiving a system is whether to be a counter-trend trader or a trend-follower. Almost all beginning traders, in our experience, opt to be counter-trend traders. They won't buy until prices appear "cheap" to them, and they won't enter a position unless there has been a reaction or some form of correction that allows them to buy on a dip or sell on a rally. They buy only when there is a bargain to be picked off and sell only after prices have reached an apparent peak. They are constantly looking for signals like key reversals, support and resistance levels, and any other pattern that will allow them to get into the market at a major turning point. Traders Want To Buy the Exact Bottom and Sell the Exact Top - It is only natural that such a trader gravitates toward counter-trend indicators like stochastics or RSI, and may become a devotee of Elliott wave theory, percentage retracement calculations, and methods that can forecast or identify tops and bottoms. If buying bottoms and selling tops is good, then buying at the exact time the market turns must be even better. Picking Tops/Bottoms Easier Providing there's an Underlying Structure - It would be much easier to find tops and bottoms if the market had some form of underlying structure or order that made highs and lows predictable. It seems that trading at tops and bottoms is so impossible using conventional methods that these traders, out of sheer desperation, must eventually fall prey to methods that presume some underlying orderliness to the markets. Searching For Tops & Bottoms Forecasting Methods - Methods such as Gann angles, Fibonacci ratios, cycles, wave theories, or even such totally absurd approaches as astrology or the "delta phenomenon" offer the only hope of forecasting tops and bottoms on a regular basis. Take any hare-brained idea and write a book about it or program it into a software package and suddenly it has instant credibility. Desperate top and bottom seekers will flock to it. The Desire To Pick Bottoms & Tops Has Caused More Failure than Anything Else - After many years of observation, I have come to the conclusion that the natural desire to buy low and sell high is more responsible for failure among futures traders than any other behavior. Successful Traders Are Trend-Followers - Almost every successful trader we are aware of is a trendfollower. This includes both private traders and professional Commodity Trading Advisors who trade billions of dollars worth of public funds. Unfortunately, trend-follower is counter-intuitive. At first it seems to make no sense at all. It is the direct opposite of how we have been taught to succeed as shrewd traders. Inexperienced Traders Think they Could Have Made the Trade Earlier than Trend Followers - Why buy at or near new highs when we obviously should have bought earlier at much better prices? Trend-following methods are usually scorned by less experienced traders who always assume that they somehow could have bought days ago, at the bottom. The fact is, however, that a market must make new highs and lows continually in order to get anywhere important. When gold went from $200 to over $800 in 1979 it was making new highs all the way. When soybeans broke $5 and went to $12 in the early 70's the same thing was obviously true.

68

Trend-Following Approach Is Best - We won't go so far as to say that anyone who is successful at countertrend trading should abandon it, but we firmly believe that the vast majority of traders should concentrate their efforts on the trend-following approach. Using Too Many Indicators Result in Poorer Results - Another common theme that runs through system design is the search for confirmation of a trading signal. Simply put, this means that a trading signal given by one technical indicator or chart pattern must be confirmed by one or more other indicators in order to be valid. For example, if a stochastic dips below 20 and then turns up, the trade won't be taken unless an RSI or another oscillator confirms the stochastic signal. This can be taken to absurd ends; we have seen trading systems with as many as thirty elements that all have to fall into line before a trade is taken. Physiologically You Feel Better With Extra Filters - It is easy to see how that can happen. No one wants to take a loss. It is comforting, after a trading loss, to tinker with your trading system and add another filter or confirmation that, in hindsight, eliminates the loser. Software that emphasizes optimization makes it even easier. Probably the best way to handle this sort of situation is to avoid redundancies. For example, if you are using one oscillator to signal market exits, it is better to decide exactly how the oscillator should be used and stick to your rules rather than adding several more oscillators to your system and requiring that they confirm one another before you exit. Additional Rules Detract From System Performance - The same is true of any other type of indicator. Remove any indicator that essentially duplicates the information from any other. Remember the mice and the maze. Every new rule you add that makes your trading look better in hindsight detracts from your system's ability to handle future price aberrations. One of the areas that is most easily abused during system design is data; specifically, which markets and time periods to test over and which markets to trade in a portfolio. Some Systems are Designed to Only Work in Specific Markets Using Hindsight - It is a favorite technique of system sellers to design systems to fit specific markets, create a track record based on a complicated system with lots of rules that eliminate losers in hindsight, and market the hypothetical track record giving the impression that the results are reproducible in real time. This is akin to teaching the first mouse how to navigate one maze, and then selling it as a mouse that can navigate any maze. . . . part 2 of article appears in next months CTCN.

EDITOR COMMENTS With reference to the interesting article about Clinton vs. Kennedy similarities, in my opinion, the most amazing similarity is the DJIA chart itself. The high correlation of the price swings between the Kennedy and Clinton time periods is truly amazing. The chart was published early Dec 1993. At that time both patterns were in a high area after a long overall upmove that had lasted about 14-months. According to my interpretation of the DJIA charts, right now (Wednesday Dec 29, 1993) the stock market is at an extreme high and is in the process of topping out now, as these words are being typed!

69

If in fact the correlation continues, the market should go down a little between now and late winter. A secondary swing high should come within 3-months, followed by a steady, precipitous and huge drop starting in the Mar/Apr 1994 time frame. Kennedy era DJIA dropped 27% from the mid 700 area in Dec to the mid 500 area by June. If the current DJIA drops 27% from its current level of 3792, it would drop to 2768 by June 1994. Needless to say some gigantic profits can be made on the short side, if in fact the amazing correlation continues. Can you imagine the profits that can be made by shorting the S&P 500? If the S&P 500 Index drops 27% from its current level of 470, it would drop to 343. The profit on 127 S&P 500 points would be $63,500 per contract! However, a warning is appropriate here...there's a strong possibility the correlations could be just a coincidence! Only time will tell for sure. Issue 9. How Diversification Can Help You Trade Better - Ashif Jumma Diversification is one of the crucial factors in the success of a trading plan besides having a good trading system and sound money management. It may in fact make the difference between success and failure of a trading plan. 1. Most of the trading systems available are trend following in nature. 2. Commodities trend for a fraction (say 30%) of the time. The rest of the time they are in a sideways market or a small trading range. 3. It stands to reason that most of the good systems will do well in a trending market and get choppy in a sideways market, unless they have devised a way to keep out of a sideways market. 4. What the system hopes to do is to make enough money in a trending market to offset the losses made in a sideways market. 5. What the trader hopes to do is to have enough confidence and money left to make a trade when the market is trending and be profitable. 6. However, a lot of traders being undercapitalized dump their system after a series of confidence shaking losses. 7. By diversifying, a trader can hope to avoid or minimize some of the above problems. 8. The aim of diversifying is to substantially lower the drawdown, minimize the equity swing and hopefully increase the profit. 9. Thus a $10,000 trading account, trading one commodity having a drawdown of $4,000 and profit of $4,800 may be diversified to have a lower maximum drawdown of say $2,500 and better net profit say of $5,700. This represents a more efficient use of equity capital. Avoid Highly Correlated Markets Avoid Highly Correlated Markets To Increase Your Chance of Success 10. Let me first define a trade - to me trading Soybeans, Soybean Oil and Soybean Meal does not represent three different trades, but one trade so does Swiss Franc and Deutsche Mark. A trader who puts on such highly correlated trades will have a bigger drawdown and increases his chances of ruin.

70

11. Different markets trend well at different times. Some markets may be going nowhere for an extended period of time. Gold may be in the doldrums for say a couple of years at a stretch before it becomes tradable, soybeans may do the same. A trader who is trading only Gold or Soybeans may become so frustrated with the losses, the time lost, the trading system, he will give up before the market becomes tradable again. 12. So a good diversified trading plan implies lower maximum drawdown, better profit, more winning weeks and months, generally more consistency. It means trading non-correlated commodities. It means sleeping better at night.

Gann's Amazing Trading Record- Reprinted from the December 1909 Edition of Ticker Magazine To make a success investing in stocks or speculating in commodities you must have a well defined plan and must know the rules that have stood the test of time for 50 years or more. After you learn the rules you must eliminate guess work, hope and fear and follow rules and you will make profits. When you buy a course of instructions, look up the record of the man who has discovered and developed it and if he has made a success with it and made money, you can afford to buy the course and follow the rules. 1902 August 25th, made first trade in commodities and started studying mathematical principles to determine the future trend. 1905 Sept 12th, the daily Texarkana, Texas, printed an article giving Mr. Gann's view on Cotton prices. 1907, he predicted the panic in stocks and the decline in commodities and made large profits. Turns $130 into $12,000 in 30-days 1908 May 12th, left Oklahoma City for New York City. August 8th made one of his greatest mathematical discoveries for predicting the trend of stocks and commodities. Started trading with capital of $300 and made $25,000. Started another account with $130 and made $12,000 in thirty days time. 1909 December, the Ticker magazine (now the Magazine of Wall Street) printed an article titled "remarkable predictions and trading record." The article was written by the late R.D. Wyckoff, owner and editor of the Ticker Magazine at that time. The following is a copy of part of the article: "In order to substantiate Mr. Gann's claims as to what he has been able to do under this method, we called upon Mr. William E. Gilley, an inspector of imports. Mr. Gilley is well known in the downtown district. He himself has studied stock market movements for 25years, during which time he has examined every piece of market literature that has been issued and procurable in Wall Street. When asked what had been the most impressive of Mr. Gann's work and predictions, he replied as follows: "It is very difficult for me to remember all the predictions and operations of Mr. Gann which may be classed as phenomenal, but here are a few: Made 23-Points Profit on an 18-Point Move

71

In 1908 when Union Pacific was 168-1/8, he told me that it would not touch 169 before it had a good break. We sold it short all the way down to 152-5/8, covering on the weak spots and putting it out again on the rallies, securing 23-points profit out of an 18-point move. Predictions Made On Scientific and Mathematical Formulas and Calculations, Time Cycles and 'Natural Law' Mr. Gilley encouraged Mr. Gann to study out the scientific and mathematical possibilities of the subject. "Mr. Gann's calculations are based on natural law. I have followed his work closely for years. I know that he has a firm grasp of the basic principles which govern stock market movements, and I do not believe any other man on earth can duplicate the idea or his method at the present time." Predicted Exact Day of High Months in Advance "Early this year Mr. Gann figured that the top of the advance would fall on a certain day in August and calculated the prices at which the Dow-Jones averages would then stand. The market culminated on the exact day and within four-tenths of one per cent of the figures predicted." "You and Mr Gann must have cleaned up considerable money on all these operations," was suggested. "Yes, we have made a great deal of money. He has taken half a million dollars out of the market in the past few years. I once saw him take $130, and in less than one month ran it up to over $12,000. He can compound money faster than any man I ever met." Wheat Closes At Exact High Price Predicted One of the most astonishing calculations made by Mr. Gann was during last summer (1909) when he predicted that September wheat would sell at $1.20. This meant that it must touch that figure before the end of the month of September. At 12 o'clock, Chicago time, on 9-30-09 (the last trading day) the option was selling below $1.08 and it looked as though his prediction would not be fulfilled. Mr. Gann, said "If it does not touch $1.20 by the close of the market it will prove that there is something wrong with my whole method of calculation. I do not care what the price is now, it must go there." It is common history that the September Wheat contract surprised the whole country by selling at $1.20, and no higher, in the very last hour of trading, closing at that exact figure. So much for what Mr. Gann has said and done as evidenced by himself and others. Now as to what demonstrations have taken place before our representative: An Amazing 264 Winners out of 286 Trades During the month of October, 1909, in 25 market days, Gann made in our representatives presence, 286 transactions in various stocks, on both the long and short side of the market. 264 of these transactions resulted in profits; 22 in losses. The capital with which he operated was doubled 10 times, so that at the end of the month he had 1000% on his original margin. In our presence Mr. Gann sold US Steel common short at 94-7/8, saying that it would not go to 95, it did not. On a drive which occurred during the week ending October 29th, Mr. Gann bought Steel common at 861/4, saying that it would not go to 86. The lowest it sold was 86-1/8. We have seen him give in one day, 16 successive orders in the same stock, eight of which turned out to be at either the top or the bottom eighth of that particular swing. The above we can positively verify. 92% Winning Trades

72

Such performances as these, coupled with the foregoing, are probably unparalleled in the history of the Street. James R. Keene has said, "The man who is right six times out of ten will make his fortune." Here is a trader, who without any attempt to make a showing (for he did not know the results were to be published), establishes a record of over 92% profitable trades. Mr. Gann has refused to disclose his method at any price, but to those scientifically inclined he has unquestionably added to the stock of Wall Street knowledge and pointed out infinite possibilities. We have requested Mr. Gann to figure out for the readers of the Ticker a few of the most striking indications which appear in his calculations. In presenting these we wish it understood that no man, in or out of Wall Street, is infallible. Mr. Gann was born in Lufkin, Texas, and is 31-years of age. He is a gifted mathematician, has an extraordinary memory for figures, and is an expert Tape Reader. Take away his science and he would beat the market on his intuitive tape reading alone. Endowed as he is with such qualities, we have no hesitation in predicting that within a comparatively few years William D. Gann will receive full recognition as one of Wall Street's leading operators."

'You Can be Your Own CTA' and Avoid Troubles With CTA'S & Managed Accounts Matthew Chiang from Canada I am a novice trader with 2-years trading experience. Over the past 4-years I have purchased and read enough books, newsletters, magazines, and software to make me talk like a pro. Yet in actual trading up to 1992 I have a loss equalling a new Mercedes Benz! Plagued with a burnt pocket and frustrated with losses, I turned to professional newsletters, advisers, CTA's and managed accounts. I concluded that futures trading is only for the pros. I was more convinced when I visited the CME and CBOT pits in January 93. In Feb/March, I was shopping for a good broker-advisor while searching for the holy grail. Fact 1: Without Proper Verification, Published "Track Records" can be False I was attracted by the splashy, cover-page ads on the Futures Magazine put up by Broker "A." They have engaged professional advisors (with combined 20 years floor experience and numerous titles) formerly providing services only to floor brokers at $12,000 annual fees. Their service was then available to the small investors at a fraction of this price. They sent me splendid trade "records" and simulated performance sheets. I subscribed to their service and opened a managed account with them. Within 5 weeks, from June to early July, my account was down 60%. I immediately stopped their trading. Concurrently, their published trade "records" showed only -10% in June and positive other months. I challenged their record and protested against their poor management, their answer was even more startling: They insisted on impeccable records, and they admitted only one "calculating error" of using 1/16th instead of the 1/32th tick value for the Bonds! They circumvented my claim by defending on nondiscretionary exemptions, and the advisor took the blow to relief the broker (the accused). Finally they tried to mute me with a defense hearing and a possible counter suit. To damp down their damaging acts to others. I decided to pursue an arbitration case with NFA, and prepared myself to legal nightmares and counter claims. As expected, they defended the case with legal might!

73

After weeks of worry and exchanges of legal firepower, I finally settled with them before Christmas for a mere 45% ($3,000) recovery of my loss. I withdrew the case. Fact 2: Hypothetical Results REALLY bear no Resemblance to Actual Performance While I was shopping around, I was wooed by no less then 2 other CTA-backed brokers. They kept sending me advise and hypothetical trade performances from March to now. Broker "W" is a CTA-backed full service broker situated in Iowa; they claim to have their ears on the grazing grass and cornfields. I followed on paper their recommendations. A $10,000 account taking all of their cattle and grain trades would become $2,000 from March to Sept. 93! Now I still receive their regular mailings and I use them, jokingly, as counter-position tools. Perhaps their ears are too close to the fields to be full of grasshoppers. Broker "S" who sells CTA-managed futures sent me piles of trade results and managed futures reports, claiming that CTA "K" topped the April 93 managed futures survey of his category. I was attracted by the reprints and so I followed a few more issues of the survey. A few months later, CTA "K" disappeared from the list and Broker "S" stopped sending me promotional letters on that managed account. I am not sure how that CTA performed lately. Correct me if I am wrong, most CTA's are like the ebbs and tides. I do not see many repeating names on annual surveys. Fact 3: Psychological Barrier Kills, Not Your Losses With the "pros" looking after my financial health, I felt safe and I ventured out on my own analysis. I still maintain a small account at discount broker "I" and a bank currency trading account, and I traded on 9 occasions throughout 1993. Surprising, these 2 order-desk accounts were up by $3,500 from Jan to Aug 93, while I lost mega-bucks with Broker "A" and paper accounts with Broker "W" and "S." All these trades were technical, without any regard to fundamentals nor report forecasts; I did not even read the newspaper. Psychology Makes Hotline Trading Difficult Thrilled by these results, I persisted, I have learned the hard way that good trader psychology is more important than a top advisor (try this: Futures Chart's Trend Setter, Commodex and Larry William's hot lines are verified big winners, but can you trade them? Why not?) Small but Positive Step . . . Brokerage Account is Now Up I stopped looking for advisors, and in August, I purchased Swing Catcher. My first Swing Catcher trade was a small loser ($450 in Pork). Then I applied my other tools to filter the Swing Catcher signals. I made numerous paper trades and a few actual trades between then and now. My actual account at Broker "L" is now up by another $1,200. Small but positive. Discipline, Self-Analysis & Emotions are Vital I will test my cash currency trades with Swing Catcher and other tools and hope to see better results. Discipline, self-analysis and emotional detachment are vital to survival, not a CTA nor a holy grail. They can help, but they are not the main key. Courage and Pulling the Trigger is Difficult On paper, Swing Catcher trades were doing much better. In actual trade, I did not do as well because I still lack the courage to trade more than 2 markets at any one time, nor would I take every signal that comes along, I also have difficulty in pulling the trigger. Thanks to mega-ton losses by the "pros", I have gradually overcome the fear of manageable losses. These endeavors and huddles have become my 1994 training goal.

74

I am far from earning back what I have lost in these years, but I am glad that time and experience has finally shed light in my trading path. I am also bold enough to assert that small traders can still make it in the futures markets. With proper tools and a good trader's mindset, a novice may even out-perform the pros! Swing Catcher is not the best system available, but it works. If you apply properly your own trading filters and styles, you may improve your trades. Finally, when you feel frustrated by your own losses and want to call in the prose and let someone take over your fate, or simply want to become a brain-dead trader, remember this ad: "What does your broker get when he makes a mistake? A full-commission!" This is the crux.

Random Thoughts on Trading and System Design Part 2 - Adam White Some Systems are Designed to Work on Data for a Short Time Period Based On Hindsight There is a much less obvious but equally dangerous form of curve-fitting that involves curve fitting the data to the system. We are referring to the increasingly popular practice of using a computer to pick out short time periods during which chosen markets have historically acted similarly. For example, we might be told that over the past ten years buying silver on May 10 and selling it on June 1 has resulted in a profit every time. The obvious inference is that if we do it this year, we have a 100% chance of winning. There are tables and tables of this meaningless coincidental data being offered to traders in books and almanacs. Seasonal Characteristics Are Highly Questionable Part of the theory is that there is some sort of very short term seasonal or cyclical basis for the similarities, although this is patently unprovable. A properly programmed PC will find literally thousands of "trades" like this over any fairly extensive set of data, just as an optimization involving a great number of variables will almost always find a great number of "profitable" combinations. Data Optimization Can Fit a System to Arrive at a False Impression of a Seasonal Characteristic The optimization fits the system to the data, and the seasonality testing fits the data to the system. Both practices result in overly curb-fitted trading results that offer no hope of success in real trading. The Trouble Is . . . The Markets Don't Listen Here is another example of something that initially seems conceptually wrong. We are continually told that every market has its individual character, and that therefore a trading system must be tailored to each market. We are also told: "Don't trade too many markets because it is difficult to watch more than a few at a time," and: don't test more than a few markets because it is unreasonable to expect a trading system to work well over a range of markets."

75

All of these concepts seem logical at first. The trouble is, the markets won't listen. They are not predictable. They will not act tomorrow in the same way that they did today or yesterday, and you are fooling yourself if you expect them to. Trading Systems Should Operate on a Wide Variety of Markets and Market Conditions Trading systems should be designed to operate profitably over a wide variety of markets and market conditions. They should be simple and flexible enough that they won't be thrown for a loop by changing conditions. There Is No Best Indicator While we are reasonably convinced that there is no best technical indicator, some are less likely to lend themselves to unwanted curve-fitting. First, we can divide indicators into two major categories: static and adaptive. Static indicators are technical studies or other entry or exit methods that do not "flex" with changing market conditions, especially market volatility. Good examples of static indicators are those technical studies, stops, and profit targets that are denominated strictly in dollars or market points. Systems that Use Changeable Targets and Stops are Likely Less Curve-Fitted Adaptive indicators change stops and targets as the markets change. When these adaptive indicators generate a trading signal, you can say that the market put you into or took you out of a position. Examples include volatility-based entries and exists, channel breakout systems such as Donchian's weekly rule, entering or exiting on an 'n' day high or low, and using recent swing highs and swing lows as entry, exit or stop points. As a general rule, adaptive indicators are less likely to become overly curve-fitted to the markets than static indicators because the system designer will not feel the need to optimize them. This is not because they are any less amenable to over-optimization than static indicators, but because they adapt to changing market conditions while retaining their integrity. Changeable Target & Stop Methods are Less Likely to Strictly Limit Losses or Profits The main disadvantage of adaptive indicators is that they do not strictly limit a loss or accurately lock in a profit.lock in a profit. For example, if your exit to limit a loss is a 10-day low, the 10-day low could be $500 away or $5,000 away. If your account is $20,000 in size, it seems unwise to risk as much as 25% of it in one trade, although 2.5% seems acceptable. The same is true if you are fortunate enough to be locking in a profit. Adaptive indicators expand with volatility, making it easy for a hard-won profit to disappear as quickly as it was created. A reasonable compromise might be to allow the markets to dictate your entries and exits under normal conditions, but if a particular market becomes too volatile, limit your potential loss by using a static dollar stop (perhaps keyed to your account size) or avoid the market altogether. Some Systems are Designed to Work on Data for a Short Time Period Based On Hindsight

76

There is a much less obvious but equally dangerous form of curve-fitting that involves curve fitting the data to the system. I am referring to the increasingly popular practice of using a computer to pick out short time periods during which chosen markets have historically acted similarly. For example, we might be told that over the past ten years buying silver on May 10 and selling it on June 1 has resulted in a profit every time. The obvious inference is that if we do it this year, we have a 100% chance of winning. There are tables and tables of this meaningless coincidental data being offered to traders in books and almanacs. Seasonal Characteristics Are Highly Questionable Part of the theory is that there is some sort of very short term seasonal or cyclical basis for the similarities, although this is patently unprovable. A properly programmed PC will find literally thousands of "trades" like this over any fairly extensive set of data, just as an optimization involving a great number of variables will almost always find a great number of "profitable" combinations. Data Optimization Can Fit a System to Arrive at False Impression of A Seasonal Characteristic The optimization fits the system to the data, and the seasonality testing fits the data to the system. Both practices result in overly curb-fitted trading results that offer no hope of success in real trading.

Don't Trade Nearby Contract At Expiration or It May Cost You A Lot - Dr. Satish Date 1/20/1994, the crude oil market was not a fast market that day. I decided to day-trade crude oil. I gave order to sell February Crude Oil one-hour before the market opened. It was the last trading day for February Crude Oil. I put in an order to sell at a price. I wanted to exit before the close if I had a fill. Remember again, Crude Oil market on 1/20 was not fast. LIT America clears through same brokers in Crude Oil pit. The wheelers and dealers in the pit did not return my fill until after the market closed. What do I do now? It cost me $3,100 per contract to take care of my problem. Why was I trading the February contract on the last trading day? Because nobody advised me against it or warned me not to do it. Somebody else was also buying and selling February Crude on the last trading day. By the way, Mike Chalek, sold Dual Thurst System for $3,000 (it does not work anymore). Talon Trading System for $3,000 (it does not work anymore). He is now selling a new system for about $2,000, will this new system work. If he sells 100 systems worldwide, he makes $200,000. It will not work again in the market.

Magic Numbers For More Profitable Trading and How 30 Samples Are Needed For Statistical Validity - Tom Cunningham There are "magic numbers" that are quite helpful in making commodity trading more profitable. There are fibonacci retracement numbers such as .618, .500, 1.618, and so forth. In opinion polls, the magic number used to be around 1600...meaning that in order to have an acceptable amount of error in these polls, a researcher would have to poll about 1600 persons who fitted the profile of

77

the average US citizen. After all, one could hardly take the opinions of those entering or leaving a high school, as there would most certainly be an age bias, a geographic bias, an ethnic bias and an educational bias. If 82% of the country's citizens are high school graduates, then the poll should be adjusted so that high school grades have 82% of the weight of all poll respondents, and so forth. Better profiles have allowed that 1600 number to be lowered to around 600, with only a slight increase in the probability of error. In trading, we should have a number to tell us whether the information we get when we back-test is the result of random action, or the result of our system finding an opportunity. (one successful trader observed that every person he knew who believed the "Market-is-infinitely -efficient" concept also happened to be poor!) 30 Samples Is Sufficient For Testing Purposes After all, the purpose of a system or practice is to find something that's NOT random. So we need a number to help us know randomness from opportunity. That number is thirty. That means we should get at least thirty random samples before we conclude whether, say, buying the day after a new high is made would likely be profitable. Coins Do Not Have a Memory By way of explanation, suppose there is a young fellow flipping pennies. Each time the coin comes up "Tails" he puts the coin into his pocket to spend, for he is looking for the magic penny that, when flipped, will only come up "Heads." After numerous pennies have been discarded, he has a penny that has come up "heads" five times in a row. Delighted, he ceases his search, ready to bet the next fellow into a three-to-two bet that the penny will come up heads. Of course, we know that the penny's chance of coming up heads is exactly 50%, regardless of previous flips. The reason that our young man has erred is that his sample is not large enough. Had he flipped 30 times, he would have come pretty close to 50% heads, at least close enough that he would have tested that penny much more extensively before wagering (and losing) with it. Vigorous Testing Is Required So when I read that someone has discovered some new indicator or rule that greatly improves profitability, I first ask "How many trials has this been given?" If it is a one variable idea that worked seven out of eight times in randomly selected markets, it's worthy of more testing, and I'm glad to read about it. But it's not ready to be incorporated into my methods until it has passed vigorous testing. Any Trading System Should Have A Minimum of 30 Actual Trades To Judge It Of course, one should not judge any trading system on less than 30 trades, unless the drawdown is so bad it is disqualified earlier! Even then, a bad drawdown may only indicate overtrading by the tester, for taking the system to 30 trades may well reveal a decent profit-to-drawdown ratio. We just can't know much in less than 30 trials! By the way, the 30-test rule is one reason why we should have a bias toward shorter term trading rather than the once-a-year concept requires at least 30 years if tested in real-time!

78

'Questions to Ask Before Buying a Trading System' Richard Thiessen 1. If the system is that good, why is it for sale? 2. What is new and different in this system? 3. What color is the "box"? 4. How is the system operated? 5. Has the vendor actually traded the system himself and if so when? 6. How does the vendor define accuracy? 7. How does the vendor define drawdown? 8. How consistent is the system? 9. How does the vendor define profit? 10. How was the system tested? 11. What is the guarantee? 12. What is one buying? 13. Is there a cutoff date? 14. How useful is the manual? 15. Are references available? 16. When is the improved system coming out?

The USA Is Better Than Japan, At Least In The Field of Trading - Tokiyuki Yokoi I'd like to introduce myself. After graduating from my University, I joined First Chicago Bank, Tokyo Branch, and I learned currency option and short-term debt market. Now I'm registering as a CTA, and this month I begin to manage $500,000 for my company. This is my first challenge as a money manager. I'm a system trader and most of my knowledge comes from books and systems published in USA. I think the USA is far superior to Japan in the trading area. I believe following USA traders is the best method for success as a trader. I subscribe to Futures Truth Reports and found Swing Catcher Trading System to be an excellent program.

EDITOR COMMENTS The excellent submission By Mr. Jumma on the importance of diversification is extremely relevant for successful trading. Many times I have talked to traders who have lost money or made less money than they should, due to diversification issues.

79

Gann's early trading history is truly astonishing. Almost all of Gann's work and writings are from later in his career. It's very unfortunate there seems to be little or nothing detailed ever written about the techniques he used to achieve his amazing trading record from 1902 thru 1909. Dr. Satish's large losses as a result of trading the spot month on the delivery date is very uncommon. Normally, the broker will warn you not do that. However, he can't just blame the broker, as he has done. It's also his fault for not being aware of that readily available information. Tom Cunningham's article on the importance of a statistically significant number of tests is very valid. A very important point raised is the fact you can't judge a system on less than 30 actual trades. Issue 10. Can Money Be Made Based on Price Movement That Takes Place Just Prior To The Close? - David Stone This research was done using data from the Live Cattle market over a 4-1/2 month period. The results probably would be similar using data from other markets but I've not verified that to be correct. Using my Quote Machine I made a note of the price exactly 30-minutes prior to the close each day. On the next day I noted the opening price, the days high/low range above or below the open, and closing price. Days were ignored if the 30-minute price and subsequent close were the same. During the test period a total of 61 trading days had up-trends the last 30-minutes, and 78-days had downtrend the last 30-minutes. Next Days Close Higher 62% of Time Next Days Close Lower 56% of Time The results were bullish for the next day if the price trend was up during the last 30-minutes, a total of 38 out of 61 times, or 62% of the time. If the last 30-minute trend was down, the next day was likely to be bearish 44 out of 78 times, or 56% of the time. This test has some good statistical validity. It seems to me that a good trading system could easily be developed based on this research. Unfortunately, the percentage numbers may not be quite strong enough to make the potential trading system that reliable or profitable. However, with more extensive research done in a number of varied markets, and good money management skills, any potential system based on this research could in fact be highly profitable. Additional research needs to be done on this subject to decide on the reliability of any potential system based on this concept.

Can Money Be Made Based on Difference Between Closing Price and Settlement Price? - David Stone Did you now that the official settlement price and the actual closing price are frequently different and quite often are changed some time after the actual trading ceases? Some Club Members may not be aware of this fact. However, if you have a quote machine I am sure you have noticed this regular occurrence.

80

The market stops trading and perhaps Soybeans last tick at exactly 679. Usually, about 10 to 20-minutes or so AFTER all trading stops, the Exchange gives the day's so called settlement price, of say 678-1/2. Official Closing Price Not Necessarily Based on The Last Actual Trade That Took Place Thus, even though the last actual trade was at 679, the official closing price will be 678-1/2 that will be published in newspapers and data vendors. Another example is TBonds last trading at say 113-04, but about 15-minutes AFTER trading stops the Exchange reports they settled at 113-03. Why does that occur? The exact reason is somewhat unclear. However, it seems to be related to the fact the Floor Brokers do some type of settlement between themselves after the actual close of public trading. It's Possible To Make Money Based On Close/Settlement Phenomenon Is there any way money could be made based on this common settlement procedure? Quite possibly! I tested this concept in the Live Cattle market and discovered the following: A total of 30 closes were observed where the final settlement price was higher than the last tick actual trade price. On 22 days the next day's closing price was bullish, or 73% of the time! A total of 28 closes took place that resulted in the days final settlement being lower than the day's last tick. On 21 days the next day's close was lower, or 75% of the time! This analysis is far from complete. Additional markets and a greater time period need to be analyzed. However, there's a reasonable chance money could be made using these observations and concepts.

Opinion on Swing Catcher - William Taaffe I wanted to let you know that I am quite impressed with Swing Catcher System and the level of support Dave Green have provided me following its purchase. The system really does a marvelous job of standing on its own. I found it very easy to set up and operate. In fact, I am not sure that the well prepared manual is really needed for successful set up and operation of the system. However, I appreciated the in-depth work put into it, because I love to read all I can about the background and operation of what I am doing. It has satisfied my appetite. At the personal level, Dave Green being available to me every time I have called with computer or trading related questions is most appreciated. Many people and companies make attractive promises of support after purchase, but many do not deliver. Dave Green has lived up to his advertised promise.

By Not Quitting When Down - You Too Can Trade Successfully - Robert Edwards For most traders, commodity trading is a roller coaster ride. Climbing the hill is often slow and tedious, no sooner do you get to the top, you fall off a big drop and end up below where you started. The slow back and forth climb can take weeks, but a large loss comes so fast and carries our wills to win with it. A loss can be so devastating!

81

Realize then that you have made money before and you can do it again. Keep following your plan if it is a proven plan, or try to make the necessary adjustments, but don't quit when you are down! The sun will come out tomorrow. It is always the darkest just before the dawn. I have made some of my biggest trades right after big losses. I may be unique, but when I get down, I really get serious and disciplined and trade my best. I have to watch myself when I get in a hot streak. That is when I get reckless and play hunches rather than stick to my plan. Or I will not be selective and take marginal trades; or I will refuse to get out when a mental stop is hit and add to a losing position and really get clobbered. Quit When You're Ahead and Never Quit at the Bottom Quit when you are at the top of the mountain, after a big win. A roller coaster rider can be saved a lot of grief by quitting at the top of the hill before the big plunge. After the plunge, it's too late. Stop when you are ahead or after you have come back substantially. Never quit at the bottom! I once gave up commodities for good (I thought). I could trade and make money, but after a big loss I always quit. Then I began trading mutual funds and I discovered a secret that has made all the difference. In March 1990, I began mutual fund switching in an IRA account and because it was my retirement money I could not quit. Also the account wasn't leveraged so I had staying power. Losses Made Me Feel Like A Complete Failure On my first trade, I bought gold shares and quickly lost over 12% of my capital. I started with $8,000 and was down $1,000 within two weeks. I stayed in and in August, 6 months later, the Iraqi invasion of Kuwait rallied the gold market enough to let me out. I was so relieved. I switched to technology and health section funds and by January 1991, I was a thousand dollars ahead at $9,000. Just before the Iraqi invasion, I again bought gold shares at the top of the market. When gold plunged the next day, I was down over $1,100 to $7,900. I jumped out at the bottom and put my money in a money market account. I buried my head in the sand. I was a failure. Not only could I not trade commodities, but I couldn't even trade mutual funds that were not leveraged. I saw the stock market rally and I stayed out because I missed the bottom and thought I couldn't afford another loss. I stayed in cash until late April, thereby missing a major stock market rally. However, I then realized if I lost my money in the market, the market was the only vehicle that could ever bring me back. You Must Trade With A Plan and Diversification I got serious and began trading with a plan and used technical analysis timing and S&P to switch back and forth from sector funds to cash. I learned to put only 1/4 of my money in on any trade any day and to diversity. In a correction, I would then have money left over to buy at lower prices and average down. However, when the market exploded, I bought 100% in one day, knowing the momentum would carry me up for a few days. Because I was in a no-load account, a $25 gain was meaningful because there were no commissions.

82

50% Gain Thanks to New Approach But Lost Money on First Commodity Trades By the end of the year my account had started at $9,000 and grown to $13,500. I had a 50% gain for the year and a 70% gain from the low. Over the two years I had averaged a respectable 25% annual gain. But had I quit at the bottom, it would have been different. With these lessons I learned from trading mutual funds, I was ready to tackle commodities in August 1993. I started with $9,424. I began trading because I wanted to get in on the seasonal rally in Wheat. The market was very sloppy but when it started to get support around my $3.02 to $3.05 target, I quit day-trading to finally buy Wheat. I ended up buying December Wheat within 1/2 cent of the Sept. low. But then it started down, I jumped out just before it made a new fractional low. That same day the market reversed strongly back up, but I was already out. I never got in Wheat again. I was frustrated and quickly lost money in Soybeans. I was devastated. My account was down to $5,500. Made Money by Not Quitting At the Bottom Winning and Winning Big - All My Losses Recovered and New Equity High I always have a $5,000 yearly limit to what I am willing to lose in commodities in a year. Once my account was down $5,000 to $4,400, I would have pulled out, based on my yearly $5,000 money management stop. I only had $1,100 more to lose and it was all over for the year. But this time, I remembered the gold losses in my mutual fund account and told myself I could not stop at the bottom. I almost immediately started winning and winning big and caught the Cocoa rally on a couple contracts and in just a few weeks I had all my money back. In November I hit my high water market of $11,200. It was time to quit now. I was at the top. But with success, I became reckless since I was playing now on the market's money. I threw away my discipline and over-traded. A small move against me in a couple trades knocked me back to a low of $4,990 by mid-December. That was when I had a real day of reckoning. This time my wife found out how bad I was doing and she was devastated. We went over 80% of my trades but a few losses killed me. Success Made Me Reckless but Stopping Big Losses Allowed the Gains For Successful Trading If I could just stop the big losses, the big gains will put me on top. I got serious and decided I would only buy at support levels and would try and get out when the support levels were breached. I would quit giving my hard fought gains back. I started on the road to recovery. By January 1, 1994, my account had $5,490 in it, a $500 gain the last couple weeks of December. I Quit My Job Thanks To Trading Successfully I have continued to gain and on Friday, January 28, 1994, my account registered an equity total of $10,544. I made over $5,000 in the first 4 weeks of 1994, nearly doubling my account for the first month. That weekend I quit my job at Employment Dynamics Inc., a private rehab company my wife and I started.

83

Confuscious said that you should choose a job that you love and you won't have to work a day of your life. In commodities I will work night and day because I love it so much, it isn't work. Now Taking $2000 A Month Out Of Profits I am taking $2,000 per month out of my trading account to pay my share of the household expenses. If I lose all my money I will have to go back to work with my wife. I now have real incentive to keep my commodity account above water (HA-HA). Profits above the $2,000 drawdown I am going to place in a mutual fund account at the end of each month, so that I will have a nest egg to start over with if I have to and so I won't over-trade. I am very excited. My goal is to average $200 per day or $1,000 per week. Had to Bypass Some Large Winners Due To Having A Small Account On paper I made thousands and thousands of dollars in January, thanks to a new indicator I have developed. However, I could not take but a few of the trades because I had a small account. Things should be better in February, with the additional capital which should allow me to better diversify. I am using the Swing Catcher program as a filter. I place my trades intra-day and look to get a confirmation with a corresponding buy or sell signal from Swing Catcher. If I get the signal from it I add a contract the following morning (adding to an already winning trade). If I don't get a confirmation from Swing Catcher, I will quickly bail out. Making Money By Pursuing Winners and Getting Rid of Losers By doubling up on my winners and getting rid of dogs and losers, I am hitting a home run or two each week. Despite the hours and hours of technical research, my trading boils down to my intuition. I have recently been able to quantify what I am doing intuitively, into a set of indicators which gives objective buy and sell signals. I make daily calculations on 35 Futures Markets. Each day after the close I calculate if I should go long or short or do nothing, based on what I perceive the market should do. Every time I am wrong I learn something. I really do believe it is possible to repeat what Gann did. Richard Dennis did it recently, as told in the Market Wizards book. Mr. Dennis is my inspiration. He took a small amount of money and turned it into large amounts of money. Without dangerously pyramiding. He did it based on mathematical probabilities. I hope to do it too. If I fail, it won't be because I quit at the bottom. I have only one goal this year, that is I never allow myself to get over a $5,000 drawdown, no matter how much money gets into my account. I made money in January based largely on loss control. Now I need to learn to let my profits run a bit more. I am making progress. Became Profitable By Not Quitting When Down, Learn From Mistakes and Stick To A Plan If I had quit when I was down to $5,500 or $4,990 mark, this would not have been possible. I wonder how many possible millionaires quit just before they learned that last secret which could have made the difference between mega-success and failure. Get a plan and stick to it. Learn from your mistakes and don't get down on yourself. If you did it once you can do it again. It requires confidence. Richard Dennis lost money early when he started on the Mid-Am, yet he never lost confidence in himself. When he was interviewed for the first Market Mavens book he was in the middle of a horrendous losing streak, with accounts he managed losing millions. Yet he never lost his confidence. He was unshaken.

84

In November 1989, I had the confidence to start Employment Dynamics, Inc. and had the audacity to predict a million dollar gross by December 1994. I reached that goal early, in January 1994, after only 4 years and 2 months. On A 5-Year Plan To A Million Dollars Trading Commodities We billed our one millionth dollar. When I started the company my family laughed at my predications. They are not laughing now. I am now on a five year plan to net rather than gross, one million dollars in commodities. Go ahead and laugh now. We will see who is laughing in 5-yrs. I have always had impeccable confidence in my paper trading. I now need to get that confidence in my real trading. Since I started my mutual fund account in March 1990, I have not traded well. Often my timing stunk. But I have managed to average over 20% gains per year in my mutual funds. In my commodity trading, a 20% gain compounded monthly, would increase my January 1, 1994 initial $5,490 to nearly $50,000 this year. This is the goal I have set. I will keep you posted, so you can see how things turn out. But one thing you can be sure, no matter what happens, I will not quit when I am losing. I will not pull out at the bottom. Remember, you must never quit when you are down.

How I Lost Money By Trading Perpetual Data Instead of Actual Contract Data Dave Montgomery When I first started trading commodities some years back, I decided to build a computerized data base by buying Perpetual Data. I had read that CSI Perpetual Data was a wise choice for a data base because of several reasons. For me, the most important reason was the fact I could save both money and time by simply maintaining one permanent data file per commodity. I would never have any reason to acquire back-data because the perpetual data was good for back-testing. I also read how well Perpetual Data mimics the actual signature of the specific contract months. Therefore, I started trading April Live Hogs using my computerized charting software, trend lines and cycle analysis. After careful and detailed chart analysis, I determined with great confidence the Hogs were bullish and would continue moving up. Consequently, I decided to trade April Live Hogs strictly on the long side based on my bullish chart analysis, etc. How's It Possible To Be Losing When I'm Trading In Same Direction As The Trend? Much to my chagrin and light pocketbook I had a string of consistent losing trades. After each loss I looked at my Perpetual Data bar chart in amazement and said to myself "how did I possibly lose on that trade when my chart is obviously in a bullish trend and my trade was betting it would in fact go up"? After 7 out of 8 losing trades, all on the long side of Hogs, the reason for the loses suddenly hit me. The Reason For My Losse Was Due to Not Using The Correct Data As I was looking at my bullish looking Perpetual Data Live Hog chart I also by chance happened to look at chart of April Hogs from a charting service. It immediately dawned on me what was going on. The chart service specific contract month chart of the April Contract had a decidedly bearish look to it. However, my Perpetual Chart had a definite bullish look! Why was my Perpetual Data chart bullish looking but the April Chart bearish looking? That's because the Perpetual Data was based on a blend of the two near contract months, April and June.

85

Due to seasonal factors, the June Contract happened to be strongly bullish but the April Contract I was trading was somewhat bearish. In addition, since the Perpetual contract is weighted based on 'X' number of days into the future, the bullish June Contract was getting much more weighting than the nearby April Contract. Thus, the Perpetual price was based on a blending of the 2 contract months and it was heavily favoring the June Contract. That resulted in the perpetual data looking considerably more bullish than the April Contract I was actually trading. Trading Against The Trend Without Realizing It and Why Perpetual Data Should Not Be UsedBy Itself For Actual Trading Consequently, all my losing trades on the long side were going against the negative trend of the April Contract. The trend was bearish, but I thought it was bullish because my Perpetual chart looked bullish. I can't blame CSI for this because their sales literature did not say you should trade using the Perpetual Data, which is artificial data. In fact, CSI infers Perpetual Data is most valuable for historical testing, rather than actual usage for real-time trading. Now I know to only trade using actual contract month data. In fact, I use back-adjusted Continulink (Continuous) Data, which is based on the actual contract month being traded.

What I Didn't Like About A Competing Newsletter ... Too Many Vendors - Also, Information Wanted - Phil Baker I like the idea of a newsletter like this. You and the readers should help each other through this Commodity Traders Club News each month to learn how to trade properly and give ideas. I subscribed to another competing newsletter once for about a year, but the writers and readers were always pushing products of their own, or if they wrote in about a product they didn't or did like it, but they never told why. Also, I don't want to pay for a newsletter unless they tell why they do or don't like a system and how the system works. I would think CTCN has some subscribers who use SuperCharts by Omega Research. So I would like your readers to give trading ideas each month to be used with SuperCharts. I would also like you and your readers' opinion on Nature's Pulse System from Ed Kasanjian Research.

How I Made Enough Money To Pay For the New House I Am Building - Don Smeathers I'm very happy with the Trend Index Trading Company's Dow Jones Trading System for trading OEX Index Options. The strategy I have found most productive is to put on credit put spreads each month using the total number of contracts from the buy date with 5 contracts for each buy. The target is usually the strike price I sell and the current spot (cash) is the puts I buy. It takes $1,000 for the first 5 points spread difference and $500 for each additional 5 points. Thus, $5,000 will permit 5 contracts to be written with a five point spread (sell 445 puts buy 440 puts). The short puts are the only contracts bought back when the stops are hit. Using this strategy with the Dow Jones System, in 4 months I have made enough money to pay for a new home. I started with $50k - I now have over $100,000!

86

My T-Bond Trading System - Frank Morgan I want to share some information and make an offer. First, by way of introduction, I have been following various commodities for many years and have been a trader since 1990. I have been a diligent searcher and have had some success and some failures. Recently, I have come upon an approach to trading T-Bonds that was quite rewarding, yet surprisingly has had no drawdowns to-date. This is not my system, nor is it available to me on disk yet. After looking into it, I've started to trade it. The negation of drawdown is accomplished by scaling the number of contracts available; an account of about $25k is needed to take advantage of this scaling potential. I would like to have partners and co-traders with me. I am offering a return of 40%, payable as 10% per quarter to be sure there are issues of trust and success here. The most effective way I can think of to address those issues is to offer to send by phone/fax the trading signals as they are generated and to do this for some reasonable period of time to potential co-investors. Realistically, the position we are going to take tomorrow and then the analysis of how that position performs at some time in the future is the most effective way of convincing myself and/or anyone else what a system can be expected to do. If interested, please call me at 404-525-1130.

Solving The Problem of How To Get On Board A Run-Away Market, Thrust Trading Method - submitted by C. R. The problem with getting on board a runaway market may be solved by using what is called the thrust method, which is useful in establishing positions in runaway markets with definable risk. The thrust method helps you overcome the problems of catching a running bull (or bear) market. If you buy (sell) at any price, you might buy the high day just before a significant correction. Getting on board just prior to a big correction would require additional margin money to stick with the position. On the other hand, if you buy during a correction, you never know how many days the reaction will last. To use the thrust method in a bull market, you must first have a down day where the high is lower than the previous day's high and the low is lower than the previous day's low. Three days are marked on the March NYSE composite index chart which satisfy this requirement. (There are also some others that are not marked, such as the setback on December 6, which gave another profitable signal.) Runaway Bear Market Entry Technique First Requires An Up Day In bear markets, use a reverse of the method for a bull market. In runaway bear markets, you must first have an up day where the high is higher than the previous day's high and the low is higher than the previous day's low. Let's take the setback into the December 2 low as an example. The December 2 setback has a high that is lower than the November 29 high and a low that is lower than the November 29 low. After the first down day, a buy stop is placed over the high of the down day. In this example, the buy stop is at 118.30, which is just above the December 2 high. If the correction continues, lower the buy stop to just over the high of the next down day as long as prices retreat.

87

Prices did not make a new low on December 3, so the buy stop could not be lowered. (Inside days are ignored, and the previous day's highs and lows are used as your key chart points.) The buy stop was filled on the December 4 rally to new highs. You Always Know Where Your Stop Is Whenever you enter the market using the thrust method, you know exactly where your protective stop will be. Once the buy stop is filled, the initial stop loss protection using the thrust is just under the reaction low. For the entry at 118.30, the protective stop is at 116.95. End. P.S.: The Thrust Method is reprinted with permission of Commodity Closeup. However, I (C.R.) personally differ a little with it because I believe that a market does not have to be a "runaway" for this to provide some help in managing money positions. Chart in Print Copy

EDITOR COMMENTS A special note from the Editor: For a number of years Futures Truth has done a great job of carefully testing some 200 different trading systems. For your information, Swing Catcher was tested by them for 4-yrs from 1990 thru Jan 1994. Their latest ranking in January 1994 had Swing Catcher Trading System ranked as the 5th best trading system tested by them, since release date, with a 78% return. However, starting with the Feb/Mar issue, Swing Catcher is no longer ranked by them. There are several reasons for my asking them to discontinue the tracking. The main reason is because as a result of their admitted lack of resources, they were only able to trade it using a fixed portfolio of just 4-markets that were originally randomly selected. The system in actuality follows 35-markets, and then ranks the best 18-markets to be trading based on their trending characteristics and profit potential. Due to their being able to only track 4-markets (DMarkBPound -TBonds-Euro$), it resulted in their published results being considerably different than actual results. That's because some (possibly all) of the markets Futures Truth was tracking may not have been the same markets being traded by system users. System users are in fact using the built-in Trend Ranking capability to isolate the best markets to be trading, and then selecting from that list of 18 recommended markets, ranked in-order. The Futures Truth ranking (though quite good and complimentary overall), was nevertheless at certain times, considerably different than the results system users were achieving. Thus, to avoid any confusion or discrepancies, I thought it best if they stopped ranking it for now, or until we can figure out a solution to this problem. With reference to Dave Montgomery's contribution about how he lost money due to using CSI Perpetual Data for actual trading. I just read the CSI Version 4.05 Manual and will quote some of the contents about their Perpetual Data: "Many traders have found it very helpful as both an analytic and trading aid...It represents a weighted average of the two contracts that lie adjacent to a given period-ahead point in time...Traders employ this concept to study a markets characteristics, etc". Unfortunately, Dave realized too late that this data is not recommended or suitable for actual trading. As stated by CSI, it's only a trading aid. Thanks to all who made contributions to this issue. All members are invited to share their knowledge by contributing to the next issue of CTCN. Issue 11.

88

Just in Time For The April 15th Tax Filing Deadline A Summary on How to Qualify for Trader Status - Ted Tesser In this article, we will explore some of the criteria which have been deemed essential for one to qualify for this classification. First of all, there is no IRS Code section which clearly identifies this election. The Code defines an Investor as "a person who buys and sells securities for his own account." (IRC 263A.) On the other hand, the IRS Code also defines a professional Dealer or Market Maker as one who holds "securities for sale to customers in the ordinary course of business..." (Reg. section 1.471.) The Code does not specifically define what a Trader is. The definition of Trader has evolved through various court decisions over the years which create and define this hybrid category. Basically, a Trader is an investor who trades with such a high level of activity, that the investing becomes a business to him. And, although he does it for his own account, he is still afforded some of the benefits of the professional. Over the past few years, many cases have been decided in favor of the trader status, and several of these in particular stand out as landmark decisions. As early as 1935, the Supreme Court decided on the Trader designation in Snyder vs. the Commissioner. The Court stated that "a taxpayer can be involved in the business of trading securities." In 1967, in the case of Reinarch vs. the Commissioner, an option writer did not even have to prove that he was running a trading business, because the nature of option writing lent itself to the basic definition of Trader. In 1978, in the case of Marlowe King vs. the Commissioner the same was decided for a future's trader - even though some of his transactions were long term! More recently, in 1991 two cases were decided in favor of trader status, and each was significant. In Nubar vs. the Commissioner, it was held that the extensive trading of stocks and commodities constituted engaging in a trade and business. In the most significant of decisions, Ropfogel vs. the U.S. District Court-Kansas, the criteria were specifically identified which qualify a person for this coveted status. These factors were determined to be the following: 1. The average holding period of the security (or other trading instrument.) 2. Whether long or short-term profits were expected. 3. The extent of financial leverage was employed. 4. Taxpayer's intent to collect dividends and interest. 5. The expectation to derive profit from frequent trading. 6. The presence of the Schedule C on the tax return. 7. The existence of an office. To summarize, to be classified as a trader, an investor should file a Schedule C, engage in very frequent trading, and profit from short-term transactions. If the trader is engaged in futures or options activities, they will, however, allow longer term transactions. Interest and dividends should not be a significant part of income, and the trader should not be buying investments for reasons of fundamental under-valuation in the market. He should be doing so to capture short-term swings in market movement. For this reason, technical rather than fundamental analysis gives more support to the Trader status.

89

Frequency of trading is an issue, and daily trading is best, although not required. Also, trading should involve substantial amounts of time tracking and analyzing investments, but a full-time profession is not necessary for trader status. In short, not everyone will qualify for Trader status, but many people do. It is better to cover as many bases as possible in qualifying, and well worth the effort to do so.

A More Detailed Explanation To My Article of Last Month On How I Used Spread Profits To Buy My New House - Don Smeathers The goal of this letter is to describe the way I use the Dow Jones Trading System program to trade OEX options. This is not to be interpreted as to be the only way to use the program, but I have found it to be reliable and profitable. I use credit spreads using OEX put options of the current months expiration as the trading vehicle. I determine how many contracts by using the Dow Jones Systems Trend Index, aggressive variable mode total contracts, the most recent trend. Thus, the most contracts that I would have ever use is 65, based on 13 positions of five contracts maximum exposure during the recent bull trend. Then I would buy the nearest in-the-money put and sell the nearest out-of-the-money puts and take in the credit. I hold the contracts to expiration and pocket the profit. If a trend is just starting on the Dow Jones (aggressive variable, actual Index), I add to my positions as your program indicates (five contracts at a time) using the same parameters for entry. As the market continues to move thru strike prices I buy higher strike puts or continue to add to the current long strike puts and sell higher strike puts depending on the market. The cost to add positions with a five point strike difference is $1000 per contract, therefore adding five contracts at a time requires $5000 (less the credit money that's generated). This program requires $15000 minimum equity and level two trading at Charles Schwab & Co. At the end of each month's expiration I start with the total number of contracts that the Dow Jones program indicates to hold in open equity. That way I can continue to profit if the trend continues and even add additional contracts if they are generated by the system. This program has permitted me to achieve a high degree of success in trading the OEX with reasonable confidence. I check every day to see if the Dow Jones System confirms my trading action, but the OEX actual index and the OEX Harmonics seem to be too conservative. I think that investors can use this system of trading using deeper in-the-money OEX contracts and achieve a more conservative return if they feel uncomfortable using the at-the-money and nearest strike of puts. The following is supporting documentation concerning spreads: Monetary Requirements: $15,000 (Broad Based) minimum equity - $5,000 (Narrow Based/Equity Options) minimum equity - Cash or MCA to cover the difference in strike prices. Plus any other requirements. Tips on Entering Order - (Chart Referred to is in Print Copy)

90

Enter the buy side first. When to use: If you think the market will go up somewhat or at least is a bit more likely to rise than fall. Good position if you want to be in the market but are unsure of bullish expectations. You're in good company: This is the most popular bullish trade. Profit characteristics: Profit limited, reaching maximum if market ends at or above B at expiration*. If call vs. call version (most common used), break-even is at A divide net cost of spread. Loss characteristics: What is gained by limiting profit potential is mainly a limit to loss if you guessed wrong on market. Maximum loss if market at expiration is at or below A. With call vs. call version, maximum loss is net cost of spread. Decay characteristics: If market is midway between A and B, no time effect. At B, profits increase at fastest rate with time. At A, losses increase at maximum rate with time. -Short side carries the risk of early assignment. The Bullish Put Spread In the put market, the bull call spread has an equivalent - sell the higher strike put and buy the lower strike put. This would create a net credit because the premium of the sold put is higher than the one of the purchased put. The maximum profit of this position is the credit. If the price of the underlying is above the strike price of the short put at expiration, both options expire worthless. The bullish short put spread can have a distinct advantage over the bullish long call spread. Because the long call spread results in an initial debit, it must be paid for in full when it is established. The short put spread results in an initial credit. Under current margin rules, it is only necessary for the risk of the spread, i.e., the credit received minus its maximum value, to be available in the account. There need not be an initial cash outlay if the margin account has excess equity. Special Risks of Early Assignment The second special situation that a spreader should be aware of involves spreads of American index options. If the short option in an index spread of this type is assigned early, the cash settlement mechanism of index options creates a debit in the account for the amount that the short option is in-the-money at the end of that business day, adjusted by the multiplier of the index. When the long option is exercised, the amount credited to the account will be determined by the settlement value of the index on the DAY it is exercised. There is a full one day's risk if the long option is not sold at some time during the next trading day! Summary of Spreading The general rules of spreading are simple: 1. A spread can only be worth as much as the difference of the strike prices of the options that define it. 2. If a spread is sold, the maximum profit is the net amount received. The maximum loss is the maximum value of the spread minus that amount. 3. Spreads must be done in a margin account. If a spread is sold, the difference between the credit received and the maximum value of the spread must be available.

91

The Trade-Offs of Spreading The major trade-off of spreading is the elimination of the unlimited profit potential that goes with a long option position. The spreader trades in immediate performance for a lower cost of entry.

Ways to Improve A System's Rollovers & Contract Months George Glendenning These are some of my thoughts on ways to improve a trading system I am now using. These ideas could also be implemented by other systems: Why not improve the data in particular with regard to rollovers. I have three suggestions: 1. Provide for automatic "close-to-close" rollover adjustments; 2. Include all "active contracts for each commodity and; 3. Revise rollover dates to better coincide with the current dates for the switchover to "lead contract" in the pits. I've been using this system for almost two years and have developed ways of "fooling the system" to overcome the first two deficiencies noted above. I believe these changes are essential; and I believe most "serous" system users, e.g., those trading "real money" will not object to changes which better reflect what is happening in the real world even if it means an extra rollover or two per year for certain commodities. After all, my system's automatic rollovers are so quick and easy that a few more rollovers and rollover dates would be little if any bother. Certainly this would be a lot less bother than the extra procedures I now go through in order to assure that the data I use doe not have artificial gaps. These gaps introduced by the "close-to-open" rollover adjustments (instead of close-close) can be quite large and also there's usually artificially reduced levels of volatility associated with rolling to a more deferred contract rather than the next month.

Dealing With Ever Changing Parameters By Using Multiple Computers - Bill Taaffe My following ideas may not be terrific for the hobbyist that needs everything boiled down to a "no brainer" situation. But for the trader whose family and personal future depends upon his success (is that you, too?), there may be some promise here. First, what would happen if we operated with two or three separate computers, each receiving the same data downloading? Computer #1 operates just like we are now doing: downloading, reharmonizing, rolling over contracts, market tagging, trend ranking, generating trade signals/initial stops, targets/follow-up stops & targets. At the appropriate time, the next parameter set is determined and installed. The data base on this computer will be lengthy and additive as each month passes. During each new calendar month new trade signals and follow-up stops & targets will be taken from this computer as well as trades from last month which DID carry over under the new parameter set (i.e., trades which did not disappear and are still open carrying over from last month).

92

Computer #2 runs just the same as computer #1, except for only one thing: it always operates on last month's parameter set. So, when active trades disappear (due to new parameters) or are no longer open on computer #1 they will appear on #2, because #2 has the parameter under which the trade signal and any follow-up was originally generated. Computer #3 simply extends the time frame open trades could be properly maintained. It could turn into a lot of hardware all lined up, but it would be impressive to show your kids and friends! But, seriously, what does a person do when his working life is soberly devoted to making money and building capital through the futures markets. I can say that I wouldn't look forward to acquiring more machines. But, if my trading system is otherwise as good as it appears to be, must its utility extend only to the amateur and hobbyist appetite? A related solution...I am definitely not in love with the idea of a multiple computer operation. It's just that I can't seem to give up on being able to solve the changing parameters set challenge. So to avoid having to have all that hardware, how about this alternative (which you could profitably sell)? What I have in mind is a drastically cut down version of my trading system, a "shadow" software program. This same program could have two or more versions with the difference between them only being the name which the computer would recognize, such as "Shadow1" - "Shadow2" - etc. As I said, this would not be a complete, full-featured program. Rather, it would only contain the modules which read price data files, produce trading signals, and produce updates for trades still open from the previous one or two months. As I see it, virtually everything needed for the "shadow" programs should already exist on the real trading program. We would mostly be eliminating what is not needed, such as trend ranking, over-night runs, charting, some or most of the utilities, etc. Parameter sets would be generated by the real program and manually backed up on floppy disk. They would be manually installed on the "shadow" programs as needed to keep them operating on "today's" price/volume data but using the parameters from last month (on Shadow 1), and the month before (on Shadow2). Following this strategy, the needed on-going minimum of 19 days of patterns would always be present. Weekly trend ranking used in trading all contracts from current and prior months would be as generated by the real program. Hard drive size would be a factor, but big ones are available. Also, there is the possibility of a second hard drive of a more moderate size being installed as a "D drive." I hope that you can see my level of enthusiasm for all that my trading system has accomplished. I admire the system developer's work very much and quite obviously want to use it as my vehicle to do well for myself and my family. If anything I can come up will help, then terrific!

If Hillary Clinton Made Money in Commodities, Why Can't You? Well, Let's Count the Reasons . . . reprinted with permission of The Wall Street Journal

93

Looking for a way to make some money in a hurry? You could always hit the lottery, or go to Las Vegas and bet on red seven. Or you might play the commodity markets. That's what Hillary Rodham Clinton did back in the late 1970s. Much of the money she and Bill used to buy a home and invest in securities and real estate came from commodity speculation, it was recently reported. According to an account in the New York Times, Mrs. Clinton began trading live cattle futures in midOctober 1978, and generated profits of $100,000 over the next 12-months. If Mrs. Clinton can do it, why not you? Well, for a start, you could easily lose your shirt. During any one year, three of every four individual investors who trade commodities lose money, says Charles K. Levitt, senior meat analyst at Alaron Trading Corp., a Chicago commodities broker. And over the long run, an estimated 95% of individuals who speculate in commodities futures lose money, according to Bruce Babcock, editor of Commodity Traders Consumer Report, a Sacramento, Calif., newsletter. Fierce Competition The lousy odds come from the nature of commodities futures themselves and the fierce competition that the individual trader is up against. A futures contract is an obligation to buy or sell a specific quantity of a commodity - in Mrs. Clinton's case, live cattle - at a fixed price at a particular date in the future. For example, when Mrs. Clinton bought cattle futures, each contract she bought called for the delivery of 40,000 pounds of live cattle, or one truck load. Obviously, she didn't do that; the delivery of even one contract would produce the raw material for a lifetime supply of Big Macs, one of President Clinton's fastfood favorites. Chart in Print Copy Rather than actually take delivery of the underlying commodity, most investors hope to make money by selling the contract at a higher price than they bought it. The potential for huge profits - and devastating losses - comes from the fact that traders only have to put up a small percentage, usually between 5% and 10% of the contract's value to play the game. As the price of the underlying commodity rises or falls, the value of the contract surges or plunges, magnified by the leverage involved. Small Beginning Stake Results In Big Profits It wasn't reported how much money Mrs. Clinton started with. But Mr. Levitt, a pro who has been trading and studying cattle futures for 30 years, speculates that a beginning stake of $10,000 could have produced profits of $100,000 during the period she was in the market. (Note: It was later revealed that she started with just $1000)! Small investors like Mrs. Clinton are competing against pros from giant agricultural and food companies trying to hedge their firms' food costs and price risks, as well as against institutional traders and investment banks. These pros have access to even the most arcane information about fundamentals that might affect prices. So, if you plan to take a flier in commodities futures, you better know what you are doing. A spokesman for Mrs. Clinton was quoted as saying she "consulted with numerous people and she did her own research," including reading The Wall Street Journal. According to published accounts, she also had a very good adviser: James B. Blair, a friend who at the time was the primary outside attorney for Tyson Foods Inc. of Springdale, Ark., one of the nation's largest poultry companies.

94

Made Millions Trading Commodities and Told Mrs. Clinton to Start Trading Cattle Futures Mr. Blair told reporters that he had made millions of dollars trading commodities for his account, and that he had advised Mrs. Clinton to get into cattle futures, because "I thought I knew what I was doing." It also helps to be lucky. "My guess is that an awful lot of her success was luck," says Mr. Babcock, the Sacramento newsletter editor. "She happened to get into a good trending situation at the right time." Mrs. Clinton did her trading during one of the great cattle bull markets. "It was relatively easy to make money in cattle futures," says Mr. Levitt. "You didn't have to do a lot of trading. All you had to do was hold your position." Mrs. Clinton "was also lucky that she stopped," Mr. Babcock says. "If she had continued to trade cattle futures after October 1979, the chances are she wouldn't have done so well." A clear trend, such as the big 1978-79 cattle rally, gives a trader "a statistical advantage," the same kind of thing you need in playing Black Jack in Las Vegas, Mr. Babcock explains. "If you play Black Jack, you must be a card counter. Otherwise, the longer you gamble, the more your lose."

Working With FutureLink Data and Updating in CSI Format - Ken Thompson Flip-flopping between import and export commands, many FutureLink subscribers save data in ASCII files in order to maintain portfolios. Most trading and analysis programs do not read ASCII files directly. This necessitates the use of additional computer commands, creating a complicated portfolio update procedure. This procedure can be simplified by exporting the FutureLink data in CSI format. The use of the CSI format, compatible with most trading and analysis software, enables direct access to data files, eliminating time consuming file handling steps. After completing the procedure outlined below, unlimited portfolio files can be maintained with one keystroke. To utilize this approach, FutureLink's Links Data Export Software and data feed as well as Trend Index Utility Software are necessary. One word of caution: although Investograph analysis software claims an ability to read CSI files directly, massive data loss occurred with this particular software's attempt to read files. STEP 1: Trend Index Utility Configuration This step sets up data files which will receive information from FutureLink. • enter Trend Index Utility program's utility sub-menu • verify data path and note, i.e. C:\TRENDXUT\ • enter the commend to start a new data file • enter the correct symbol (found in the FutureLink manual) and the correct values (found in the Trend Index manual) for each contract requiring CSI formatted data. Note: A trading system with a pre-programmed symbol list can not read a data file without a matching symbol. If this occurs, change the symbol in the pre-programmed list to match the data file symbol for that particular commodity. Consult software manual. STEP 2: FutureLink Configuration This step reads chart data for export.

95

• enter configuration menu for charts in FutureLink • turn on daily, weekly and monthly charts for contracts being followed STEP 3: Links Data Export Configuration During this phase, contracts to be updated will be specified. • enter Links Data Export Utility and specify the portfolio contracts to be updated • specify where data will be derived: charts or TSR; see note below • specify fill or fix; see note below • specify data format: CSI • change data path to the location of CSI data files (derived in first step) i.e. C:\TRENDXUT (the omission of the second slash is intentional) *NOTE: Charts are appropriate for analysis programs which do not need an actual open. They also provide 150 days worth of historical data including volume and open interest. TSR gives today's data only and offers an actual open but no volume and open interest. For 24 hour markets, it is nearly impossible to export data at the settlement price using TSR. If neither charts nor TSR are adequate, a combination of the two can be utilized within the same contract. The following procedure will provide 150 days of data. The date of the update will be the 150th day. This date and all future updates will include an actual open. Procedure: • list each contract twice • the first time contract is listed, specify "TSR & fill" • the second time the contract is listed, specify "charts & fix"; the fix command will overwrite the high, low and close with the actual settlement prices, if the prices differ. STEP 4: Change Software Path - to automatically read the data files, the data path of the trading and analysis software must be changed to the location of the CSI data files. i.e. C:\TRENDXUT\ With this basic configuration complete, enter the Links Data Export program and press GO. Retrieving 150 days of historical data takes about one second per contract. A daily update for a 30 market portfolio can be obtained in under one minute.

Editor Comments The Purpose and Objectives of Commodity Traders Club News - Dave Green My original idea was to start a newsletter similar to Club 3000, but geared specifically more to trading ideas and info on how to trade profitably. In addition, I wanted it written almost exclusively by individual traders, with more Editor comments about articles, and with far fewer articles by Vendors. One thing I have heard many times from a number of Club 3000 members, is they were unhappy due to the preponderance of space taken up in it by Vendors or by prospective Vendors. Certain Vendors it seems, are constantly either pushing themselves or criticizing others. Also, a lot of their members were disappointed or felt somewhat mislead (not by Bo Thunman . . .but by the Vendors) due to many articles written by so called "vendors in disguise". They then went on to use it as their main advertising media to promote themselves. After extensive free advertising thanks to Bo, they suddenly became vendors and made lots of money. This is especially true of one well known vendor, who made (in an approximate 2-year time period) an estimated 1 million dollars

96

plus, and became likely the most profitable Vendor of all time. Most of his success was due to his numerous Club 3000 articles, many of them free articles written as a "vendor in disguise". He received lots of free publicity over a very long time period by writing a number of inordinately lengthy articles praising himself and his seemingly profitable trading methodology. After getting lots of free publicity, he subsequently then announced he was in fact a Vendor, only too happy to sell his system to all those anxious Club 3000 Members. He then continued his publicity blitz after announcing he was really a Vendor. All told he took up a staggering amount of space in that newsletter. After selling many systems (manuals, video tapes and software) and making bushels of money (much more than he made trading) he then announced in Club 3000 he's back to trading and no longer a Vendor. However, he has changed his mind and is now back in the vendor business selling his system again and managing money. Now, he has a friend (who lives nearby in Reno) who has done the same thing. He wrote a myriad of lengthy free articles over a multi-year time period, telling everyone just how great he is and what a fantastically successful trader he is, and implying how much better he is than anyone else. Subsequently, he announced he is now a Vendor and will sell his system, even after saying in Club 3000 while writing the barrage of articles, that he will never become a Vendor! A number of others have done the same thing these two well-known parties did. They have taken up vast amounts of space in Club 3000, mostly for the purpose of getting all the members hyped up about them, and then announced they are all too willing to sell their methodology to the members. It's been very lucrative for many vendors in disguise to use (or should I say misuse) Club 3000 in that manner. That's why I started a different kind of publication, one devoted almost completely to articles written by and for the benefit of small traders, and not promoting specific trading products. Don't misunderstand, I'm NOT criticizing Bo or his fine newsletter. In fact, Bo Thunman is held in the highest esteem and is very highly regarded. I recommend to all CTCN or Swing Catcher System clients that they subscribe to it. My present system brochure also recommends subscribing to it and gives Bo's address, etc. Commodity Traders Club News Brochure states on Page 5 "we prefer not to publish many articles referring to Swing Catcher." It goes on to say "we do not want or solicit letters devoted to praising the System." It also says "CTCN will be segregated as much as possible from system sales, including separate phone numbers." I have actually received some complaints from system owners about that policy, because they wanted to read some articles about the system. Therefore, I have in fact been occasionally publishing articles written by members (not myself) referring to the system. However, articles mentioning Swing Catcher have been kept to a minimum, and in fact some months we have had zero references to my system. An audit of all back issues reveals that only 2% of the articles are about Swing Catcher and just 9% briefly mention it. (Note: The actual lineage used is actually an even smaller percentage). That is evidence that articles about Swing Catcher are kept to a minimum so members can learn all about a large number of other products, services, systems and methodology. I could have published many articles if I wanted to, because I have received a large number of complimentary letters about it. However, I don't want to do that. I want Commodity Traders Club News to be an unbiased open-forum which covers many different subjects so everyone benefits from a broad array of trading information.

97

The article about claiming trader status for tax purposes was written by Ted Tesser, a Certified Public Accountant in New York and also an active Futures Trader. He is the author of "The Serious Investor's Tax Survival Guide." It is my understanding that even if you are not trading actively enough to qualify for "Trader Status", you can still deduct almost any purchase you make involving trading related products, if used to assist you in your investments. That would include trading systems, software, books, seminars, newsletters, etc. Check with the IRS or your accountant to be sure. Thanks to everyone who made contributions to this issue of Commodity Traders Club News. Issue 12. Futures Truth Reports...Do the FT Rankings Constantly Change Because the Systems Tested Are Curve-Fitted? - Vern Nord Have you ever tried to pass up a rope? I have spent the last two days trying to analyze the Feb/March issue of Futures Truth. I would like to share my conclusions with your readers to start a discussion. I know we are all looking for the perfect system which works on all commodities with similar rules and parameters, but are we really looking for the impossible. The very best systems in Futures Truth were only good on a maximum of 4 commodities, and if you throw out such things as Pork Bellies, Live Cattle, Soybeans and Eurodollars, then no system was any good on more than three commodities. The best systems all had three or less unrelated commodities at the top of their lists. I thought that a good trend following system would test well on all the Currencies because they are very good trending markets. None of the systems tested well on more than one currency. No system worked well on any two commodities in the same group with the possible exception of Gold and Copper. They both tested very well under Welles Wilder's Volatility Movement System. There was no system that tested both T-Bonds and T-Notes, but they should test similar on a system. As I expected, the few systems that tested well on the S&P 500 were very poor on all other commodities. On non-trending markets like the S&P 500, Wheat, Lumber, Silver, Gold, etc., there probably is no perfect system to handle the random nature of these markets. So what I am trying to say is that there can never be only one perfect system for all markets. You need one type of system for trending markets; one type for random walk markets and one type of system for commodities that trend for a few months and then go into a trading range. In all three systems you would need an indicator like the ADX from Wilder's Directional Movement to tell when to shift gears from trending to trading range or to random markets when you should stop trading for now. Another surprise from my analysis is that pattern recognition systems don't test well in related markets. Arnold's Pattern Probability System (PPS) tested well on the Jap Yen, Lumber & T-Bonds - all totally unrelated markets. This reminds me of something that Hulbert said about his one-year ratings on stock market newsletters and their track records. After over 10-years of tracking all the best timers, he finally realized that his six month and one year rankings were almost totally worthless.

98

It seems last year's Guru is this year's goat. There's no consistency from one year to next, and you can't make money following last year's expert. This leads to one last conclusion - Futures Truth rankings continually change and I think this happens because all these systems are curve-fitted. If you test any one system's across 36 commodities and stock indexes, you should get the traditional bell shaped curve results which means that 10% or three commodities would test very good, and 10% would test very poorly and the balance of 80% would fall in the middle inside the bell curve. This might explain why only 3 or 4 commodities test well on any one system and why they are totally unrelated. They probably found an algorithm and then curve-fitted it until they got good results in 10% of the commodities. These price histories will never repeat the same way and systems are doomed to fail. Look at an old Futures Truth and see how many systems are still around, or even compare the "Top 10 since Release Date" with the "Top 10 for the past 12 Months". Only 4 out of 10 in the "Top 10 since Release" are in the current list of "Top 10 for past 12 months".

Analysts Make Predictions, but Traders Make Money - Is Lesser Degree of Analysis Better Than Great Analysis? - John Piper One of the points which became clear when giving our seminars, was the almost total lack of analytical input into the methods, which we are putting forward for successful market trading. As I developed these systems, this was always fairly clear to me, but it came as something of a shock; I think, to some of the delegates. Indeed this is a fairly revolutionary idea, perhaps even sacrilegious in some quarters. One can imagine the title of this article raising a few hackles at one of the monthly STA meetings - true though it may be. The impact of this statement is that analysis is a red herring - just one more dead end in the road to trading success. The purpose of this article is to examine this proposition. I think the first point to make is that before we can dismiss analysis as a red herring we have to know what is has to offer. So the novice perhaps has no choice but to get to grips with the full range of analysis, be it technical, fundamental or both. After all it is only once he has mastered some of these techniques that he can judge whether they are useful or not. The second point to make is that clearly analysis is useful to some people. 90% of traders may lose money (perhaps pouring scorn on the title of this piece) and many of those will be using some form of analysis - but of the winners, some of those also clearly use analysis techniques. I'm not condemning analysis per se, indeed as I've written about it for some years, readers may consider it somewhat absurd if I were to do so. I have always stressed that I consider trading and trading skills to be of far greater importance - and in this I include reading market action. For example, seeing and interpreting a failed breakthrough (or re-test) is not something I consider an analytical function but a function of trading. Clearly this is open to debate but this draws the distinction between the two for our purposes. Perhaps it would make the distinction clearer if it is borne in mind that the trader may have to act pretty quickly if he's going to benefit from a failed breakthrough, there's not usually enough time for an analyst to see pattern and then contact the trader. However analysis can be the mother to the "view" and the view can be fatal. This is because we must not allow ourselves to be swayed by our views, fixed views are invariably fatal - if not initially then over the course of time.

99

So why is analysis the mother of the view? Because we have a tendency to believe what we want to believe. The more analysis we do the more we will be convinced of our original "view" - i.e. we may be achieving precisely nothing, indeed worse than nothing. Now we can overcome this problem by being particularly disciplined, but an enigma remains if first an oscillator is giving an over-bought reading, suggesting a possible sale, then any trend following indicator will be in "buy" mode - i.e. they will tend to always contradict themselves. This article is not designed to cover "emotional" trading which is the root of most traders' losses - you can hardly expect to make money if you have no system and act on impulse. But analysis can fall into the same camp and it can be more subtle. All those knobs and whistles, all that computer hardware and software, all that work - it must mean something, mustn't it - Yes! For most it means more losses. Also the facts of the matter are that a good system will out-perform a good trader. This also may be a somewhat controversial statement and it must also be considered something of a generalization. But if you are a super-trader you won't need a system - or you already have one. If not, this statement is true. However, let's make this statement even more specific. I have one account which I am trading which was up 40% at the end of September - however, if I had been trading the system outlined in our recently published "Trading Manual" then the gains would have been significantly higher. So personally, I can say that methods utilizing very little analysis (and perhaps that little bit itself is a negative) have outperformed my trading which involves a greater degree of analysis. Hardly conclusive, I agree but significant to the extent that any trader who is not sure of the right direction to take should carefully consider the points in this article. Now you may say, "how can I trade the market without any analysis?" Well we are not going to explain the details of the approaches outlined in our "Trading Manual" but both the IOP and the Options approach are "market driven". This means that the market determines what positions are taken. So you don't say, "my analysis says I should go long", you say "the market has triggered me long". This of course is the key - price is the most important feature of the market, it has no view, there is no difference of opinion, the price at any one time is (usually) fixed and certain. Our systems are based on that certainly. John Piper is the editor of The Technical Trader, 76 Nunnery Lane, York, Y02 1AJ, United Kingdom. Telephone: 44-904-636407

Here's A Form Clients Should Read & Sign At Time of Opening A Trading Account With A Broker or Money Manager - Mike Coleman I understand what commodity trading is, by nature, highly speculative and that while the system I am trading has been successful in the past, there is no guarantee of success in the future. I understand that in order to be successful in trading commodities, it is absolutely necessary to: a. be totally oblivious to losing trades

100

b. be completely firm in my resolve to be able to lose that which I originally committed to lose c. be able to be "in the red" through extended periods of time and not cave in before the predetermined amount of money has been lost d. ignore any fears, doubts or misgivings of what I am doing e. be able to keep the whole thing in perspective, i.e., this is just another business venture which can have high returns for the risks taken, but only represents a tiny portion of my total net worth no matter what the results of the trading might be I understand how debilitating negative or unpleasant comments to the person doing the trading can be. That person wants more than anything else for you to be successful, but negative comments only serve to create hesitation, doubt and temerity in continuing. These comments are 100% deleterious to any success that any trading program might have and must be completely non-existent. Finally, I understand that in order to be successful in trading commodities, I must think of how am I doing in terms of 3-month periods, not how did I do yesterday, today and tomorrow. The curse which has befallen our great country, instant gratification, has no place in a venture such as this. If you are obsessed with having to win every time, everyday, every moment, if you are scared about what you are doing, or if for any reason you simply are not comfortable with this, get out, stay out, and we will still be friends. I, the undersigned, understand and agree with the above premises and ideas and promise to the best of my ability to conform to them. I also expect the representative trading my account to honor the trades as the system dictates, to take every trade as they come, but to do so with no fear of retribution, negativism or ill-will in case of loss or temporary draw-down.

My Experiences & Reviews of System Writer & TradeStation - Don Wilson In the hope of helping traders interested in using computers in trading, I would like to share my experience:

I'm an early retiree EE and began studying trading July 1992. Except for 8-months doing full-time engineering consulting, I have devoted pretty much full-time to trading analysis and trading. Because I had traded part-time for about 10 years, I was familiar with the details of trading but not with system development and back-testing. To start, I purchased a 486/33 mhz computer system from Gateway 2000 by mail ($3,030). It arrived, I plugged it in and it has worked great for 21 months (I did have to swap out a monitor after 15 months $250). I then bought System Writer ($975) software. I also bought 40 trading systems from CTCR (Bruce Babcock for $500 at their "summer sale". None of them proved effective for me in their published form but they did contain lots of good ideas. Bruce Babcock's book, The Dow Jones Irwin Guide to Trading Systems, was also extremely helpful in showing me the way to develop systems and to back-test them.

101

After 8 months of system development and back testing, I felt that I was ready to begin trading. I began to investigate ways to get real-time data into my systems that were written in System Writer. Call me a novice - I had not realized it could not be efficiently done until I tried to do it. So I called Omega Research. I happen to get Bill Cruz (Omega's President) on the line. After some discussion, he explained that I could not get real-time data into System Writer. He said I needed TradeStation. I said "Oh, no"! I read an article in CTCR that said Tradestation was still full of bugs (this was December 1992). Bill said "Not so". I'll prove it to you. You buy TradeStation and if I cannot get you up-and-running and satisfied within 3 days over the phone - send it back for a full refund." So I bought it ($1714) - installed it - and it has worked great ever since. (I have had very minor problems or questions 3 times but they were resolved each time on my first call to product support at Omega). (One item of contention I do have with Omega is that they now charge $495/year maintenance for TradeStation. This is way too high in my opinion, but I'm sure they will back-off from it if and when some competition arises.) So, now a summary. I have found Gateway 2000, System Writer and TradeStation to be excellent products.

The System Writer and TradeStation software and 20-year historical data provide an efficient and easy way to back-test trading systems. Of all the systems I've tested, I've been able to come within about +/- 15% of the results published by CTCR, Futures Truth, etc., for a given system. I should mention that I do use Signal ($700/month - real-time or $100/month - 15-minute delayed) from my cable TV for my data and have had no problem with it working with TradeStation. One cautionary note I should make. Before anyone spends the time - 12 full-time months and money ($15,000) to replicate my experience, be aware that all of your testing and analysis may not provide a system you can really use to make a profit or even to earn back the money you have invested. I estimate that I have analyzed over 60 trading systems. Some I developed, some I bought ($6,000) and several I was paid to evaluate by customers (for several months I offered the service of evaluating systems using TradeStation and historical data). I have yet to find a mechanical system that can be efficiently traded without some discretion. I believe that any successful trader uses a type of mechanical system as a core guideline and then uses discretionary intervention for money management and number of contracts traded, etc. But the reasons that mechanical systems fail will have to be the subject of a later letter.

How Hillary Clinton Made $100,000 Trading Commodities - Kent Calhoun In 1980 I moved to Fayetteville, Arkansas to conduct computer studies of commodity prices and to work as a commodity broker. My reputation as a commodity trading expert, allowed me to attract a wealthier clientele than average commodity brokers. Many clients kept repeating the same story about how a market could be traded without losing money. I was quite skeptical of these stories, until two ex-Refco brokers explained to me exactly how it was done.

102

These brokers claim to had seen it being done everyday for several months in 1978 and 1979 at the Refco office in Springdale, Arkansas. This is the office where Hillary Clinton established her commodity account and profited $100,000. Robert "Red" Bone was the owner of the Springdale office, and had close business connections with Thomas Dittmer, the owner of the Chicago commodity clearing firm Refco. Both men had traded cattle futures contracts to allegedly profit eight to sixteen million dollars in the 1970's. Futures contracts allow speculators the right to buy or sell a specified quantity of a commodity at a contracted price before an expiration date. Less than 3% of all futures contracts result in physical delivery of any commodity, the majority of all contracts are liquidated before expiration. Since 40,000 pounds is the quantity of a cattle contract, each one cent move is worth $400. Mr. Bone's reputation as a successful cattle trader had spread far and wide, the number of new accounts at his office grew dramatically. The Springdale Refco office became the largest Refco trading office in the world. WalMart and Tyson foods were fast growing billion dollar businesses with head corporate offices in Northwestern Arkansas. These two companies pumped millions of dollars into the hands of their employees, and into the Springdale Refco office. Cattle prices have an average daily price range of less than one cent per day, so the average contract would be able to lose or gain less than $400 per day. The $1000 amount that Hillary Clinton opened up her account would allow her to margin only one contract. Margin money serves as an earnest money deposit required for each contract by the Chicago Mercantile Exchange, CME, which regulates the cattle futures market. Major brokerage offices have a minimum net worth requirement of $250,000 minimum account size of $25,000, and very few brokerage offices would accept an account under $20,000. Opening a commodity account for $1000 from a couple whose AGI was under $42,000 just isn't done. Commodity brokerages are well aware over 75% of all speculators lose money, and demand well capitalized accounts against the dreaded "locked limit price movement" possibility. A locked limit price movement is any day, or series of consecutive days, when a market moves the exchange maximum allowable limit without a trader being able to exit his trading positions from the market. His trading position is "locked" into the market and he can not exit until market trades again. This limit price move in cattle 1.5 cents per day or $600 per contract. If Hillary traded one contract and encountered two locked limit moves the wrong way, she would have owed the brokerage office another $200 minimum besides her $1000 initial account equity. Locked limit moves do not happen to the Governor's wife, when her account is traded in Omnibus Acct. An Omnibus account is an arrangement between an office owner or trader and a clearing firm that allows orders to be placed without account numbers assigned to priced orders. The arbitrary matching of buy and sell orders with client account numbers is purely at the discretion of the Omnibus account trader. This Commodity Futures Trading Commission, CFTC, loophole legally allows an omnibus account trader to assign winning trades to any accounts he wants to have winning trades. Eventually, White House will retract their statement that Hillary produced all the cattle trading profits for herself. I believe an Omnibus Acct was used to produce Mrs. Clinton's commodity profits.

103

Each commodity trade must be executed on the exchanges by a clearing member firm, like Refco. The trader of an Omnibus account is allowed to assign trades, AFTER the trading day has been completed, thus guaranteeing profits. An Omnibus account might be used like this: a trader buys 20 contracts at .7000 sells 20 contracts at .7010, buys 20 contracts at .7020, sells 20 contracts at .7030, and continues this buy-sell pattern all the way up to .7100, or down to .6900. At the end or during the day, winning buy and sell orders are paired, then account numbers are assigned to the clients. An Omnibus account is a legal license to steal. If cattle had a daily high of .7100 and daily low of .7000, a one cent $400 price movement, the trader doesn't care whether the market moved up or down because he can pair profitable orders that had to make money. The trader could say; Hillary's account bought 10 contracts of cattle at .7000 and sold 10 contracts at .7090 for a profit of $360 per contract times 10 for a $3600 profit that day, minus the brokerage fees. According to Mrs. Clinton's records, she profited $5300 on her first day of trading. If this in fact is true, someone had to illegally violate CME margin requirements, since her $1000 could not legally fund more than 1-contract for a maximum daily profit gain of $400. This also means, someone had a loss of $5300 that day because commodity trading, like chess, is a zero-sum game. For every winner there is a loser. Mr. James Blair, Tyson's chief attorney and favored Refco customer, is largely given credit for advising Mrs. Clinton's account. Why would Tyson Foods' top attorney want to make Mrs. Clinton commodity trading profits equal to over 60% of the Clinton's 1979 annual income? Did the opposite buys and sells for Mrs. Clinton's $100,000 come from Mr. Blair's account? Was this entire adventure an elaborate illegal campaign contribution? Mr. Bone received $50,000 commissions per month from Mr. Blair's account, of which he monthly paid Thomas Dittmer about $20,000. Mr. Bone also received the largest fine ever assessed by the CFTC until 1980, $250,000, and longest suspension, three years from futures trading. Is it pure irony that Mrs. Clinton, who had never traded commodities before in her life, makes a 1000% return on her money and her broker turns out to receive the strongest sentence ever handed out by the Commodity Futures Trading Commission? Mrs. Clinton got $100,000. This lingering question remains, what did Mr. Blair receive on behalf of Tyson Foods? Pure speculation might include Tyson business contracts from the state of Arkansas, favorable zoning regulations, or easing of environmental or OSHA regulations, or political favors yet unpaid. Tyson Foods is now the largest poultry producer in the United States. Nobody gives a governor's wife $100,000 without expecting a dividend greater than the investment. Tyson stock grew over 4400% from 1980 to 1990, mostly during the Clinton governorship of Arkansas, except for one term. That's a lot better return than you can expect from trading commodities.

The Markets - What and Why - Ken Turkin It is a business. It is a money business. It has the best product line available, the promise of wholesale money. Everyone wants some but at the expense of someone else. How hard do you work in your business to get yours?

104

Why should this be any different. There are 50,000,000 people out there waiting to charge you a fee again and again to learn this business. The only way to learn this one, is from each other in all aspects. When you go to a doctor, an exam will be performed to get your current state of condition. This by itself can be informative but must be put in the proper perspective. Knowing how you were in the past completes the picture. From here, your future can be evaluated given your particular tendencies. The same analogy goes for any market. The main tool for examination here is a chart of recent price activity. Look at any price chart. Why does it look that way? Groups of people! Nothing else. Why? One idea is there is something so-called "in the air" that affects human emotions which in turn alters our perception of value when pertaining to things we own or want to own. When dealing with the markets, these viewpoints show up as the price activity seen on bar charts. In this respect all people are the same. One of the things that separates us into groups is our type of trading style. We might be categorized into one or more of the many different time frames of trading such as to scalp, daytrade, weekend watch, invest monthly, adjust annually, long term buy and die etc. For whatever the reason (our level of expertise or the amount of time available), we are attracted to some comfortable time frame. Now we have something else in common. Most of the time, each group seems to act together, moving to similar internal or external reasons. Some might be confident while some confused. All of this shows up on the price chart because the markets are all groups acting together yet independently. Things seem to go in cycles of active then passive, positive then negative. People buy a stock, then depending on their expectations they will hold it or buy more or sell it. Each group does it again and again because people are habitually people. On the other hand there is always the option of altering your trading style periodically. In essence, you join a different group to satisfy your changing needs or realizations. Let's say a rally just occurred, wouldn't you want it to happen again so this time you can get something out of it. How about if something bad just happened, wouldn't you be cautions and wait for someone else to prove it is safe again. Whatever gets you excited or scared, you will play, trade or invest accordingly based on your future expectations. Our job is to always try to find some of these group tendencies at the right time to take advantage of. Some types of market action has been called market noise or random activity. Noise is really the smallest time frame of price activity for which you can not explain its motivation. Someone's definition of what constitutes the noise level is also a reflection of their understanding of the markets. Whatever your understanding of the markets are, they must be understood. In any competitive business, you must know who your competition is and learn from them. Our job can be made easier by trying to find some of the above group tendencies at the right time to take advantage of. What we should also try to do is dissect the markets composite chart form into the groups of people which made it in the first place. This can be done by putting yourself in their place.

105

Each group is important but not always well defined. An interesting observation is how the smaller groups tell us where the bigger ones are going, while the bigger ones tell us where the smaller ones must go. Each group tries to obtain their goals while only a larger group might prevent this because their expectations and needs are contrary to yours. Besides, they have more time and money to accept the risk of proving themselves right. People of all levels are quite consistent that a market chart becomes an excellent graphic representation of human emotions and logic. In summary, markets are groups of people with different expectations trying to do their own thing at the same time in an arena where the strong will survive. The professionals have better toys and tools, faster and cheaper executions and deeper pockets with more time and money. They also seem to be deafened by the markets noise. For the rest of us, all we have is each other to learn from. The above is from the documentation of an interactive computer program which teaches a different perspective on how all markets work.

Astrologically Based S&P Chart Carol Murphy I did a lot of work on the S&P (astro) and this is my bar-chart forecast for S&P Cash (dated 940328): Chart in Print Copy

Technical Indicators I'd Like Added To My Trading System To Find More High Probability Trades - Ashif Jumma Since I'm trying to separate the high probability trades from the low ones by using filters, I have the following suggestions for some changes or additions I would like to see made to my computerized Trading System: Some of the suggestions may be difficult or not feasible, but they represent one person's opinion. 1. Divergence alert and ability to pull up charts of all commodity together to check for divergences 2. Open interest and volume graphs on charts 3. Bollinger Bands and C.C.I. 4. Up-down Volatility and Random-Walk Index 5. McClellan Oscillator, a seasonal index for seasonal commodities, Weekly Stochastics This would of course change the approach from completely mechanical to a technical approach which may not be suitable for everybody. They just represent my views.

More Notes on FutureLink - Ken Thompson Here are a few notes concerning FutureLink and the Trendx Utility Program: 1. FutureLink customers can request a CSI data facts sheet from FutureLink 2. Two customer support reps verified to me that HG Copper's file number was 0006. FutureLink may need to mention 0008 as the new CSI ID number, as stated to me. 3. NG Natural Gas file #0202 - Conv=+3 - Tick .001=$10.00 - Not price correlated to other petroleum products 4. If FutureLink won't open a price file, suggest using "charts & fill" command only, on first export.

106

More on Hillary's Profits - Jeff Ramby My contribution is simple and to the point . . . Hillary's trading was a no-lose situation. Broker 'Red Bone' constructed a straddle program, whereas most winners were diverted to Hillary's account and the losers wound up in less prominent managed accounts. This is very simple until you get caught. 60-65% of politicians have No Ethics.

FastTrack - A Mutual Fund Traders/Investors Friend - Jim Hill There are many monthly/weekly/hotline/software services available for individuals interested in trading or investing in mutual funds. Of course, you do not even have to use these if you access a data service and use technical analysis software. But I find that there is a combination software/data service only for mutual funds that meets my investment needs - FastTrack. FastTrack (FT) is a data service that follows over 800 mutual funds and indexes and uses its own proprietary software for analysis and charting. It has its own built-in data communication service and each day you dial an 800 number to download daily info. In addition, one of the authors, Paul Charbonet, will about once a week give his view of the market and his selection of mutual funds. For the last several years his advice has been very good. In addition, there are comments about fund groups, select funds, trading ideas and other useful info. There are two primary approaches one can use: selection and timing. To help you decide which mutual fund to select, FT divides the funds into fund groups (such as Fidelity, Fidelity Selects, Benham), indexes (DJ-20, DJ-30, etc.), topical groups (such as Health, Aggressive, Schwab No Load No Fee, Muni-Bonds and many others). You can select one of the smaller topical groups, or fund groups, or the one category that has all the funds in it. You can create your own fund group if you have your favorite funds. So, how can you use FT for selection? I will assume you want to trade only Fidelity Select funds. You would load the Fidelity Select Funds, and then choose an index to compare all funds against. The index can be any fund or index in the entire list of funds. This method of selection is when you always want to be in the market; you choose the best fund of a pair of funds. You choose the time frame of analysis, and you look at charts in color. You can also use Stochastics, MACD, Moving Average, Momentum and Relative Strength for technical analysis. However, I find the best technical tool is their own; it is called AccuTrack Indicator. It is a combination momentum and relative strength index that has two variable parameters. It is excellent at enabling one to develop strategies for selecting the best mutual fund of a pair. The indicator is disclosed, and you could program it with software such as TradeStation, but if you want a complete package, it is very good. As of the date I am writing this article, April 14, 1994, my indicator for the general market is still negative and it will not be positive in the near future. It is an easy indicator to set up in FT and easy to follow each day. (This article is continued in next months CTCN)

107

Editor Comments Vern Nord did lots of research and analysis involving the various systems tested by Futures Truth. It seems to be true that it's rare for a system to perform well in a wide number of markets, even closely correlated markets. A seemingly minor or insignificant variation in a pattern, or the markets volatility, can make a major impact on a system's overall performance. That is especially true if the system has a number of optimized parameters. John Piper's article about too much analysis sometimes being detrimental, has lots of validity. That's also true with the number of optimized parameters a system uses. For example, in my opinion a system with say 50 non-optimized parameters but only 3 optimized parameters, is preferred over a system with say 10 nonoptimized parameters but 5 of them are optimized. Unfortunately, Mike Coleman's form that he has new clients sign is very difficult for traders without discipline or patience to go along with. Many traders do not have what it takes to sit thru several losers in a row or a couple weeks of losing trades and drawdown. They expect immediate and constant profits and don't realize that's next to impossible, unless you happen to be Hillary! Once again there's been much feedback about Hillary's trading. There can be little doubt that Hillary had little (or anything) to do with it. Keep in mind, she was apparently a complete novice at the time of her amazing feat. Note: I tend to believe Kent Calhoun's version on how she did it, as published in this issue. Thanks to all who made contributions to this issue of CTCN. Issue 13. No Doubt All The Futures Truth Systems Are Curve-Fitted - Russell Sands In response to Vern Nord's letter in the April issue, I thought I'd contribute my opinion. Although I have never personally worked with any of the systems covered by Futures Truth, I have no doubt that they are all curve-fitted. Any 'system' that purports to specialize in one market is optimized for that particular set of data. Some people will say that different markets have individual characteristics or personalities. This may be true to a limited extent. However, in testing, a computer doesn't 'know' what market it is examining. All the computer knows is a bunch of numbers (highs, lows, closes), from which it attempts to produce an algorithm to explain or predict price behavior. For a system to be valid, it should work over a given set of numbers (data). Whether those numbers have a name such as 'Beans" or 'Bonds" is (and should be) irrelevant to the data and to the testing program. Systems Make Money When They Trend and Lose Money When They Don't - No Surprise The best that you can hope for is to create a system that is profitable over time over a wide range of markets. Systems such as the Turtles use, makes money when the markets trend and loses money when they don't (no surprise). Since trendiness is a proven characteristic of commodity markets, given a long enough sample period (i.e. ten years) almost all the markets yield positive results. However, in any given year, since there are only a few good trends, most of the markets will prove unprofitable. This is not a reason to abandon the system, or to eliminate (temporarily) unprofitable markets from the portfolio. In fact, the markets that have lost the most money recently (due to being in a consolidation) will probably be the best in the future (when they finally hit a trend). Finally, I wish somebody could teach me how to know when the markets will trend and when they will be in a trading range. If I knew this, I wouldn't need to know much else to make money. I can visually eyeball

108

a chart and tell you if it's in a trend or consolidation, but that doesn't tell me much about the future. Unless I've been missing something, Wilder's ADX, or almost anything else for that matter, is more of a lagging indicator, telling where the market has been, not where it's going.

A Minor 1-Tick Difference in Price Makes A Gigantic 59-Tick Difference in Trading Results - David Stone Most traders fail to realize the major difference in a system's profitability as a direct result of its stop-loss or its target price accuracy. For example, I vividly remember a T-Bond trade I had with my system that called for a stop-loss to be placed 29/32nds under the next day's opening price. That stop equaled a risk of $906.25. The target price was 30/32nds above the opening. That could have resulted in a profit of $937.50 if the trade went my way without my stop getting hit first. For the first 2 days the trade went my way but did not reach my target price. Suddenly on the third day, the market went sharply against me and my resting stop-loss order that I had earlier placed with my broker got hit. In fact, it got hit exactly! It turned out to be the exact low of the day and low of the entire time period. I lost $906.25 plus commission on the trade. After my stop got hit (the same day) the market rallied up rapidly and never saw that price level again, until after the target price my system had generated was hit (the next day). If I was still in the market I would have made $937.50. The swing difference between the loss price and target price was $1843.75 ($906.25 + $937.50). That means all because of a seemingly insignificant $31.25, I ended up with $1843.75 less in my account than if I would have had a 1-tick larger stop-loss!

Do You Know That You're Not Guaranteed a Fill if the Price Hits Your Order Price but Does Not Go Thru It? - David Stone A few years ago a very similar thing (compared to my T-Bond trade) happened but in the reverse order, in the Soybean market. I was long July Beans and had the position for 7-days total. On the 5th day the price hit my pre-determined target price exactly. However, my resting order to take my profits of 12-1/2 cents ($625.00) was not filled because it did not stay at that price long enough to fill my order. If the order price happens to be a resistance/ support area or the price is in the process of topping/bottoming out, it's possible your order may not get filled at all, even if the price is touched. That's because the price must go beyond the order price before a fill is guaranteed. After my target price was touched, the price dropped steadily for the next 2-1/2 days and my resting stoploss was subsequently hit. That resulted in a loss of $550.00 (11 cents). Consequently, I ended up with $1175.00 less money than if my original target order was filled. In other words, if my target price had been 1/4 cent ($12.50) lower than it was, I would have ended up $1175.00 better off the price!

109

I have talked to other traders who tell me similar things have happened to them. Perhaps it would be a good idea to always place your target orders slightly closer than your system indicates...perhaps 2-ticks or so. Also, perhaps place your stop-loss order 2-ticks or so farther away than indicated by your system. However, I am not sure if in fact that will help. It's possible the market may then simply go 2-ticks more (or less) than it would have if it were not for the adjustments. Do any of the other members have opinions on this? Please write and let me know via the next issue of Commodity Traders Club News.

My Dealings With A Chicago Futures Discount Broker - Fred Montgomery A few years ago I had an unfortunate experience upon opening a trading account at Ira Epstein & Company Futures, a large discount firm located in Chicago. The main reason I opened the account was because they offered me an extremely attractive rate of $17.00 per round-turn. However, the savings of $3.00 per trade compared to my previous broker turned out to be incredibly minor, and ended up costing me thousands of dollars. That's because I ended up losing thousands of dollars due to an odd series of events and Ira Epstein's alleged strange policies involving new accounts. The very first trade made with Ira Epstein involved buying T-Bonds at the opening, with a fairly small 10tick stop-loss order. I did not actually place the stop because I was using a so called mental-stop loss. That meant as soon as I saw the price hit my stop, I would call and exit at the market. This is the story of the actual trade: I entered the trade on the opening at exactly 7:20 AM. I was watching FNN (now known as MSNBC) on Cable TV and at 7:26 AM they reported T-Bonds were down 7-points from the opening and they had slowly drifted down since the 7:20 am opening. I knew an important government report was coming out at 7:30 am, so I decided to call Ira Epstein for a price quote before the government report was released, especially since my stop order was fairly tight and within 3-ticks of the CNN reported price. At exactly 7:27 am, I called the Ira Epstein Price Quote Line to see if my stop was being hit. Ira only offered quotes thru their Computerized Quote Line, which entailed pressing buttons similar to a Voice Mail setup. You would enter your account number and codes for the commodity quote wanted and the computerized voice would give the quotes. To my shock, the Quote Line automated voice told me "sorry, you do not have enough money in your account to get any quotes today." This was not true as I had over $20,000 in my account. After this delay, I immediately (7:28 am) tried to call the main number to get the important quote. However, by the time I explained what happened (to a very dense and slow person), and got switched to a couple extensions to get my quote, it was 7:32 am and that important government report had already come out. As soon as the (construed negatively) Government Report came out, the market dropped like a rock. In fact, it gaped down some 20/32nds instantly, and then dropped another 20/32nds over the next 2-minutes. I know that because I got "time and sale" which showed the ticks and the times involved. The time and sale also showed that at exactly 7:27 am the price was in fact at my stop-loss price (down 10points from the open). That was the exact time the Ira Epstein Quote Line refused to allow me any quotes and over 2-minutes prior to the release of the critical government report. If I would have been able to get that quote at 7:27 am, I would have immediately switched over to the Order Desk and got out at-the-market because my stop was hit (and before the adverse government report was released). There's little doubt I would have been out of the trade at 7:28 or 7:29 am and my loss would have been only 10 or 11 ticks, or about $340 or so.

110

During past experiebces with a number of T-Bond "Market Order" trades at a different discount brokerage, my trades were always filled within one to no more than two minutes. Therefore, I know I could have got out of the market in time before the U.S. Government Report came out. Instead, I was not able to get out until 7:33 am and ended up losing 50-ticks ($1,562.50). That was over $1,200.00 more than I would have lost, if not for the refusal of the Quote Line to give me my quote. The next day I called Mr. Ira Epstein himself to complain about the apparent "computer error." To my complete shock and bewilderment, Ira told me it was not really an error by the Computerized Quote Line at all! It was a deliberate planned event that took place. For reasons that still puzzle me to this day, Ira said they "programmed their computer to automatically tell all new accounts on their first phone call that they have insufficient money to get quotes," (regardless of whether it's true or not)! Of course, they did not pre-warn the clients of this potentially costly asinine practice. Apparently they did it so the client will be forced to then call them direct. By doing this they can then manually double-check to verify a new client has money in his account and their check has cleared the bank, etc. They subsequently program the Ira Epsetin QuoteLine to operate normally for new clients calls for quotes in the future (after the first call deliberately fails). I was originally extremely upset and annoyed, due to thinking the Epstein QuoteLines refusal to give me the critical Treasury Bond quote was a computer bug or error. Subsequently, the amazing revelation that it was not an error, but instead was an idiotic, deliberate and planned occurrence added salt to my wound and caused extreme anger and bewilderment. I was shocked that Ira would have the audacity and nerve to do something which could be so incredibly harmful to their clients' pocketbook. When I asked for restitution for my loss, all Ira proposed was a token good-will settlement of $200.00. The small offer was ridiculous compared to my plus $1200.00 extra loss, so I turned it down. Another reason I turned it down was because I thought Ira would change his mind and give full restitution, but they refused and I subsequently closed my account. I was also planning to complain to the NFA or CFTC but unfortunately have never gotten around to it (but may still do so). Note: After this incredible event occurred I still foolishly made several more trades with "Ira Epstein & Company Futures." I ended up losing another $2000.00 due to more stupidity, incompetence and errors involving their order-clerks and Ira Epsetein's order call back personnel. They did things like not bothering to call back at all with fills or unables, or calling back an hour or so late, and after my stop had already been hit. One trade in Coffee involved a limit-order where they (admittedly) failed to call back at all with my fill. As a result, I did not know I was in the position and ended up losing lots of money by the time I found out I was in fact in the trade the following day. That was partially my fault for not calling them to verify the order until late the next day. However, that should have not been necessary. After going thru hell with Ira for about 2-weeks, I finally closed my account. At the time I realized they were not going to reimburse me for my original large Treasury Bond loss they caused, and they were also extremely negligent and incompetent in other ways, which compounded my losses. I ended up losing over $3000.00 due to their stupidity, deliberate misinformation, incompetence and negligence. This includes the infamous T-Bond trade loss due to their deliberate and planned computerized programming problem with their Quote Line. In addition, I found some people on their staff to be sarcastic and rude.

111

It is said that over 80% of commodity traders lose money. With thongs like this occuring involving your commodity futures broejr, the number is more likely near 100%. Good luck if you trade with them...you will need it!

A Warning To Traders - Malcolm McNutt There is a hot neural network program on the market called InvestN32, sold by an outfit called RaceCom, headed by a guy named Joe Sheppard. I bought this program about a year ago, and have been trying to get my money back ever since. The thing is a joke. I was told it could accurately predict the Deutsche Mark to within one cent (well, that's only a $1,250 margin of error). The first time I tried to get a refund, Sheppard told me that my licensing agreement stated that once I opened the package, I owned it. What is this, a China shop--you touch, you break, you buy? For all I knew, the box could have been empty inside, how do I know unless I open it. This is not a valid disclaimer. I was also told that I would be sent an update of the program that worked in real time with Tradestation, it never happened. They were going to sell the 'real time' program to big New York institutions for several thousand dollars, but I suspect that was just the dreaming and scheming of a small time hustler. Then I read a review by Larry Williams, whose system testing experience I greatly respect, and he said he came to the conclusion that RaceCom worked brilliantly in historical testing because it 'cheated' by peeking into the future before predicting the next outcome. Wow! So I called Sheppard and again requested a refund, which he again refused. He reiterated that the program worked, and said he had several customers who told him they were currently making huge sums of money in S&P's and other markets. But he would not offer any written proof, and when I asked if he had a real time track record to backup his claims, he acted as though he didn't know what the words 'real time track record' meant. I don't think he knows what the word 'integrity' means either. Or probably a lot of other words. I told him if he didn't send my money back, I would write this letter and circulate it all over the Futures industry. He threatened to sue me for slander, and then hung up the phone on me. This guy is bad news. The Better Business Bureau won't do anything, and I don't expect to get my money back. But if enough people read this letter, then maybe guys like Sheppard will be forced out of business, and we can regain just a little bit of integrity to our already tarnished industry.

A Sample Chart Showing How To Use Swing Highs and Swing Lows (Market Structure) To Trade Successfully - Dave Green The concept of only selling providing a "Swing- High" has occurred and only buying upon the occurrence of a "Swing-Low" can be very profitable. Unfortunately, the method is enhanced by using some subjectivity or by using charts of past data. Old charts and subjectivity can combine to make it look highly profitable. In real-time trading it's more difficult due to the issue of what constitutes those Swing-Highs/Swing-Lows, and their identification. Sometimes saying 2 or 3 lower days on each side of a high point qualifies as a Swing-High, and can be very profitable. Sometimes more days on each side of the swing day are better to more clearly define the Swing-High and Swing-Low.

112

The problem is the fact the more days on each side we have, the more of the move is over by the time we can get into the market. Conversely, the fewer days on each side of the bar means the move has likely not progressed far. However, it's more likely to be a false or minor Swing-High/Low and consequently less profitable, or a loser. It's fairly easy to draw the buy and sell arrows at Swing-High and Swing-Low points on the chart appearing below. However, to do it in real-time trading is not as easy at it appears on the chart. Nevertheless, the Swing-High and Swing-Low concepts (a.k.a. Market Structure) are in my opinion likely the best way to trade the markets successfully. It will "work" in any market, the actual market makes absolutely no difference. Of course, as always, trending markets make it work a lot better. However, keep in mind the concept of buying/selling Swing- Lows/Swing-Highs is simple but it's not easy.

Sleazy Trades? reprinted with the permission of the Wall Street Journal The Clintons have provided some commodity-brokerage printouts, than you. But they are not, as widely believed, trading records. After spending two days with these incomplete numbers, we find that they answer fewer questions than they raise. That is, the printouts don't put to rest the suspicion that someone cut a lot of corners to steer Bill and Hillary nearly $100,000 in commodities gains. These suspicions lurk because amateur commodities players simply don't make such money, because of what the whole Whitewater affair tells us about the way business and government mixed in Arkansas, because a powerful friend of Bill and Hillary loomed in the background, and because the trades were handled by a broker who was repeatedly sanctioned. The White House will have to go a lot further to demonstrate that Mrs. Clinton did indeed trade commodities as she says she did and not with undue assistance from Tyson Foods lawyer Jim Blair and/or his (and her) broker Robert Lee (Red) Bone. What the Clintons released Tuesday were two types of monthly statements for the first eight months of activity. One showed the gains or losses being posted to her account as positions were closed; they don't reveal the types, the durations or the prices of the deals. The other statement showed open futures contracts at the end of each month. Except on the open positions, we can't tell a cattle trade from one in soybeans, for instance. Chart in Print Copy Presumably these records were obtained from the Refco brokerage house or from the family files. Either way, people in the business tell us, we should expect a third type of statement to be part of the package: a record of daily trade confirmations, with amounts and prices. Once upon a time there would have been time-stamped trading slips that would allow checking the trades against exchange records of prices, but these are typically discarded after a few years. But confirmation slips would tell us what exactly she was trading, what her price in and out was, and where there were intra-day or adjusted trades-both of which would flag attention to possible misallocations by the broker. The issue of intra-day trades is particularly relevant because of Mr. Bone's history. One of his disciplinary proceedings, according to sources quoted by Securities Week, "largely related to trade allocations, whereby customers of Bone's choosing would be given the good, i.e. profitable, trades at the close of the trading day and other accounts would get the bad trades." Allocations are easy on intra-day trades, and very difficult to do on longer trades without raising "as of" red flags. Mr. Bone was found to be playing with margin requirements, which also reflects on the Hillary matter.

113

To appreciate the essence of this, you don't have to go beyond the two first days of Mrs. Clinton's monthly statements. On Oct. 11, 1978, she made a cash deposit of $1,000. This is a curious figure for a prospective cattle trader, since the margin requirement for a single cattle contract was $1,200. The next day she closed out positions netting a profit of $5,300. Margins apply to overnight accounts, and since Hillary didn't meet the margin for a single contract, until we see the actual records, we have to presume her Oct. 12 profits came from day trades. We and others have been asking around for explanations of how one makes 530% in one day, given the fact that, by exchange limits, the most a cattle contract (40,000 pounds) could move during that day was 1.5 cents up or down per pound. As best we can determine, the actual movement of the most volatile cattle contract on Oct. 12 was 0.8 cents. In other words, to make $5,300, one would have needed to own about 17 contracts. A contract was worth about $22,000. Even if not all of them were held at once, if broker Bone were carrying off a string of amazing buys and sells as the day proceeded (with Hillary at his side, of course), we're talking about a position at any one time that dwarfed the worth of a couple who had a $42,000 income the previous year and didn't even own a home. The exposure to simply one day's swing would be many times the $1,000 Mrs. Clinton had put down. At the least, any broker actually making these trades had to assume there was a lot more behind the Clintons than showing on paper. Or maybe they weren't her trades at all. That day's gains in Mrs. Clinton's account, says John Damgard, president of the Futures Industry Association, "very well may apply to trades that were on for some time and were liquidated that day." Indeed, the Washington Post quoted a White House official to the effect that Hillary believed her gains accumulated over several days. But if so, according to the records, they had to belong to somebody else, somebody who was willingly or unwillingly giving up his gain to her. If Mrs. Clinton's account was cleared that first day, she survived the heavy exposure to loss. But if the records released so far are accurate, on that first day she was able to show profitable intra-day trades that seem wholly out of line with her financial resources. This raises a question about the rest of her trades, since the released records are ambiguous on which were day trades. Some trades, those held over the end of the month, are clearly of longer duration. But with the bulk of trades, and the bulk of the profits, the positions were closed within the month, and perhaps within the day. It is true that Mrs. Clinton sustained losses, sometimes sizable ones, such as $17,400 on Nov. 22, but each time the debit was made up with gains on what may have been more of those easily manipulable day trades. It looks as if the inter-month positions were net losers and the intra-month trades net winners. Confirmation records would address what the intra-month deals were. And, of course, if the balance of the trades were indeed overnight, it again raises the issue of margins. "Significant undermargining" at the outset, Mr. Damgard says, "raises the question of whether someone was arranging her trades." Trader Morris Markovitz, quoted recently in USA Today , calculated that at one point her account was $90,000 short of margin, and commented, "I defy you to find any other account in the country where such a tiny amount of cash was allowed to risk such massive amounts of money." While true trading records would tell much of the story, it would also be helpful to hear soon from Mr. Bone under oath. Especially so since he has told the New York Times, more than once, that he did not confer with Hillary over her trades, as the White House says he did, and in fact doesn't even recall doing them.

114

Perhaps others in the Refco operation, past and present, could shed some light on whether it was standard procedure for a broker to permit an amateur with $1,000 to control perhaps 400,000 pounds of cattle. Refco itself was disciplined by the Merc in 1979 and fined $250,000 for record-keeping negligence. Any such testimony would require congressional hearings, not yet set for Whitewater. Robert Fiske's inquiry into possible crimes would appear to be irrelevant here, since the statue of limitations has long since lapsed. When confronted with the messy circumstances of deals by which Mr. and Mrs. Clinton sought to "get theirs" earlier in life, this administration's habit is first to brush off the questions as an impertinence, then to dribble out documents that purport to put matters to rest but (slyly?) don't, and finally to act victimized when the inquiries don't cease. The President and his wife are not the first to have suspicions about their personal finances follow them into the White House. We remember a guy whose California "slush fund" hung over him for 20 years, until he clumsily gave the press something really to write home about. We're not suggesting this episode is pointed toward another Watergate, and for the sake of an unstable world and shaky markets we surely trust not. But at the very least, we have to note that the coverup of the Clintons' 1978 and 1979 tax returns got them past not only the statue of limitations but some important political deadlines. If the commodities trading had come out during the 1992 campaign, for instance, or 1993 tax debate, the Clinton's effective rhetoric about greed in the 1980s would have been exposed as the hypocritical blather that it was. Now, we've drawn conclusions from two days with incomplete records, and while our inquiries at the White House yesterday were unavailing, further explanations may dispel our suspicions. But by now the administration has welcomed to Washington nearly every Arkansas ally this side of Red Bone and Jim McDougal. So with the record so suggestive of sleazy trading, surely it is time for the Clintons to start doing some real explaining.

If You Can Get In The Winners Circle, You Can Become Wealthy By Getting All The Money The Others Lose - Jim Ford It may be true that the majority of traders lose money. However, what happens to all the money that is lost? The answer is, it must be made by the consistent winning traders. If 80% or more lose money, that means the 20% that regularly make money trading futures are becoming wealthy by getting all that money the other 80% are losing. That is what makes commodity trading so exciting and potentially rewarding. If it were not for the fact most traders do lose money, the reward for us winners would be far less lucrative than it is. The fact is you can become wealthy much quicker and easier because of the preponderence of losers money. That gives it great reward potential. You too can get in the winners circle by hard work, the ability to weather the occasional storms and drawdown periods, discipline and money management techniques.

Broker Trading by Computer can be done thru Robbins Trading Co. or Commodity Research Institute - John Bowley Dave, your Traders Club News is really great! The following is submitted for publication:

115

There are now many users with their own systems and those evaluated by Futures Truth. Robbins Trading and Commodity Research Institute (CRI) offer to run these programs and make trades. Robbins uses SystemWriter and CRI uses Excalibur to program, test and general signals. Robbins in Chicago will not allow one to cancel trades or enter stops. CRI in Atlanta is associated with Futures Truth and says they will offer a simple filter or stop which improves percentage of gains or reduces drawdown. One must buy a system, most under $1,000 to participate. Both charge about $50 per trade. This type of service represents a big step forward for small users. It allows one to trade automatically without placing orders, and one need run the program only if desired to choose actual trades. Futures Truth publishes results monthly. Now one can trade them with little effort.

FastTrack - A Mutual Fund Traders/Investors Friend - Part II - Jim Hill You can expand FastTrack's analysis (referred to last month) by developing a combination fund of the two and then develop counter relationships using a new index. This is a very powerful feature. You create a new mutual fund that represents the counter relationship of the two select mutual funds. Then you develop a counter relationship with another index. If this second counter relationship is positive, then you choose the strongest mutual fund; if it is negative you can be in another mutual fund or a money market fund. This type of pairing is easy to establish, and you can determine its effectiveness, historically. What type of historical information is provided? Besides the usual mutual fund pricing and dividend data, you will obtain the composite return of the fund and index, paired, a total return of the fund and a money market fund in case you want to invest in a money market fund when your selected fund is weak, the fraction of time the chosen indicator was up or down, the number of sell/buy signals, the standard deviation of volatility, the return unadjusted, correlation coefficients, and the expected return given the standard deviation. Assistance with FT is readily available from the company. Or, you can communicate with users on the investment bulletin board in Prodigy. The bulletin board participants are helpful, and discuss more advanced selection strategies. What are some of the disadvantages of FT and its data service? First, the data only goes back to September of 1988. And second, you can not analyze a group of different funds for net profit/loss (in other words, you can not easily do asset allocation beyond two funds). What is the cost? There is an initiation charge of $69 and a monthly data cost of $30 if paid monthly or $240 per year, if paid yearly. They have a one month trial package. If you are interested, you can call them at 1-800-749-1348 and obtain the most recent cost for a one month trial. This is the best method of determining FT would be of use in your selection of mutual funds. I will close this article with a comment about timing. I use FT for both timing and mutual fund selection. I time the market as a whole, and when my indicator is positive, I invest in Fidelity Selects. I will leave for another article how this is easily done, but I will give you the sell/buy dates using this methodology: S,9/1/88 - B,9/23/88 - S,6/8/89 - B,6/20/89 - S,10/19/89 - B,04/30/90 - S,04/09/90 - B,01/04/91 S,08/28/91 - B,10/04/91 - S,04/03/92 - B,10/06/92 - S,10/12/92 - B,10/14/92 - S,05/27/93 - B,07/30/93 S,02/14/94 As of the date I am writing this article, April 14, 1994, my indicator for the general market is still negative and it will not be positive in the near future. It is an easy indicator to set up in FT and easy to follow each day.

116

Editor Comments My goal is to make CTCN even more useful to members so we can all trade better and avoid the many pitfalls along the way. With that in mind there are several good articles in this issue that reveals ways you can lose money or not make money thru no fault of your own. Thanks to all who made contributions. Issue 14. Concerns About Validity of Seasonal Trades & Little Mention of Drawdown - Ed Forys After being bombarded with many solicitations for seasonal trading advice being hawked by several vendors, I sat down one day to think seriously about their track records. The one thing that struck me was that often times, they would cite examples like "in the past 7 years, this trade was profitable 5 out of 7 times." There seldom was mention of paper loss (drawdown) while in the trade; drawdown is anathema to a stress adverse trader like me (as well as undoubtedly to many others). I then consulted my statistics textbook and found that with a simple random, stationary set of data, using the Student "t" test, the calculation of a mean using 30 samples was accurate to about 5%. A smaller sample size leads to a greater error. That alone was almost good enough for me to reject all of the too brief track records being hyped as the answer to the quest for a truly mechanical trading system since with less than 30 samples, the accuracy level is unacceptable to me. If you flipped a coin 3 times and it came up heads 3 times, would you bet the farm that it would come up heads on the next toss? If so, you don't understand statistics and/or random processes and you need to do some homework (besides money management). Another point I found to be disconcerting with these seasonal forecasts was the complete lack of walk forward testing. It appeared to me that the vendors were using up all of the available data to come up with the magic dates upon which to enter and exit the market and had no out of sample test results. Is it because the vendors don't know that they don't know? Or is it because they just don't care? I would rather err on the side of caution and in the meantime, when I do get one of those oh so enticing solicitations, it goes without hesitation into the round file.

Is Futures Truth Doing it Right on System P&L & Misc Dr. Gerald Greenwald It is distinctly uncommon for me to stick my two cents in, but I'm compelled by certain letters you printed in CTCN: Re Russell Sands' comments on Futures Truth. Mr. Sands, from short conversations I have had with him, seems intelligent and personable. However, I would like to relate my experiences with Futures Truth. About two years ago, I went public with my Key to Currencies Software. Shortly thereafter, Futures Truth sent me an equity curve they had decided fit my software. They never bothered to consult me, but George, their programmer, claimed that between anonymous faxes and working backwards from info he had, George "believed" he had reproduced my program and would follow it in Futures Truth. I told him I would send (and then did send) a copy of the program so that they could accurately track the program. They did not bother to do this.

117

Then I spoke to and faxed both John Hill and George depicting their lack of propriety and giving half-ass representations of what they believed my program to be, albeit I had told them it was not. They did not care a whit. In summary, I believe there is little, if any, credibility to Future Truth's evaluations. They are incorrect and misguided, in my humble opinion. Re Mr. Stone's lamentations: Is this really worth including in a newsletter? (Editor's Note: Yes it is! Mr. Stone's contribution is especially valuable for new or novice traders). Also, Mr. Montgomery's jeremiads about the Ira Epstein Co. Montgomery appears to have never traded before, and appears to have little, if any, experience. I would suggest that the $3,000, he says he lost was mostly due to his own "stupidity, misinformation, incompetence and negligence." Before you play the game, Mr. Montgomery, you should make sure you know the rules. One of the rules I find valuable, is never be in a trade unless a protective stop is in place with the broker (not in your mind). I might add that from the tone of your letter, I can't help but wonder if it wasn't you who were "sarcastic and rude," and not them. Dave, keep up the good work.

Advantages of a Full Service Broker over a Discounter & Misc - Paul Diehl I love your newsletter and wish I had found it a long time ago. Maybe misery loves company. I find great value in reading the comments of traders just like myself that have nothing to sell and no axe to grind. I wanted to comment on Fred Montgomery's problems with a discount broker. I have traded with both full service and discount brokers. A full service broker will give you a discount if you trade enough and ask for it, but you will never get it without asking. I have had my own problems with discounters calling back with fills and have solved the problem by using a live quote machine (QuoTrek) and mental stops. This way you can call in a market order and have it filled while still on the phone. Live quotes are expensive so you have to find another system if you don't trade enough to make it worth your while. Yesterday I called to place an order in the S&P 500 futures market just after the market had dropped 1.20 in fast market conditions. The broker's quote machine was still showing the last trade at 455.15, while my machine showed 453.95. If you had been depending on the quotes from the broker, you would have either lost money with a bad fill or never have gotten into the market in the first place. I have never had this problem with my full service broker, but each trade costs $50.00 or more. It all depends on where you want to spend your money and how much you trade. I have been considering the Pocket Quote Pro to replace my Quotrek. The PQP is a lot cheaper, but I'm a little afraid to make the switch since the Quotrek has given me such good service. I'd like to hear from anyone out there that has used PQP. I am also the owner of the Right-Time Index Program for trading futures and options on futures. So far, I have had little or no luck with trading this program, even though the vendor makes heavy claims about profits. I would like to hear from someone that has had success and get some ideas on how its done. The manual seems incomplete. I also use the AIQ Trading Expert and find it to be very helpful, but I also find that you still have to use some judgement in taking the signals. I have begun to believe that there's no perfect program out there, because it would ruin the markets since everyone would own it and we would all be trying to trade the same way.

Hillary Clinton - Kent Calhoun

118

Since my letter postulating how I believed Hillary Clinton managed to produce her commodity profits, many things I speculated have been confirmed as fact. The White House officially retracted the version that Hillary produced her own profits. James Blair, Tyson Foods attorney, was credited with producing Mrs. Clinton's $100,000 profits despite the fact he lost over $5 million dollars in his personal account. Hillary's broker, Red Bone, was revealed in court testimony, regularly locked his office door and assigned account numbers after the close of trading. These trades were carried in an Omnibus Account. Bone also neglected to ask Mrs. Clinton for $20,000 additional funds to secure her under margined positions in her account. Those trades were eventually taken off with a profit. I concluded my letter by asking what return Tyson Foods received for their $100,000 contribution to the Hillary Clinton coffers. The answer turned out to be $7 million in Arkansas State tax credits granted to Tyson Foods, while her husband was Arkansas State Attorney General. I spoke extensively with USA Today reporter Bill Montague, who verified all of the above facts in his series of articles on Mrs. Clinton's commodity profits.

System Results Evaluation - Kent Calhoun I would like to share some thoughts on system optimization. When I introduced my method of system optimization and evaluation, in the November and December 1989 articles in Technical Analysis of Stocks and Commodities Magazine, many system developers were upset that my high evaluation standards made their systems look bad. These values were based on "Calhoun Profit Ratio", CPR, which is an important ratio related to portfolio risk and structure. CPR is the Cumulative Profits divided by Maximum Equity Drawdown divided by number of years tested and traded. If a system makes $100,000, has a maximum equity drawdown of $10,000 and has been traded for 5 years, the ending ratio is 2.0. This is an annual dollar return based upon maximum risk. The CPR assumes a maximum equity drawdown occurs the moment a trader begins trading, then looks at expected return on investment one year after trading began. A 2.0 ratio means that for every one dollar at maximum risk, two dollars should be returned to the trader by the end of the year. Any system under 1.0 has a negative annual return. Applying the CPR to the 10 most Profitable Trading Systems article in Futures Magazine 1993, only two of the ten systems have a positive annualized return. Of these two, my Ultimate II produced twice the amount of profits per dollar at risk than Time Trend II. Why? Because the manner in which parameters were selected. I tested over 260 trading systems only to find false track records or misleading trading results for 90% of them. The most common deception system developers used was the equity spike optimization parameter set. This is when a system has less than 5% of its trades generate over 20% of its profits. Page 66 of Babcock's book on Dow Jones Guide to Trading Systems provides an excellent example. A hypothetical Yen trading system is used by Babcock for teaching purposes and is not presented as a real system. The cumulative system profit is $37,062.52, but one trade made $23,562.50. When this trade is removed from the other 9 winning trades, the average profit per winning trade drops from $4,620 to $1,500! Imagine the shock a trader may experience making this discovery after buying a system like this for $1,000. A dual parameter set of the system above may look like this; a 3% filter X a 20 day moving average=4620, a 3% filter X a 18 .m.a=1500. This means a 10% one parameter value shift resulted in a 68% equity shift decline!

119

The key to all system optimization is to create equity stability in relationship to the parameter set. When any parameter deviation produces a greater percentage equity shift, the parameter set should probably be discarded. Over 80% of the time, the parameter set that produces the maximum amount of profits are not the parameter set that should be used due to equity shift instability. It is the "buffer zone" around a parameter set that limits the equity shift relative to the optimal parameter shift. So long as the optimal parameter shift still produces profits within two standard deviations from the optimal parameter set mean, the parameter set will make money 95% of the time. The Calhoun Method for Optimal Portfolio Selection will compensate for the other 5% shift, and 27% standard deviation, when a commodities profits decline below a ten year annualized return. This is a lot simpler than it sounds. A computer doesn't recognize a bean from a bond. For a system to be valid, it should be profitable for both markets? Maybe not. Since the market psychology of belly traders is different than those of currency traders, it behooves the traders find out what works and what doesn't within the context of the same system. Many commodities are prone to consolidation periods more than others. Currencies, financials and stock indices offer more potential profits for trend following systems than agricultural and livestock markets, which have the highest percentage or range overlap from one time period to next. A system that constantly produces profits in some markets should not be discarded because it loses money in others.

Five Vertical Bars - Kent Calhoun When the 5 VBTP trend is short and one particular vertical bar is generated for soybeans, 106 of 109 times one range of that bar is violated before the other. We confirm the trade by two parameters. Make money 97% of the time when traders take the opposite side of our trades. There are 25 commodities that have 93% probabilities or better. The choice of losing or learning from optimization is theirs. Consider one 5 VBTP sell pattern for T-Bonds has never had a winning trade in over 10 years! A pattern tells the trader to sell on daily vertical bars when the intermediate 5 VBTP weekly trend is bullish. The sell signals per trade maximum equity drawdown has never dropped more than $1,400 per contract. A trader may buy the market on the first sign of technical strength, after the daily sell signal has been generated, and use a protective stop placement that has never failed in 10-years of testing. The point is this - how a system loses money is just as important as how a system makes money. Not all same system parameters need be profitable for all markets to profitably trade a system. The same principal applies to price action. A market that falls 20 cents in five days, then rises 10 cents in five days should fall below the 20 cent low, because the market fell twice as fast as it was rising, (without previous trend considerations.) Consolidation Period - Simple Analysis When the trends are not obvious, a longer term time period should be used to define the trends and increase the trading possibilities. Defining volatility in apparently non-trending markets can provide valuable information, especially a major tops and bottoms are projected. In January and February 1993, I recommended gold purchases below $330, based on the fact the market had ran out of sellers according to the 5VBTP time and price objectives for daily, weekly and monthly vertical bars. January's range for the entire month was less than $10. Thirteen years earlier, the monthly range was over $300.

120

The 5 VBTP weekly profit objective was 150% oversold, yet the monthly bottom was due the previous month and had achieved only 62% of its objective. The 5 VBTP daily downside price objectives are usually twice the upside objectives when the major trend is down. Both those daily price objectives were within $1 of each other at the major 1993 gold bottom. Since the weekly trend was oversold, as soon as the daily exceeded a previous daily high, the weekly and major bottoms assumed to be completed. Major bull markets begin with higher daily highs and lows that become higher weekly and monthly higher highs and lows. To Optimize or Not? All trading systems are optimized to some degree, unless trading parameters at randomly generated without any profit considerations. Would anyone in their right mind trade a system without knowing what the best trading system parameters could possibly produce? I would not. Consider what an optimized variable can be. Does the system enter intra-day or on the close? This is an optimized variable. A channel breakout system, that buys above 14 day highs, may have tested to 100 days, has 100 possible parameters; adding a sell below the 28 days lows creates 9901 possible parameter set combinations. The point is this: not all optimized parameters are equal in terms of curve fitting or optimization. Richard Donchian, the father of modern technical analysis, created a 20 day channel breakout system known as the four week rule. Buys were made whenever a market closed above the previous four weeks' lowest low. Channel systems have historically been the most consistently profitable group of trading systems. The difference between the optimal number of days for the buy and sell parameters increased total profits for portfolio of 24 commodities over 1210% and lowered equity drawdown over 73% for a 6-year period. Less than 2500 possible parameter set combinations exist for a two parameter system like this testing up to 50 days. Any system using a fixed number of days to enter or exit trades would be improved by locating the best parameters and using the CPR on parameter sets. Correct usage and analysis of optimization is the most valuable trading tool available. Whether optimization should be used, is never a valid question for any professional trader.

A Simple Way David Stone (May Issue CTCN) Could Have Made Money Instead of Losing Lots of Money - Russell Sands Use "Market if Touched" orders when attempting to take profit targets (rather than Limit-Orders).

Psycho Babble: Pluses and Minuses Russell Sands Gary Smith has gone to great lengths to disclaim the validity of the (proliferation) of psychology guru's and 'coaches' that are charging a lot of money to 'help' people become better traders. This letter is not meant to get into an argument with Gary, or anybody else for that matter, but to share some personal insights on the subject. Let me begin by agreeing that there are many charlatans out there who charge too much money for too little (quality) services, then try to keep you coming back for more. There are people like this in every business, from the carnival barker who wants you to come see the"private show," to the system vendor who wants to sell you his "advanced updates."

121

However, these few rotten apples should not lead one to conclude that the whole field is worthless. Gary claims his real beef is that these psychology guys refuse to tell the truth that most people just aren't suited to trading. I think this is wrong. Maybe most people aren't naturally suited, but anybody can learn. Richard Dennis unqualifying proved that a random group of people, having average intelligence, common sense, and good discipline, can learn to trade for a living. And he did it by teaching simple rules of the markets, without psychological programming or hypnotic mumbo jumbo. On the other hand, many people need mental help (no pun intended) when it comes to trading. I am a great believer in the power of the mind, and that anybody can accomplish anything if they put their mind to it. But the reality is that most people need help in most endeavors in life that they undertake. They need confidence. They need support and encouragement. They need to be told that they can do it. Yes, I agree there are no shortcuts. And people should not be tantalized by the lure of quick and easy profits. But with hard work, and a positive belief system, anything is possible. Let me relate two personal experiences from outside of trading. In 1980, I won a World Championship in Backgammon, with a trophy as tall as Jake Bernstein, and enough money to get me started in trading for a living. For those who think Backgammon is a "luck of the dice game," there is probably as much skill involved as Chess. But the dice do play an important part, and for five days in a row I rolled dice that were absolutely beyond normal statistical bounds of reality. How did I do it? With transcendental meditation, mental dynamics, psychokinetics, and good old fashion mind control. I saw the numbers I needed in my mind's eye, and rolled them accordingly. I had great help in accomplishing this feat. I had a psychologist, a psychiatrist and a hypnotist, all working with me for a month before the tournament. The same type of 'gurus' that we talk about, and none of them even knew how to play Backgammon. But they sure helped me with my mental abilities, both controlling the dice, as well as focusing and concentrating on my game and being more aware of the technical aspects. If that story is a little far fetched for some of you, try this one. A few years ago, I did something called the Firewalk Experience, where you walk over a bed of burning hot coals. This was a famous 'fad' in the 80's, taught by a pretty flamboyant Neuro Linguistic Programmer named Tony Robbins. But it was 100% legitimate, and to this day I still can't figure out how I did it without burning my feet. You're put in a different state of mind, change your whole psychology and physiology...it works. If NLP can do that, and if meditation can help me roll dice, then I have to believe that some of these 'coaches' can legitimately alter the mindset of a doubting trader and turn him into a self confident success. Yes, the power of the mind is an incredible thing to experience. Of course, as Larry Williams has recently said, if you have a system that's 80% accurate, with a risk reward ratio of 5 to 1, you don't need very much of this psychology stuff. But if you do want to improve even more, you still have to differentiate between the legitimate psycho gurus out there and the charlatans. But that's no different than having to choose between legitimate trading teachers or system vendors, and the many slimeballs in the industry. But even Gary Smith would agree that just because there are a lot of slimeballs, it doesn't mean the whole field (vendors) is completely worthless. Of course, some people will choose or prefer to do it on their own, i.e., develop their own trading systems, and develop their own discipline and self confidence. But for those that need some extra outside assistance, I think the psychobabble field does have some degree of merit.

122

A Critical Letter from Mr. Ira Epstein & Some Order Placement Help & Advise One of my clients, Ray Simpson, recently sent me a reprint from the May 94 issue of the Commodity Traders Club News. (Editor's Note: There's no record of a Member named Ray Simpson, if such a person exists, I would like to discuss with him giving an illegal copy of my copyrighted CTCN to Ira Epstein, in violation of Federal Law.) To say that I was disturbed upon reading this baseless and libelous letter, is a gross understatement. Your publication of this letter without substantiating any of its allegations was irresponsible and seriously damaged our reputation. Based upon my experience as a journalist gained in 10 years of hosting the television show, "Stocks, Options and Futures," which was broadcast on over 100 individual markets across the country, I believe that reporters should examine the facts and verify that they are reporting something with substance before publishing. I seriously doubt that CTCN undertook any such investigation before publishing the wild and untrue allegations here. We have just completed our initial search for accounts bearing the name of "Fred Montgomery" the purported author of your letter. To date, we cannot find an account opened under that name. If, in fact, such a person exists, we would like to discuss his allegations with him. If this person does not exist, then your failure to investigate the claims in the letter becomes even more apparent. Further, Mr. Montgomery's letter shows that its author lacks even a basic understanding of futures trading. He claims that he lost money because he was unable to get a quote from Ira Epstein & Co. He initially states that he was watching CNN cable TV at 7:26 a.m. and learned that Treasury bonds were down. CNN does not run a business show displaying the markets tick-by-tick. However, that really isn't the key here. (Editors Note: CNN was a typo...it was FNN). Montgomery alleges that our system wouldn't let him get quotes. This is impossible. Even if a customer has used up all of the free time allocated to him or her through the Ira Epstein & Co. Commodity-Fone quote system, the system would still allow the client to hear quotes for a minimal price per minute. I find it difficult to believe that anyone that has an active trading account with a $20,000 balance, as this man claims he had, would have expended his allocated daily free time so early in the day. We build in sufficient free time so that most of our customers do not have to pay for quotes. The only reason we set a limit at all is to prevent inactive traders from unfairly abusing our quote system. This policy allows us to keep expenses low, which in turn permits us to maintain our low commission structure. In any case, we do not lock clients out of the Commodity-Fone system, but rather give them the opportunity to continue receiving quotes for a very small fee. No client that has an active account with Ira Epstein & Co. is ever locked out of the Commodity-Fone system. We do not treat new customers any differently than existing customers, with the exception that we initially give all new accounts more free time so that customers can familiarize themselves with the workings of Commodity-Fone. We certainly do not penalize our new customers as claimed in Mr. Montgomery's letter. Next, and more importantly, as any person even minimally familiar with the workings of the commodities and futures markets would realize, Mr. Montgomery's expectations as outlined in his letter were unrealistic and display an ignorance of this business. His letter states that he saw a CNN (FNN) report that showed TBonds falling at 7:26 a.m. He next claims that he tried to get a quote from us at 7:27 a.m., because he knew that an important government report would be released at 7:30 a.m. Apparently, his claim is that he could have closed out his position before the government released its report at 7:30 a.m., if only he could have obtained a quote after placing a call to our quote line at

123

7:27 a.m. Even if these events took place, which I doubt, his expectations were completely unrealistic. Our quote lines and order takers are fast and efficient, and the market operates quickly, but even if Mr. Montgomery had placed his call to our quote line at 7:27 a.m., received a quote at 7:28 a.m., made an immediate decision to sell and called our order takers at 7:29 a.m., it is highly doubtful that the order could have been taken, relayed to a floor broker, and executed before 7:30 a.m. Any experienced trader knows this, and places his orders at least 10-15 minutes prior to the release of a major report to allow time for it to be executed. Mr. Montgomery was setting up his own debacle. Mr. Montgomery apparently believes that from the time that a stop order is placed to the time it gets into the trading pit is under one minute. We use a computerized order entry system on orders that are not market orders and orders that are not exceptionally close to the market. Even with our advanced system, it would have taken 1-1/2 to 3 minutes to have placed his order that day. By that time, the report would have been out and the market reaction underway. Mr. Montgomery should have had a resting stop order in the market. Mental stops, as experienced traders know, are often the key to disaster. Mr. Montgomery next argues that I should have reimbursed him for his loss. He claims that I offered him a $200 goodwill settlement towards his loss. If Mr. Montgomery, in fact, did exist at all, I may very well have made a gesture like that. It would not be uncommon for me to do so. At times, if the client has a problem, due to their own lack of expertise, we step to the table, show that we are not without heart, and try to help that client out. However, I have no recollection about this particular instance, if in fact, it occurred. I have been in the futures business for 25 years and Ira Epstein & Co. has just celebrated its 10th year in the business. We are one of the largest discount brokers in America. We do not get many client complaints. Any check with NFA or CFTC will prove this point. We have 1000's of accounts and execute 1000's of orders on a regular basis. We have review mechanisms in place and strive to improve our service level at all times. Without excellent customer service, we wouldn't keep the 1000's of satisfied customers that we now maintain. I already know, from talking to the editor of Commodity Traders Club News, that several of the readers of this newsletter have called or written to express their believe that Mr. Montgomery is in the wrong here. They believe that he was uneducated and unsophisticated in trading futures. I hope that the CTCN will print their letters and an apology for publishing Mr. Montgomery's letter without first checking the facts. I take my reputation very seriously and am entitled to a statement setting the record straight.

Precision Commodity Trading Program John Maglovsky I recently received a copy of a trading program that selects seasonal tendencies that are remarkably correct (by their brochure). I have a copy of their trading recommendations for April. I evidently don't know how to check this program properly and need the expertise of CTCN Members. I only checked four commodities and 3 were losers with one with a marginal profit. I called Precision Commodity Trading for a profit/loss statement of one following their recommendations. Their answer was, it is included on the recommendation list. Their list does not tell me how much I would make or lose if I bought one contract of each commodity on their list and followed their instructions. I'm sure if this program can be proven to be profitable 79 to 100% of the time, as it claims, many of our club members would be interested in it. I hope you or the members can help with information about this program and its success or failure. Thanks Dave, for your time and energies you put into your Swing Catcher Program, CTCN and your personal time with callers like me, I appreciate it.

124

A Batch File for Data Backup - Verl Philliber To paraphrase the 1970's tune, "Backing up is hard to do." Many of us find backing up data files to be a bothersome task, so sometimes it just doesn't get done. Yet, since good data is the lifeblood of our trading, it is essential that we protect it at all costs. The backup program provided in DOS is not elegant, but it is adequate for most of us. Problems arise because it is not very user-friendly, and uses arcane commands which are sometimes hard to remember. To make the task less odious, and to help avoid errors, I wrote a batch file to make backup less of a chore. You may find it useful. Some background comments: I wrote this as a working program for my own use, so it is not "pretty," but it does work. I made some changes before submitting it to the CTCN newsletter to make it workable for most versions of DOS. Pre-DOS 4.0 users will need to remove the "@" in the ECHO commands. The directories are coded to match the same names used by Trend Index Trading Co. Probably, we should all use the same directory names as Dave. This simplifies troubleshooting if we need assistance with a data problem. It may also prove useful at some time in the future if Dave makes a program improvement which affects file structure. You can choose either C or D as the source drive, and either A or B as the target drive. I followed the conventions described in the CSI manual. Thus, data stored with program files (18 month Trendx, or Dow-Jones/OEX files) are backed up on two disks: QMASTER is stored on one, and data on the other. Historical data files are not stored with program files, so can be backed up on the same diskettes as the QMASTER files. Non-CSI users will need to make changes as appropriate. After keying in the program, you can run it without backing up any files to get a feel for the program, and to see whether it meets your needs. Just press CONTROL-BREAK each time the program prompts you for a diskette. DOS 6.0 users have a new command called CHOICE to use in inter-active batch files. Others will have to create a small program called REPLY.COM, and store it somewhere on your path (e.g. C:\, C:\DOS, C:\BATCH, C:\UTIL etc.). For those who don't remember how to create .COM files, I'm including the instruction. This is a two step process: 1. Create a file named REPLY.SCR by typing the following lines EXACTLY as shown, pressing (ENTER) at the end of each line. C:\>copy con reply.scr (ENTER) e100 b4 08 cd 21 3c 00 75 02 cd 21 b4 4c cd 21 (ENTER) rcx (ENTER) e (ENTER) w (ENTER) q (ENTER) Now press the function key (F6), then press (ENTER). DOS will show 1 file copied. 2. Now type: c:\>debug reply.com < reply.scr (ENTER)

125

This small program was written by Van Wolverton, author of several books on DOS, including Supercharging DOS. With minimal changes this batch file can be used to create a restore program in case you ever need to use the backup files. I didn't list the changes here, because of space constraints. However, if there's any interest, I can submit them for a later newsletter.

You Alone Are Responsible For Your Actions - Russell Sands To Fred Montgomery. You must learn to take responsibility for your own actions. Specifically, you should always call your broker if you haven't had a call back within 10-minutes to see if you got filled, and you most definitely should not use 'mental stops' if you are not in a position to watch the markets live all day. Despite my own feelings about Epstein, the problems you described were 90% your fault. If you have learned something from these sloppy mistakes, then it was well worth the cost of tuition.

The 1-2-3's of the Market - Ken Turkin People are use to thinking and communicating in symbols. Life is made easier with complicated forms being describing as some symbolic reference. All markets, being only comprised of groups of people, also communicate in the same way. Numbers are the most common symbols used and have a multitude of interpretations. The best numbers for the markets are 1, 2, 3 and 4. ONE can be a dot, a single point or a obvious high or low point. TWO can be a line with 2 end points or a single point which started to curve and come back to itself forming a circle. The 2 can be a high-low or low-high swing on a price chart. The number 3 is the first completion of something real. THREE is a Triangle, probably the most important symbol of all. The 3 consecutive swing points on charts can form what is called a cycle. They can look like a high-low-high or low-high-low. The 3 points can be squared off which in essence creates a fourth point. Taking it another way, just add another swing to the two which made the triangle. Now there are 4 swing points which will always show you the illusive TREND. In other words, the 4 swing points (2 highs alternating with 2 low points) create 3 price thrusts or swings which show 2 consecutive cycles indicating one trend. This can be generic to any time frame or price movement. Only the scale perspective is different.

Editor Comments As you can tell by reading Ira Epstein's letter, he is very upset over Fred Montgomery's letter in the May issue. If in the future there's an extremely negative letter like that, I will likely try to get a comment or rebuttal from the target of the criticism prior to publishing it. In fact, that should have been done in Ira's case and for that I apologize. However, Ira says CTCN should have "investigated the claims" and "substantiated its allegations" and "examined the facts" before publishing Fred's letter. We are not the Police, nor the FBI. Unfortunately, we do not have the capabilities or the power to discover and correctly verify the truth. I am sorry to say that it's really unreasonable for Ira to think CTCN has an obligation and the authority and resources that would be required to verify statements made by its Members. Furthermore, I have spoken to Fred Montgomery and he says his letter was absolutely correct. In fact, he states he taped the specific call (and others) to the broker, in which he was told their policy at the time was to automatically make the clients first call fail (so they could check the account status and balance). He taped those calls because of a number of errors or screw-ups attributable to several different brokers over the years.

126

He also says Ira couldn't find a record of his account because the account was under a different name (his business name). You should know that in addition to negatives, I have heard some good and positive things about Ira's brokerage service. However, these positives were not submitted to me for publication. Therefore, I would greatly appreciate letters (for publication) from CTCN Members who have had experiences with Ira Epstein Futures. Thanks to Verl Philliber, his excellent back-up program is available free to all CTCN Members. The reverse side has details on an upcoming Dow Jones Telerate (CompuTrac) Seminar. It should be beneficial to attend it. Thanks to all who made contributions. Issue 15. Futures Truth's Numbers Are Accurate Key To Currencies System - John Hill We standby the current numbers we publish on Dr. Greenwald's Key To Currencies System and firmly believe they are correct. We initially published numbers based on back-engineered logic on Dr. Greenwald's system. We received a copy of his program logic anonymously from someone who has back-engineered the blackbox. This was tracked in Futures Truth using actual contract prices instead of continuous data. He decided to send us a copy of his blackbox system for a closer comparison. We were able to essentially duplicate results during this period. Our historical tests with our program showed very similar results to his advertised results, except British Pound (see table below). His system is intended to be traded as a basket, thus the overall drawdown may be less (or more) than that shown for individual futures. We were not aware of his dissatisfaction until the article in last month's Commodity Traders Club News. Because of his expression of displeasure and the possibility that he may have changed some of his basic logic since the blackbox he sent us expired, Futures Truth will cease publication immediately of numbers on his system in our Master Performance Table. A private individual performance report will be available to investors on what we believe is his basic methodology. We have always told vendors to show us where we are wrong and we will immediately correct them. This option is open to Dr. Greenwald and anyone else. We sincerely believe we programmed his basic methodology correctly. Obviously, we cannot keep up with day-to-day changes, if any, in the methodology unless the vendor keeps us appraised of the changes and that is why we will cease showing numbers on his system. If something is sold to the public, I believe Futures Truth has every right to publish results on those systems for the benefit of it subscribers only, irrespective of how the methodology comes to us. (see P&L report on page 8 -Report in Print Copy)

John Hill on Russell Sands & Curve-Fitting

127

Russell Sands points out that all systems in Futures Truth are curve-fitted without every seeing a copy of our report. I believe that to be true... including his system. Technical analysis is simply taking past data and forecasting future results which is curve-fitting. Mr. Sands' main argument is that his system does this better than others by money management or less curve-fitting. This may be true, but I suspect there are a number of systems in our reports that will do jut as good as his. We also only present numbers without the benefit of hindsight, so this is an attempt to show the realworld.

This Newsletter and It's Contents are For Members Only - Wayne Roberts For several years, I have subscribed to Club 3000 newsletter. Maybe you have too. Not long ago a contributor (he's been in there several times, don't remember his name, but it definitely wasn't Fred Montgomery) said he called the trading desk at Ira Epstein and got an answering machine. As I understand it, he was trying to put on a trade, or maybe he was trying to get out of a losing trade, and what he got on the other end was a recorded message. I couldn't believe it! When I read those words, Ira Epstein Co. was immediately crossed off as a broker, where I would ever be interested in opening an account. Also I came to the realization that it's possible criticism could have been bought off via regular advertising or maybe scared away, as in a lawsuit, so it was possible we would have never seen that letter. Would send you a photostat of that letter, except to do so would be breaking the law. Just like "Ray Simpson" broke the law. Unless he's a subscriber, Fred Montgomery's letter was never suppose to come before Epstein's eyes. CTCN is confidential, closed-circuit for members only. What somebody doesn't like, or even want to know about these little insider tidbits, are one of the reasons we subscribe. As I see it, Epstein's use of the word "publication" is a bit of a stretch. CTCN is more like a bunch of old boys chewing the fat at the corner service station. Anybody can say anything, because what is said never goes outside the group. The outside world never knows or cares what was said or isn't suppose to anyway. Perhaps you've already taken care of this, but Commodity Traders Club News should be a separate corporation, completely divorced from any of your personal assets or trading accounts. CTCN's assets should be described, such as printing press, rented room, etc. Listen to me, I'm a high school graduate.

How to Trade Successfully Mike James from New Zealand To be a success as a trader, I believe that several things are important. A sound game plan is vital. It needs to define: a. A trading method with a positive outcome; b. A money management strategy, that prevents the drawdown that occurs from taking you out of the game; c. The psychological makeup to follow your plan faithfully.

128

I believe that investment success requires internal control more than any other factor. Unfortunately for them, from what I can see, most novice traders stop at point (a). Sure you need a game plan that gives you an edge, but more importantly you MUST control risk, but in my experience that can amount to naught unless you make sure you don't sabotage yourself (read, not follow your rules). So presuming you've got a trading method that your happy with, what's the next step. For a start I'd like to recommend a couple of books that I've found very helpful. If you haven't got them in your library, I'd suggest you get them. The first book is "Money Management Strategies for Future Traders" by Nauzer Balsara. For me, I found this a lot easier read and more practical than Ralph Vinces' two books. As well as chapters covering such ground as "Limiting Risk through Diversification" and "Managing Unrealized Profits and Loses". The Appendix (which occupy some 80 pages) not only gives computer code that can be used to calculate risk of ruin but also gives information on the correlation coefficient for 24 different commodities. This can help in portfolio selection to make sure that your open positions are not unbalanced by being, say for example short three different currencies at the same time. I would also strongly recommend the book the "Disciplined Trader" by Mark Douglas, which offers a lot of useful information on psychology, as well as another book I've just read, "The Inner Game of Trading" by Robert Koppel and Howard Abell. The "Inner Game" has several interviews with top traders that make the book worthwhile just for that fact alone. We've all heard the statistics. 95-98% losers. So here we have a business that is a zero sum game where the odds are, that at least 90% of people will loose! I'm sure if most of us were looking to start up a company in an area with a known failure rate of at least 90%, we would not go ahead in the same blithe manner that so many traders seem to. Don't be fooled. This is a serous business that requires dedication and discipline to succeed. Arm yourself with the best tools you can find and make sure your own personal amour has no weak points. I read somewhere that those who choose to trade subconsciously choose elements in their trading that not only complement their strengths, but will also confront their blind spots and weaknesses. Think about that the next time your stress levels rise because you neglected to follow one of your rules. What your trying to do on a subconscious level, is not necessarily gain financial reward but experiences such things as facing fear, self-worth and increase or decrease of personal power. We have the choice of confronting our blind spots to heal them and move on, or reject that process and switch trading system or broker, etc. You need to continually work on yourself. Just as markets change and must be adapted to, life itself for us as human beings is an evolutionary process. Hard, questioning self-analysis will go along way towards confronting our blind spots, to not only improve our trading results each month but also to enrich our personal life as we discover more about ourselves.

Trading Discipline - Ed Forys

129

I have found that the discipline problem is mainly one of exiting a trade. Therefore, before I enter the market, I know exactly what parameters will get me out. When that time comes, I exit the market, no matter what. A trailing stop helps a lot to automate the exit. I am not a "born trader" (most people aren't); this forces me to be a strict rule follower. I think Larry Williams once said that one of his main winning characteristics is that he could follow a mechanical system faithfully to the letter. While I am in the market, I don't change any of my rules to exit the market, especially if the trade is in a losing position. When the exit signal comes, very seldom have I been able to override the rules and turn the losing trade into a winning trade (more so when trading S&P). Sometimes, by overriding the rules, the losing trade becomes a big loser which one must absolutely avoid. It also helps me a great deal to have a panic message appear on my screen like "Exit Now! Trend has Reversed!"

Opinion on How Hillary Did It From A European Trader - Stuart from Sweden Per the article in March 94 CTCN titled "If Hillary Made Money In Commodities, Why Can't You?" As a non-American living overseas, I have to say that my instinctive answer is "Because my husband is not a Governor." I am not a jealous person, and I accept that Hillary is a highly intelligent women. But I simply do not believe that anybody, not anybody, can turn $1,000 into $100,00 in a year, and then stop playing the market. There simply has to be fraud in there somewhere; whether it's her, Bill, someone else or whoever. This neither interests nor bothers me, (although that money was stolen from the likes of you and me), nor does the reason for such fraudulent activity, unless it eventually erupts into a Presidential scandal, which will affect the markets. Surely nobody is naive enough to believe that she seriously made that money honestly, are they? If anybody is, what do you Americans know about politicians/lawyers that the rest of the world doesn't?

Precision Day Trading System - M. Kuhn I purchased Precision based on its great track record published in its brochure and the fact it had a moneyback guarantee. After trading it for a couple months, I came to the conclusion it was not profitable. I returned it for a refund. It took lots of effort and letters before I finally received my refund. However, I did in fact get the refund. In my opinion readers of CTCN should avoid purchasing this system as it is not profitable as it's advertising indicates.

Simulation - Playing What If - Verl Philliber

130

Don't you sometimes wish that we could take an early peek at the effect of today's price action? It may be helpful to know, for example, that today's price action will: • Generate a Swing Catcher signal for the next day's Open • Break a trend line on a daily chart • Generate a signal in an indicator, such as Stochastics Here is a way to use Swing Catcher's data management module to take a peek at the effect on today's action. 1. Gather today's intra-day data. Your broker can provide it, or you can use data from CNBC. 2. Starting at the Swing Catcher Main Menu: Press <7> Utilities/Update/Edit/Rollovers Press <F2> Edit/Update data Press <F1> Select file to edit Enter the number of your contract. This will bring up the Edit Screen. Press <U>pdate. Use the arrow keys to move the cursor, and insert values for Open, High, Low and Close (actually the last trade). Move the cursor to the bottom of the screen and press <R> return to menu. Now when you run your chosen program, it will treat the new data as if it were end-of-day. If the price action is enough to trigger a trade for tomorrow, you may want to trade before the market closes today. When you do your usual electronic download at the end of the day, most data services will simply overwrite the manual entries you made, so it's unnecessary to manually delete the intra-day data you entered. Using this technique, you can alter the entries throughout the day as prices change. You can also insert artificial prices to see what levels prices will need to reach before a signal is triggered. This might be useful in setting stops.

Special Treatment of Hilary So She MadeMoney Reprint with permission USA Today Hillary Rodham Clinton had some special treatment while winning a small fortune in commodities, a fourweek study by USA TODAY found. Hillary Clinton's brief but spectacularly successful career as a commodities trader in the late 1970's looks more and more like a story out of the Wild West. Like most Western yarns, it's filled with colorful characters, money, greed and shady dealings just this side of the law - and maybe a few steps beyond. At an extraordinary news conference, the first lady told her version of the story: "The fundamental facts are...I opened an account with my own money, I took the risk, I was the one who made the decision to stop trading." She denied knowledge of trading abuses by her personal broker, Robert "Red" Bone, or her brokerage firm, Refco Inc. And she denied receiving preferential treatment from Refco's Springdale, Ark., office. "There's really no evidence of that," she said.

131

But court documents, regulatory rulings and other records reviewed by USA TODAY, and interviews with brokers and customers in the Springdale, Ark., office where Hillary traded, continue to raise questions which she did not answer - about what she knew about Refco's trading activities, and when. USA TODAY submitted a list of detailed questions to Clinton. In her news conference, Clinton and her staff answered those questions but did not address all the details. Hillary says she knew nothing about any trading abuses in the Springdale office until months after she stopped trading with Refco. But records show many other Springdale clients, including her own investment advisor, longtime friend James Blair, knew about those questionable practices - and hoped to profit from them. Court records and her trading statements also show Clinton repeatedly received preferential treatment from Bone in posting margin. Those favors enabled her to avoid large losses in July 1979. By now, the main points of the story are well know. Between 10-78 and 7-79, Clinton made almost $100,000 trading cattle and other futures with Refco. Her timing was perfect. In late 1978, the cattle market embarked on a wild ride, as prices first soared and then plunged. Many Springdale traders, including Bone, a some-time professional gambler, made and lost small fortunes. For the most part, Clinton correctly called each turn. She was aggressive, even reckless, sometimes opening and closing trades in a single day. But in July 1979, she abruptly stopped trading with Refco. It was a stroke of apparent luck. In early October cattle prices collapsed. Springdale traders lost nearly $20 million. The Blair family lost $5.4 million, records show. A number of traders, including Blair, filed suit against Refco and its chairman, Thomas Dittmer, charging they manipulated cattle prices in the summer and fall of 1979, causing the October losses. Blair and Refco settled out of court. Records of the case were sealed. Arkansas juries ruled for the traders in several cases filed in federal court. Those judgements were later overturned on appeal. Clinton closed her Refco account in 10-79. She says now she was too rattled by commodities trading. But at roughly the same time, she opened an account with Stephens Inc., a Little Rock brokerage. Trading a variety of commodities, but not cattle, she made $6,498. She failed to pay taxes on those earnings until recently, when she paid $14,615 in federal and state taxes and penalties. In May of 1980, she left the commodities markets. Clinton credits Blair for much of her success. "I trusted Jim Blair and it worked for me," she said. At the time, Blair was the main outside lawyer for Tyson Foods, one of Arkansas's biggest firms. He is now Tyson's general counsel. He is also a long-time activist in the Democratic party, and a donor to Democratic candidates, including Bill Clinton. Blair's role has proven sensitive. While Clinton was trading with Refco, her husband was state attorney general, then governor. During Bill Clinton's time as governor, Tyson Foods received at least $7 million in state tax credits. Records from the Springdale office also show that in 1978 and 1979, Tyson was one of the office's biggest customers, trading through three corporate accounts. In 1977, Bone, a former Tyson executive, was barred from trading for a year by the Commodity Futures Trading Commission after a probe of manipulation in the egg futures market. Similar penalties were levied against Tyson Foods and its chairman, Don Tyson.

132

Hillary disclaimed close ties to Tyson. White House officials say she was not aware Tyson was a customer in the Springdale office. Tyson officials deny receiving any special favors from Bill Clinton. Numerous efforts to reach Bone were unsuccessful. In interviews with The New York Times and The Wall Street Journal, Bone has denied any wrongdoing. But court documents contain extensive testimony from Bone and other figures. Some specific allegations in those records: Price manipulation. In 1983, Blair testified he believed Refco and Dittmer were manipulating cattle prices during the time he advised Clinton. He said Refco brokers and customers, trading together, "helped" move cattle prices, in part by controlling delivery of live cattle to market. "They wanted to see the market go up or see it go down. There wasn't any money to be made if it didn't move," Blair said. During that time, Refco and its customers accounted for up to 40% of all cattle contracts traded on the Chicago Mercantile Exchange. Dittmer had sizable ownership stakes in cattle feed lots in Texas and Kansas. Refco and Dittmer have denied any manipulation. But they, along with Bone, were disciplined in 1979 by the exchange for repeatedly violating exchange rules and reporting requirements while trading cattle in 1978 and 1979. The exchange levied a $250,000 fine against Refco, then the largest penalty ever imposed on a broker. Bone agreed to a three-year suspension of his right to trade on the exchange. Trade allocation. Court evidence shows Bone and other Springdale brokers routinely placed trades in Refco house accounts, then distributed them to specific customers. Brokers and customers, including Blair, said trades often weren't allocated until after the mercantile exchange closed for the day. That's a key point. Testimony shows Springdale brokers often executed large "day" trades, a purchase and sale the same day. By waiting until after the market closed, they would be able to tell which trades were winners and losers - before allocating them to customers. For that reason, block trading is closely watched by regulators. Holding trades until the end of the day is, and was, forbidden. Blair now denies favoritism by the Springdale brokers. But David Jeffrey, a dentist who traded in Springdale during the same time as Clinton, raised the issue in a suit against Refco, and in a complaint he filed with the exchange against Dittmer, Bone and Jack Musteen, a Springdale broker. "After the trading sessions...orders were allocated to various accounts," Jeffrey charged. "In this way, defendants were able to illegally control the profit and loss characteristics of each account." In 1983, the exchange ordered to Refco, Bone and Musteen to repay the $27,000 Jeffrey claimed he lost as a result of their actions. His lawsuit was dismissed in 1986. Backdated trades. Two Springdale brokers, Bill McCurdy and Steven Johns, testified they participated in a cover-up of block trading in the Springdale office on a particular day in the summer of 1979. The pair were testifying as friendly witnesses for one of the investors who claimed he was defrauded by Refco. The brokers claimed they were told to lock the office doors after the market closed, set back the clocks used to time stamp trader orders, and prepare phony customer order slips that could be substituted for the block orders actually placed during the day. According to Johns' testimony, the date in question was June 27, 1979 - the day Clinton opened a trade that eventually would earn her $43,760 - her single most profitable commodities trade. It is also one of three days for which the White House says it can't locate Clinton's daily trading statements.

133

Johns and McCurdy refuse to discuss the incident. In their testimony, the two did not specifically claim winning or losing trades were back-allocated to specific customers. Margin Waivers. Court testimony shows Bone frequently waived margin calls for certain customers - in effect, loaning them money to maintain their accounts. Clinton's records show she was repeatedly allowed to avoid posting margin, including on her June 27 trade. That shortfall peaked July 12, when her account showed a $61,000 loss. Under Refco's rules, she should have been required to add $92,364 to avoid having her account liquidated. Records show no deposit. By waiving Clinton's margin call, Bone made it possible for her to wait until the market turned back in her favor. Ultimately, she made a profit of $24,631 on her trades. Violations of account agreements. At her news conference, Clinton denied Bone could have allocated trades to her, because her account was non-discretionary, Federal and exchange rules require brokers to get customer approval before trading in non-discretionary accounts. But numerous customers and brokers testified that Bone ignored restrictions on non-discretionary accounts. Blair said Bone often placed trades in his non-discretionary account without permission.

Validity of Seasonal Trading John van Laar from the Netherlands I have always been interested in seasonal trading. I have bought Frank Taucher's Almanac every year. He claims good results, but there are so many trades in it. In his 1994 $upertrader's Almanac, there are 580 outright seasonal trades, 207 intra-market spreads, 389 inter-market spreads and 240 exotic spreads. If you want to have positive results, you have to trade all the recommendations. You have to be a trader for a living to follow his recommendations and you need $100K for margin and drawdowns. A method to reduce these hugh amount of trades is to filter the trades. Maybe there are members who use this technique. I'm interested in hearing from these traders. A far better system of seasonal recommendations is the Moore Research Center, Inc., who publishes the Moore Research Center Report. This is a monthly report with seasonal recommendations - spreads and outrights. In this 60 to 70 page report, Moore gives trade recommendations and articles about trading, trading techniques, etc. What is the most important: he gives reviews of last month's trades, with per trade the trade equity, peak equity and the largest drawdown. He has fixed entry and exit dates. In his review of the latest month, I controlled, he used the close of the day. I have purchased two reports April and November 1993. The results are: April 1993 - Review of the last month's outrights: 36 trades: Closed 13 and Open 23. 13 trades Trade equity: $11,229.70 (without commission etc.) Largest drawdown $460. Review of the last month's spreads: 38 trades: Closed 16, Open trades 22. 16 Trades equity: $9,475.75 (without commission etc) Largest drawdown $2,710 November 1993 - The numbers are outright: 43 trades: Closed 16 and Open 27. 16 trades equity: $3,699.30. Max. drawdown $1,887 - Spreads: 41 trades. Closed 14, Open 27. Trade equity: $5,044.10. Max. drawdown $1,240 You see these are good numbers for the two random months. I am not trading this year. Next year I hope to have time available to trade and will subscribe to the Moore reports and see how the results are for a whole year. If the numbers are good, I will follow the recommendations.

134

Perhaps my trading system can help fine tune the entry and exit dates. Maybe someone out there has experience with this matter of fine tuning? I agree with Ed Forys in the June issue of CTCN, that there is much garbage in seasonal recommendations. I think the Moore Institute is a good exception. Last remark - I don't have any connections with Frank Taucher or the Moore Research Center.

Editor Comments Thanks to John Hill for his two contributions covering Dr. Greenwald's System and his comments on Russell Sands and curve-fitting. There is no way CTCN can tell for sure if Futures Truth performance reports are 100% exact and accurate. However, John Hill and George Pruitt are very highly regarded and are extremely honest. They also try to do as careful a job as possible in tracking all those systems and compiling their reports. Keep in mind their job is very difficult and complex and they do an excellent job under difficult circumstances and with a small staff. In reference to John Hill's remark that all systems are in fact curve-fitted. I also believe that to be correct. It seems to me that there really is no way to design a system without a knowledge of past prices or past patterns. As a result, a certain degree of curve-fitting is inevitable. However, if CTCN Members differ with that opinion, they are invited to share their opinion with all CTCN Members. Subsequently we can all benefit from an exchange of ideas about the important subject of curvefitting. About Wayne Roberts contribution covering Ira Epstein and CTCN confidentiality. I called Mr. Ira Epstein about it and he has a very good reason and explanation for the so called answering machine. His reasoning for it makes a lot of sense to me and his detailed explanation will be published in the August edition of CTCN. Reference CTCN confidentiality, Wayne is absolutely correct. The opinions and statements made are for members only and NOT for the general public. Ed Forys made an important contribution. Yes, you should never change the rules while a trade is in progress. Your Editor and many other traders have unfortunately in the past deviated from that advise, which then resulted in larger losses. For example, canceling or changing a stop-loss order to a greater stop, because the original stop is close to being hit, on the belief the market will soon go your way. Doing that almost always fails and results in a small loser becoming a large loser, sometime becoming a disastrous loss. Reference Mr. Kuhn's opinion of Precision. He is very fortunate that he received a refund. Most trading systems do not have a money-back guarantee if dissatisfied or unhappy with it's performance. There are many reasons for that, including the fact there's usually no way to tell for sure if the system was actually removed from the buyers computer, plus the costs of filling the order, sending it out, and the support and other expenses involved. In addition, all systems, regardless of their prior track record or their cost, have losing time periods and drawdowns, which can sometimes last for a number of weeks, or even several months. It's always possible a newly acquired system entered a losing period about the time you received it, and consequently you may want a refund. Keep in mind, it may take 6-months to a full-year to properly evaluate a system. That's presuming you make every trade, rather than pick-and-choose, as most traders unfortunately tend to do.

135

Also, many system developers (especially non-blackbox systems) feel that once you know their algorithm and trading techniques, you were privy to confidential information that only system owners are entitled to. An Error Correction: Last month there was an article titled Five Vertical Bars by Kent Calhoun. It stated Donchian's 20-day channel breakout system made a buy when a market closed above the prior four weeks lowest low. It should have said buys were made whenever a market closed above the prior four weeks HIGHEST HIGH. It also should have also gone on to explain that sells were made when the market closed below the prior four weeks lowest low. Thanks to all who made contributions to this issue of Commodity Traders Club News.

Special Request - I ask that you please do us all a favor by making a contribution to the next issue of CTCN. Don't worry about your submission not being interesting or useful to Members...rarely is that true. Usually, most all contributions/submissions/articles are quite interesting and valuable to other traders, but the author usually does not realize the actual value of his knowledge or experiences. Issue 16. Opinion of TBSP Right Time Program - George Moldenhauer In response to the inquiry from Paul Diehl (June 1994 issue) concerning The Right Time Programs. I own the Right Time Index Program for stock index options (OEX). My experience with the program, which I have had for a couple of years, is less than favorable. In fact, I have kept an accurate signal log for both the OEX and XAU signals and they are a far cry from the track record that is frequently published in the many advertisements that indicate 10's of millions of dollars in profits. In many cases the dates of their transactions were dramatically different than what my records show. When I called the company for technical support, I was told that my data must contain errors (which I checked and that is not the case) and any further questions would go unanswered since I purchased the software from a third party software vendor. Basically, in my opinion, the ads for this software are hype, and somehow this organization seems to be immune from any disciplinary action that might stem from false advertising. Personally, I would not spend another dime on any product produced by this company. But I was able to make some use of the program. I run the numbers each day for several indices and use the support and resistance signals to switch mutual funds. A word of caution! The program will change the support on resistance signals if the market does not respond on the next trading day (i.e. if the software signals that support has been hit when you run the numbers for the close of a particular day. The next day must generate a positive net change close in order for that support signal to be valid. Otherwise the support signal could move from one day to the next which accounts for the dramatic results that appear on your historical graph). You can access the chart that shows support and resistance under the Review field and making the selection Graph Cumulative Data. I don't know how it might work for the futures program. You might want to experiment and do some extensive paper trading, before committing real hard earned dollars. On another subject: I am interested in hearing from anyone with experience with the Futures Market Analyzer program...especially the new version being offered on an annual fee basis. I own a previous version, that in real time, contains some serious flaws that will dramatically impact the hypothetical track record.

136

Why Was A System Not Mentioned in the S&C Magazine Readers Choice Awards...An Observation, An Answer, and a follow-up Article by Zoltan S. from Austria I would like to know why the Swing Catcher Trading System is not advertised in S&C Magazine. Also, I received the S&C Magazine Issue containing their Readers' Choice Awards, under the section titled "Systems: Futures Trading," I see Swing Catcher was not mentioned. Why is that? (Editor Note: In answer to the above, I faxed a reply to Zoltan similar to the Editor Comments articles about S&C Magazine in this month's issue. The new article printed below was subsequently received from Zoltan in response to that...opinions on this matter are invited from other members). I would like to submit my unbiased and independent opinion to you regarding your comments about your dealings with S&C. Technical Analysis of Stocks & Commodities is a well-known futures industry magazine and I find that you acted on behalf of the prospective customers of the system when you submitted your system to S&C for review. S&C, as a third party, if it prepares a system evaluation, needless to say, it should be unbiased and adequately informative. Errors found afterwards should immediately be corrected and published. Because the opinion of a well-known third party publisher is highly appreciated, the errors without prompt corrections can have serious consequences, first of all in futures trading. You mentioned that S&C promised and failed to publish an in-depth review. In the first place, the prospective customers of Swing Catcher have been negatively affected, for due to the lack of the review, maybe they could not obtain another third party opinion of the system; or they were not even aware of the system and may have bought another system that performs inferior to it. It is evident that in order to prepare a sophisticated evaluation of a computerized mechanical trading system, one should install all the program and see how it really works. Because, some systems don't work in real-time trading. Prior to real-time trading the system, the best way is to generate walk forward (out of sample) tests or to paper trade the system for a short while, in order to obtain a simulated "real time" performance figure, with no hindsight, based on a statistically significant number of trades. The system which they did not install, even allows testing on portfolio level. You mentioned that S&C prepared a Quick Scan review, containing errors and without installing the software and without immediate error corrections, so I think it's OK that you canceled all ads. I find it unfair that the ballots used for the S&C Readers' Choice Award, do not allow the readers to discretionary vote for a certain system, but only for the systems that use display advertisements in S&C. Right now, I have the 1994 S&C bonus issue in my hand. On page 69, the introduction to S&C Readers' Choice Awards states that "this listing represents products and services that S&C subscribers are using and/or find useful." There is no indication that the listing is limited to the advertisers. In addition, foreign subscribers were excluded from the voting, this is a pure discrimination, and reinforces the limited style of the S&C Readers' Choice Award. Therefore, the "novice" reader has the feeling that the systems not ranked in the S&C Readers' Choice Award perform poorly compared to the listed ones and are not worth future investigation.

Why People Do Not Make Money Buying and Selling Commodities - W. D. Gann

137

I have stated in my books many times the market does not beat you, it is your own human weakness that causes you to defeat yourself. The average man or woman nearly always wants to buy low and sell high. The farmer always wants to sell at high prices whatever he produces but he wants to buy what he needs at low prices. The laboring man wants high wages all the time but wants low prices for what he buys to eat and wear. This is a violation of a fundamental economic law and it just will not work. To make a success in speculation, you cannot expect to buy low and sell high. You will make money when you do exactly the opposite of what the average man or woman wants to do or tries to do, and makes a failure and loses as a result of what they are trying to do. You will make profits when you learn to Buy High and Sell Low. You must learn to follow the trend of prices and realize that they are Never Too High To Buy as Long as the Trend is Up and Never Too Low To Sell as Long as the Trend is Down.

Why a Broker Can't Always Answer Phone if Busy and Uses Alternative - Ira Epstein In reviewing a letter from (CTCN Member) Wayne Roberts (in July issue), I saw that Mr. Roberts said he "couldn't believe it" concerning the fact that at Ira Epstein & Company, what he got when he called was a recorded message. This deserves a full answer. At Ira Epstein & Co. we have sophisticated computerized telephone equipment that places customers into a "Call Que" if all of our order clerks are busy. An example of this happened this morning, July 29, 1994, when the GDP report came out, the markets went into fast conditions. The telephones at our company lit up and virtually every single order clerk was on the phone taking orders from clients. What happens to someone that calls in while our clerks are on the phone? At Ira Epstein, the caller is told that all clerks are busy and that their calls will be answered in the order that they were received. Our computers will then place calls, in the order that they came in, with the order desk. This prevents favoritism and should prevent any client from thinking that he is not being handled in a prompt manner. Additionally, in the few times that a client has to go into the "Call Que", he will hear live quotes on the markets and will also hear what reports, if any, came out and reaction to it. I don't know of any other firm that operates this efficiently. After market hours we have voice mail on our trade desks so that our accounts are able to place orders. We will take that order, via the clients instructions from our voice mail, and place it for them in the proper market. Again, this is an extra service that is offered. If any of your readers believe that they can deal with any brokerage firm that will be adequately staffed to answer all phone calls from all accounts at one time, they are kidding themselves. The questions become one of how to balance the resources of the firm while offering fair commissions, and a high level of service. We have done this and done this efficiently for our cliental. Rather than the old method of grabbing a phone and shouting into it "Hold On" and then finishing with the original caller and having the clerk trying to remember who he just spoke with, we beat that chaos. This benefits the clients, the clerks and offers a high level of efficiency. As for the rest of Mr. Roberts questioning as to what your CTCN does, I will not answer that. He seems to believe that CTCN is a "confidential, closed-circuit for members only." I do not know if he is right or wrong on that. What I do know is, if somebody is going to publish a fact they should research it and at the very least, hear the other person's point of view, so that the other members do not get a jaded point of view from one sour apple that may not fully understand a procedure. I think that is

138

what the benefit of CTCN is to its members and subscribers. Wrong information or only partial information may not be what they are looking for.

Did John Hill (Futures Truth) Benefit From My "Stolen" Key to Currencies System - Gerald Greenwald John Hill says that initially, they "back-engineered" my system Key to Currencies Software. Then he "received" an anonymous copy of my program logic from "someone" who had also back-engineered it! My maximum drawdown trading the basket of the 4 currencies was about $11,000, over the 15 years of testing. He says "we have always told vendors to show us where we are wrong and we will immediately correct them." I told him, he failed to correct! He says, "if something is sold to the public, (he) believes Futures Truth has every right to publish results, irrespective of how the methodology comes to us." From a "professional" like John Hill, I have never heard nor would I expect to, such a totally unethical, immoral posture. In effect, he's admitting to having accepted my stolen property (which is copyrighted) and to having resold it for his personal benefit. Because of its enormous profitability and popularity, I took "Key to Currencies Software," priced at $85,000, with liberal terms available, off the market on July 1. However, due to interest sparked by CTCN's readership, I will answer inquires from CTCN people. Don't worry, John, I'm enjoying my life, wife, kids, retirement, etc. too much to sue you right now.

Are Systems That Use Different Parameters or Only Trade A Limited Number of Markets Curve-Fitted - Russell Sands Although it is a definition of technical analysis, I do not agree with John Hill's suggestion that simply taking past data and using it to forecast future results is a generic definition of curve fitting. In my mind, curve fitting means either using different systems for different markets, or using different parameters of the same system for different markets, and this is not valid technical analysis. Historical testing via computer means inputting a set of numbers (high, low, closing prices), and receiving back an output set of rules that hopefully will make money trading. The numbers themselves do not have names, and the computer doesn't recognize the difference between 'Beans' or 'Bonds'. For a system to be valid, it must work on all numbers tested, not just those with certain names and not others with different names. If a system works on Cattle, but not on Beans, this system is curve fitted over a specific set of data (Cattle) and it loses all statistical validity. To believe it will work in the future as it has worked in the past is very dangerous. Also, different markets do not have different personalities. Again, they are reduced to just being a set of numbers or a bunch of algorithms. If a channel breakout (or any other) method is successful, then the same parameter must be used for all the markets, for the same reasons as above. You cannot use a 20-day channel in Silver and a 40-day channel in Corn, this also falls under the crime of curve fitting. I therefore take exception to any system, Futures Truth tested or otherwise, that either only trades one specific market or group of markets, or trades different markets using parameters or rules of the same system. All this proves is what has worked best in the past, and this will usually not continue to work in the future, as there is no correlation under this scenario.

139

This letter is not specifically written to condemn vendors, or Futures Truth itself. This is a clarification of my definitions of 'optimizing' and 'curve fitting', and a warning as to what types of trading systems may be valid and what to stay away from. Let me close by emphasizing that these are not my own opinions, but were the opinions taught to me by my two very famous 'market wizard' mentors, who based on their own long records of success, obviously know what they are talking about.

Headlines Can Be Traded Profitably, With No Knowledge of Past Prices - Edward Forys Regarding the statement (made by John Hill of Futures Truth) "There is really no way to design a system without a knowledge of past prices or past patterns", I would like to submit the following: I used to trade newspaper headlines only. The way it worked was this: every day, I would check the headlines in a major daily newspaper (LA Times). I would also check for major breaking stories. I would look for unexpected events which would catch most traders (and people) by surprise. For example, the Tylenol scare, Valdez oil spill, large plane crashes, invasion of Kuwait, etc.* The reason I did this, was that in the past, I had observed that almost every time there would be an immediate reaction and it was generally an over-reaction. I would track the price forward from the time of the event and when I thought the time was appropriate (my judgement call), I would fade the action (go long after bad news and a decline). Inevitably, the price would return to its original price (or almost, sometimes higher) before the event and I would get out with a profit. This worked great and I won almost every time (if price did not move at all after I got in, I would get out with only a tiny loss). The biggest problem I had with this system was that it was very boring waiting for the next news break. It was almost like what I heard a pilot say about flying an airplane, hours of boredom occasionally interrupted by moments of terror. Another problem was sometimes entering the market too soon, especially if it was a commodity (too much leverage); then, I might have to endure a paper loss while waiting for price to recoup. Now, assuming that this is indeed a system, my question is this: Is this a curve fitted system? When I entered the market, I had little knowledge of past price history or fundamental knowledge of the company or industry or commodity. I had to know the current price to figure out how many shares to buy. If it was a commodity, I had to know what the margin requirement was to figure out how many contracts to buy. Since I did not look at a chart, I had no idea of what patterns might be there. Was this system subjective or objective or a blend? I did not use a computer or any fancy indicators, I just tried to use common sense and the observation noted above. The main reason this system worked, I figured, was that it was taking advantage of human nature to sell (erroneously) on bad news. Others might say that it was the specialists (floor traders) controlling the market by using the news to their advantage. (Is that why major news breaks are released to the floor before the public?) *Even the cold fusion announcement was no exception; after going straight up, palladium eventually returned to its original price. I did not fade this particular move because with an engineering background, I felt the risk was much too high. If cold fusion proved out to be true, (I didn't know enough physics to figure out if it was true) the price of palladium would have gone through the roof, the whole world would have been affected (dirt cheap energy) and I would have been stopped out with a loss.

The Trend is Your Friend & Standing Aside If System Performance Declines - Steve Neslen

140

Many thanks for your publication of CTCN, and your related products and services. You have proven yourself to be someone of integrity. I have been an active futures trader for the past two and a half years, and have been almost exclusively a short-term position trader. Since following my system's recommendations almost exclusively since March 1994, I have been able to record a moderate success for the first extended period (four months ended June 1994). As an observation, two factors stand out as contributory. Firstly, my system's utilization of profit targets, and my discipline using them, (I have found MIT orders to be most effective, as many exchanges do not accept OCOs). Secondly, I note the existence of several clearly trending markets (notably, crude oil, copper and bean oil). I am reminded of a cliche offered by one trading guru or another, "at some point one realizes that the trend is your only friend." In view of the difficulties I encountered during the last two weeks of July 1994, and the present lack of clearly trending markets, I must agree with this guru's sentiment. So, perhaps this is one of those periods in which one is well-advised to sit on the sidelines and await further developments. As I look back over the previous two years of learning experience, I note that had I known enough to 'sit out' several very choppy periods, I would have fared much, much better. Perhaps the existence of only two 'highly ranked' markets recommended by my system could be thought of as an indicator that the commodities markets generally are in one such choppy period. So, for the present I shall sit and wait. Also, I have recently developed an interest in learning more about day trading currencies, particularly in view of the difficulties presented by Globex and night trading. If anyone has information or advice regarding any of the currency day trading systems currently on the market, I would appreciate hearing from you through CTCN. Note: I am particularly impressed with claims made by Michael Gent for his Recurrence III and IV systems, but have no information from independent sources.

Mid-Am based data can replace Globex Data - John Bowley As many of you may be aware, Evening and Globex data are not used (or recommended) by various trading systems. This (night) data is usually combined with day data by exchanges and reported. If your data supplier does not supply day only data, it is suggested that Mid-Am mini-contract data be used, (as a substitution for Globex/Night data) since they have no evening session. For example, developers of ROCM and another Trading System I use both agree that it should be OK to trade Bonds and Currencies with either regular or mini-contracts.

How To Control Broker Order Accuracy - Carl Iverson Here is a simplified method I use to control broker order accuracy. Before I call my broker, I write the following on an 8-1/2x11 sheet of margin ruled paper: At the top center, I write my account number. In the body, I write the order information (buy or sell, quantity, exchange, contract month, commodity and price or action). Some of this information, i.e. exchange, isn't necessary in this case - but when it is, there is no question about which commodity I want. Then I call my broker and give them my name and account number. I then wait until my broker responds. That way I know that they are ready for the order. Next I read the order. This insures that I don't say buy instead of sell or forget some important data. The sequence of this information (buy/sell, quantity, exchange, etc.) is the sequence preferred by the brokers and thus further reduces the potential for error.

141

When the broker repeats my order information, I don't have to think about what I've said. Instead I just visually check their confirmation against what I have written. In the margin, to the left of the ruled line, I place the type of order, date, time, broker's name and broker assigned ticket number. If I was dealing with large lot sizes or if I was placing my first orders, I would also tape record my order placement. As soon as I hang up the phone I would replay the conversation and check my broker's confirmation against what I had written. When some type of action has occurred to the order, I write this information to the right of the vertically ruled line. If the order is filled, I note the price, date and broker. If it's an expired day order, I write expired. If I cancel the order, I so note along with the date, time and broker. The important point is that each order must at some point had action taken. This is especially true with GTC or good until canceled orders, which if not canceled could cost you a lot of money. This format enables you to quickly spot any incomplete order status. It also makes it easy to insure that sell orders are covered by buys and that all quantities are accounted for. I keep all open orders in a 3-ring binder. Once complete, they're removed and filed. Also, I prefer not to chit chat with my broker when giving him orders. Distractions can lead to errors on their part or mine. If you must shoot the breeze, wait until after you've received and checked your confirmation.

Astrological Forecast Follow-Up Request - Steve Gibson Looking back at the (astrologically based) forecast made by Carol Murphy in the May issue, I see that she started out fairly well. Perhaps you could drop her a line and tell us something about how she made it? Who knows? Maybe someone has an idea on how to improve it! (Editors Note: I did, I sent a copy of this letter to Carol and asked her to expand upon it in next month's CTCN).

P&L Report on Futures Truth's Universal System & Why Did Its Performance Decline & A Simple System I Propose that May Not be Doomed to Fail - Vern Nord As I looked over the June/July issue of Futures Truth, I noticed they added Futures Truth Universal LT while still keeping the old Universal System. The Universal LT System is long-term and does not trade as often as the Universal System. The Universal LT System appears in both the Top 10 Since Release Date and the Top 10 for the Past 12 months. I want to stop here and say that my comments are not made to criticize Future Truth, John Hill or John Fisher in any way. I merely want to point out general problems with all system testing. In the December 92 issue of Technical Analysis of Stocks & Commodities, John Sweeney wrote a review of the original Universal System, he said "Well, who would know better how to put together a system? Futures Truth, headed by John Fisher, has seen the guts of many systems and monitored their performance for more than half a decade." I personally would agree with this statement and Futures Truth tested this system on 22 different commodities over a 9-year period. John Sweeney said that results for all 17 commodities across all nine years were uniformly in the black.

142

Futures Truth optimized 5 parameters for each commodity to obtain these results, but they were unable to find any set of parameters which were profitable on New York Futures Exchange contracts, cotton, gold, cattle and lumber. If Futures Truth couldn't find a system that's profitable on every commodity, then maybe system hacks like myself should stop looking for a system that does it all. About a year later, Futures Truth showed a detailed report on Universal with the results on the best six commodities. The report showed a total profit of over $520,000 for the six commodities over a 10-year period from 1-83 to 4-30-93. If you were looking to buy a system that would make you $50,000 a year, so you could quit your job and enjoy the good life, you would be disappointed. For the last 12 months, this system has been loosing money overall. This is typical of all systems, and this is why so few systems show up on both of Futures Truth lists. Very few of the Top 10 since release still show up on the Top 10 for the last 12 months, and the reason is that commodity prices are non-stationary. Any type of system is doomed to fail. The only question is, how soon will it fail. It is like someone said recently, "It is the only game where they keep changing the rules and nobody tells you." Now that I have said that, I would like to suggest an exception to the rule. The one possible exception would be a simple system based on relative strength similarly to the one used by Timers Digest on the DJIA and Fidelity Select Funds. Take the concept of relative strength and rate all commodities compared to the CRB Index to come up with a list from strongest to weakest. You could buy the 2 or 3 strongest commodities and sell the 2 or 3 weakest ones. Add some money management rules and a trailing money management stop of $400 to $500 and you are in business.

An Opinion Trend Index Products Should Not Be Covered in CTCN & Other Improvements - George Bashar I have been receiving CTCN since the early part of this year and have found several of the articles interesting. However, I would like to make some suggestions to improve the newsletter. You should include some guidelines in this issue as to what should be acceptable contributions and what should not. Also, your position as editor should take into account some of these suggestions. First of all, enough already about Hillary!! Anyone who has been trading commodity futures for at least a month knows how Hillary made her killing, and knows that it was not due to her expertise with respect to fundamentals or charting. She and slick Willie were given a gift by Tyson Foods camouflaged as trading profits in return for favors when he became governor. Clear and simple. Why waste any more valuable space on this matter? Secondly, I feel that you should refuse all commentary on your Swing Catcher system in CTCN. You should keep the promotion of Swing Catcher totally separate from the objective and impartial views in CTCN. If anyone needs references before buying Swing Catcher, they should be provided separately, not as part of CTCN. This policy would heighten the credibility of both Swing Catcher and CTCN. Finally, since we are all traders, or presumably would not be interested in subscribing to CTCN, why not aim to get more of a discussion of subscribers experiences with books, newsletters and most importantly, systems that work or do not work. This would be the greatest service CTCN could provide to its subscribers - keeping them from wasting their money on some of the worthless systems that are out there being hawked as the latest Holy Grails. I have enjoyed CTCN so far, up to a point. But, it has gotten somewhat repetitious lately. I know that you put a small request at the end of each newsletter inviting contributions to the next newsletter. Perhaps if you made the request more explicit and explained in more detail what types of submissions would be welcome, we could all benefit more from future issues.

143

Suggestion CTCN Has Ongoing Trading Contest & Test Systems - Phil Baker I would like you and your subscribers to talk about any filters they use in their trading that keeps them out of a lot of whipsaw losses. I would also like your subscribers to talk more about how they trade and about the different trading systems they use and less about, I bought this system and it's no good or I bought this system and it's the greatest system ever. Because everyone has a different opinion, so if anyone wants to talk about trading systems, talk about how it signals trades and how you use it. I have also read and heard about using Gann lines to forecast a change in trend when two Gann lines cross. I would like to know if you know anything about this and if you do, which Gann lines should one use to forecast intermediate change in trend? Because there are so many Gann lines, that if you used all lines there would be Gann lines crossing at least once or twice per week. I also have an idea that could possibly get more interest in your newsletter and get more subscribers involved. I got the idea for a contest from articles I read in investing magazines and newspapers. So I think you should have a contest where you publish a different commodity every one or two months and set a 2-4 year time period and let interested subscribers enter. They would test any system or trading method they want to and enter it in the contest. They must show how they got their signals and how the system works and also show profits-losses, and trades taken. You could then show the top 5 or 10 systems in your newsletter and you or your subscribers could pick the winner. The winner or winners could get a certificate suitable for framing or 6-month free subscription to CTCN. I think it would really help a lot of traders, because they can see how others trade, I know it would really help me.

How I Solved My Computer Fax/Modem Problems - Chris Ongley Two years ago, I bought a new 386-33 computer with hard drive, for both DOS and Windows programs. Six months later, I added a Fax/Modem Card. I started to receive a daily fax from my broker. Initially, no problems, but as time went by, I started getting problems. The computer would answer the phone to start the fax communication sequence. However, the sending computer and my computer failed to communicate and would then timeout. By the end of 1993, my fax success rate was down to 20% or less. This also included sending the board back to manufacturer and many discussions with the fax/modem manufacturer and the phone company. At the same time, I had bought a trading program which would not work on my machine. After much discussion with the programmer, it came down to the bios in my mother board. My machine came with MR BIOS. I then upgraded to a 486 mother board with AMI bios. This solved my software problem and my fax/modem board has worked perfectly everyday now for 2-1/2 months. If you are in the market for a new or used computer, I would recommend making sure the mother board has the AMI Bios. On a different subject: Has anybody had dealings with Jules Greenstein from California, who has been promoting his trading system Prime/Line? Please let us know what your results and comments are.

Pocket Quote Pro Review - Don Good I'm replying to Paul Diehl's request regarding Pocket Quote Pro. I have been using PQP for over a month. I purchased it as it was, by far, the cheapest method of obtaining both real-time and delayed quotes.

144

The "real-time" quotes rarely jive with the "real-time" quotes I receive by phone through 1st Americans InfoLine. However, they are usually within 1-3 ticks of each other. PQP's keypad is electronic and I find it harder to use than if it had buttons. The biggest problem I've had with PQP is that it's not really portable. I got it as I often have to travel during market hours and I wanted to keep tabs on the market. Even though I live in an urban area and PQP's FM transmitter is near by, I find the PQP is rarely able to pickup the signal. So for all practical purposes, it's worthless on the road or in various locations, other than my office. I was able to get it to receive signals in one location by moving the antenna to various locations and finally getting it to work in a convenient location on my desk. Therefore, PQP is still the cheapest way to obtain quotes, just don't expect to travel with it.

Editor Comments Several years ago Technical Analysis of Stocks & Commodities Magazine said they wanted to do a detailed full review of Swing Catcher Trading System. It was to be for the benefit of both their readers and prospective buyers of the software. It was sent to them via Federal Express, plus some updates, but the long ago promised review never appeared. After waiting patiently for almost a year, they were (politely) asked about the long delay. I ended up speaking to three top officials there (Thom Hartle, John Sweeney, and Jack Hudson). Pointing out to them the promised Full Product Review was for the benefit of their readers and also improves the quality and value of their magazine, did not dissuade them from refusing to do the review. In fact, they would not even give the reason they did not and would not do the promised Full Product Review. How Can A Review Be Done Without Actually Running the Software? They did in fact do an earlier so called "Quick Scan Review". However, is was far too short and poorly detailed to be very helpful to their readers and it also contained some errors. It turned out the errors and shortness of the review may have been attributable to them NOT actually installing the software on their computer! Instead, they did the review based 100% on simply reading the trading system manual and the accompanying advertising! Even though they had the actual software disks, they chose not to install them because I was told it was easier for them, compared to actually running the program. Last Year's S&C Magazine Readers Choice Awards Ended-Up Biased & Discriminatory As to why certain products seemingly received no votes and therefore were not ranked in the S&C Magazine Readers' Choice Awards. A few months ago I called them about that and asked them why some well known and good products apparently received zero votes. I also pointed out it seemed very strange Swing Catcher System received no votes in view of the fact it received many votes and was rated as the number one system in a Futures Magazine Readers Survey! The answer they gave was very disappointing. I was told at that time they used ballots that only contained the names of systems and trading products that were doing display advertising in their magazine. In other words, a product may in fact be the most popular or "best" product but merely because they were not advertising it in S&C Magazine, it was purposely not listed on the ballot and therefore received no votes!

145

Their methodology was even more alarming in view of the fact most products do NOT in fact run display ads in their magazine. That results in the large majority of products being in effect eliminated, in favor of the small number of actual advertisers. As a result of their voting method the S&C Magazine Readers' Choice Awards were unfair and misleading to the trading public. However, I am sure they did NOT deliberately intend to mislead anyone as their overall reputation is very good. However, last year's Readers' Choice Awards survey results are suspect and of only limited value to their readers and the trading public. It would be extremely difficult for a trading product/service to receive any votes if it is not listed on the ballot! Is there any chance a politician could be elected if his name was not on the actual ballots...of course not! I have personally talked to a number of traders who told me they purchased certain trading products based to a large degree (or even based 100%) on the fact that a certain product was ranked number one, or ranked highly in the S&C Awards. I have also talked to traders who decided against buying certain products because the product/system was NOT listed in the Awards rankings, as a result of getting no votes in its category. (Note: see last paragraph of article by Zoltan on page 2) These traders were totally unaware that last year only display advertisers were on the ballot. There very possibly could have been several other trading products (non-advertisers) that would have been much better or more useful, etc., than the product they purchased. Unfortunately, they did not know how severely limited the S&C Awards were and purchased under the belief they were truly buying the number one or a highly rated product. Or alternatively, did not buy or even consider another product or system because he was under the impression it was no good due to getting no votes. Today, I called S&C and was told they have changed their policy and now include non-display advertisers. They have also greatly expanded the products listed. For example, the number of qualifying trading systems has expanded to 25 this year on the ballot included in their August 1994 issue. I was also told those results will be published in their December 1994 issue. This subject demonstrates how awards and rankings of products and systems can not always be relied upon, regardless of the credibility or reputation of the source. However, S&C Magazine is to be congratulated for greatly improving their ballot and voting methodology, compared to the previous year. About John Bowley's article on substituting Mid-Am Exchange data for Globex/Night data. That can be done. However, it makes more sense to switch data vendors and go to a data vendor that does in fact supply day session only data from the major exchange, not Mid-Am. Reference the suggestion from George Bashar, that articles referring to Swing Catcher be prohibited. There is really no conflict of interest. In fact, only 3% of past articles were about the system, and they were written by Club Members, not the System Developer/Editor. However, I fully agree with George that it would be best if that was done. Especially from a credibility standpoint. Therefore, we will try hard not to publish articles from CTCN Members referring to it. Especially, if the article is not relevant to non-owners of the program. Sometimes a Member may want to discuss important money-management or methodology issues, and he may refer to the system in his article. If that's the case, I will usually delete the system name from the article. In fact, I have done that (whenever possible) in this issue and will do that even more starting with next month's issue. About all the Hillary articles...George is right...enough is enough...no more about Hillary! Thanks to all who made contributions to this issue of Commodity Traders Club News.

146

Issue 17. Stocks & Commodities Magazine - Z. S. I would like to submit my unbiased and independent opinion to you regarding your comments about your dealings with Technical Analysis of Stocks & Commodities Magazine in last months CTCN, August issue. S&C is a well-known futures industry magazine and I find that you acted on behalf of the prospective customers of the system when you submitted Swing Catcher to S&C. S&C, as a third party, if it prepares a system evaluation, needless to say, it should be unbiased and adequate informative. Errors found afterwards should immediately be corrected and published. Because the opinion of a well-known third party publisher is highly appreciated, the errors without prompt corrections can have serious consequences, first of all in futures trading. You mentioned that S&C promised and failed to publish an in-depth review. In the first place, the prospective customers of Swing Catcher have been negatively affected, for due to the lack of the review, they may be could not obtain another third party opinion of the system or they were not even aware of the system and they may have bought another system that performs inferior to it. It is evident that in order to prepare a sophisticated evaluation of a computerized mechanical trading system, one should install all the program and see how it really works. Because, some systems don't work in real-time trading. Prior to real-time trading the system, the best way is to generate walk forward (out of sample) tests or to paper trade the system for a short while, in order to obtain a simulated "real time" performance figure, with no Hindsight, based on a statistically significant number of trades. The system they did not install even allows testing on portfolio level. You mentioned that S&C prepared a Quick Scan review, containing errors and without installing the software and without immediate error corrections, so I think it's OK that you canceled all ads. I find it unfair that the ballots used for the S&C Readers' Choice Award, do not allow the readers to discretionary vote for a certain system, but only for the systems display advertised in S&C. Right now, I have the 1994 S&C bonus issue in my hand. On page 69, the introduction to S&C Readers' Choice Awards states that "this listing represents products and services that S&C subscribers are using and/or find useful." There is no indicating that the listing is limited to the advertisers. In addition, foreign subscribers were excluded from the voting, this is a pure discrimination, and reinforces the limited style of the S&C Readers' Choice Award. Therefore, the "novice" reader has the feeling that the systems not ranked in the S&C Readers' Choice Award perform poorly compared to the listed ones) and are not worth future investigation. CSI Data - Matthew Chiang I switched to CSI data service a few months ago. Compared to my previous source (Genesis), CSI's data is "very clean and reliable." Turtle Strategy Seminar Attendees George Glendenning

147

If you also attended one of the first four Turtle seminars in August/September 1992 and were given verbal or written assurances by either Larry Williams or Russell Sands that the Turtle Strategy Seminar would never again be offered to the public by Russell Sands, please contact George Glendenning at 702/435-7500 or FAX 702/458-1933. Jim Burke I have found that the best trading methods are the ones that are produced by yourself. Also, the best way of testing your method is not by using system writer or other testing software, but by taking 30 charts with your indicators and to see the profits your method produced one day at a time. This way you will gain confidence in what you developed and you can tell how many bad trades in a row and how many good traders in a row. It will take much longer to test, but you will also start seeing market action and chart patterns. I used PPS in 1992 with excellent results, enough to win a championship. In 1992, I used the manual and was very cautious as the signals I used. In 1993, I changed to the software and experienced losses, many losses. I no longer use PPS. Now I use volatility of 1-day with a constant of 1=65 as my entry point. I use a filter of the opening price of six days also. If the open is above my entry price, it is a good signal price for a buy, but if the open is below, I will not take the signal. So, if volatility equals X and open from six days ago is Y, Y must be greater than X for a buy and Y must be less than X for a sell. Depending on your risk aversion will dictate of stop loss point. I never take a loss on close, I would rather try again tomorrow. This method really is buying/selling on strength/weakness after a retracement/rally. If you apply this method consistently or for that matter any trend following method, you have a better chance of producing than inconsistently jumping around from system to system. I believe all methods need some type of a filter, either moving averages, oscillators, envelopes, stochastics or RSI. It will keep one from overtrading and making your broker happy. I just read two outstanding books, "Trading for a Living" by Dr. Elder and "The Innergame of Trading" by Koppel & Abell, wish both were written seven years ago. Timer Digest - Vern Nord In my last article, I mentioned the best method of trading mutual funds. Timer Digest is a newsletter published every 3-weeks by Timer Digest Publishing, PO Box 1688, Greenwich, CT 06836-1688 - $224 annually. In each issue they track the Fidelity Select Funds and rank them by relative strength as compared to the S&P 500. They recommend splitting your investment money in thirds and buying equal dollar amounts of the top 3 ranked funds. If at any time after a 30-day holding period, one of the funds goes below its 21-day moving average, you sell that fund and buy one of the current top 3 funds that you do not already own. There are a few other qualifications and sometimes you will roll over into the Money Market Portfolio, but I won't give the whole system away. This simple method was the top timing system for last year, the last 3 years and the last 5 years. The yearly results are as follows: 1989 - 35%, 1990 - 1%, 1991 - 55%, 1992 - 1%, 1993 - 52.9% This track record looks like it has a two year cycle built-in. Maybe you should buy mutual funds in odd number years, and money market funds in even numbered years, but I am getting away from the point.

148

What if you ranked all commodities and stock indexes by relative strength as compared to the CRB Index. You would end up with a list of 30 some commodities with the strongest trending commodities at the top and the weakest commodities at the bottom. Then depending on the size of your account and how much risk you can take, try the following: Long one contract of the strongest commodity vs short one contract of the weakest commodity. There is an unlimited number of options available depending on your risk capital. Examples: Long one each of the two strongest commodities vs short one each of the two weakest commodities. Long one each of the three strongest commodities vs short one each of the 3 weakest commodities. If you have a bullish or bearish bias you could alter the ration 3/2, 3/1, 2/3, 1/3 etc. Add an initial stop of $400 to $500 on each position, plus a trailing stop on each position any you are in business. I want to make one other point regarding commodities to trade. I assume that any system you trade is basically a trend following system. If this is true you should forget about commodities that are poor trenders. In the January 1992 issue of Technical Analysis of Stocks & Commodities, there was an article by E. Michael Poulos entitled "Futures According to Trend Tendencies." Mr. Poulos developed The Random Walk Index which ranked 28 commodities according to their inclination to trend. If you start with this list and modify it by the profitable trading commodities in Futures Truth and by "Trendiness in the Futures Markets, by Bruce Babcock or any track record you want to, you will find out that over half of all commodities are poor trends and unsuitable for trend following methods. Throw out the stock indexes, meats, metals, grains and most soft commodities. This doesn't help you diversify your portfolio since you only have left the currencies, interest rates, and a few energy contracts to trade. But why waste your time and money trying to trade commodities that don't trend. If you feel that you are missing the boat by not trading everything, then devise a long term channel breakout system that will get you into a runaway market that only happens once in a lifetime. Don't trade poorly trending commodities just because you are afraid to missing a major move. This will only waste you trading capital through commissions and slippage and you won't make a dime. P.S. - I am not in any way connected with Timer Digest other than being one of their subscribers. Why Optimize? To Learn - Kent Calhoun Russell Sands has incorrect assumptions about the basic nature of technical analysis, including optimization. I base this statement on statistical facts, not opinions. To optimize anything is to view it in the best condition po*sible, and this is no crime. Optimization informs professional traders how their systems perform before trading them, valuable information. There is a correct method to optimize any system that is statistically valid, 30 occurrences with 95% accuracy. My article will be published by Futures Magazine concerning optimization and its research value by November. The key to optimization is to select stable parameters with an equity shift less than the parameter shift after equity spikes have been eliminated. This process creates stability for optimal parameters shifts within the four technical m4rket phases. Parameter shift is always geometric, but equity shift decline relative to unstable parameter selection is usually exponential. The Value of the opening Price Historical testing should include the open, omitted by Sands, since it offers an additional price reference point for qualifying price action, another entry option, and a statistical price relationship as to where a market will close that day. Most markets that open lower tend to close lower that day, and the lower a market opens the more likely it is to close lower. All systems are optimized to some degree. As soon as a trader chooses to enter a trade on the open opposed to the close, he has made a decision as to how a system should be traded. Does he know the close entry is better than the next opening for an entry? If not why not? A potential 28% difference in profitability exists for channel system entries between opens and closes.

149

The purpose of trading is to consistently make money. This is done by having the best information available. If a trader does not know the best entry for his system, what is he trying to prove? That the system isn't optimized? To lose money because a trader is ignorant of his systen's best parameters is foolish. Russell Sands Uses Optimization Mr. Sands, I am told, is a likable and intelligent trader. I phoned Sands to discuss this letter. Sands id a blackjack player. When I asked him if he always double his bet and split aces and eights, he responded yes. I asked him why. He stated if I ran a few million blackjack hands through a computer, the strategy makes money. Right again for Russell! The computer analyzes a conditional set of historical statistical data and provides the best trading strategy; this is optimization. Randall Brooks As I told you?. last week, I got stopped out on the first trade in feeder cattle, but with the Swiss Franc trade I was able to use my day trading knowledge of the currency markets to lock in a $850.00 profit going up (courtesy of Swing Catcher), last week and a $975.00 profit going down, on Monday and Tuesday, in spite of the long signal from Swing Catcher. I am guilty of not following the target prices, but the currencies are in the process of making their annual double top and the target prices were past the high the marketsmade back in July. In any case it is fun and exciting being back in the futures markets once again. I really enjoy using Swing Catcher. Two questions: The monthly parameters testing: Should I do it this weekend 8/27-28 or the following weekend 9/3-4? Also, I had an outstanding credit with Omega Research from my day trading days (TradeStation) and they are sending me SuperCharts. Will the CSI/Swing Catcher data work withSuperCharts? I hope to bolster my trading account with additional funds in a few weeks so I can trade all of the f: signals on a consistent basis. A Trading Tutor - James R. Burke, Jr. I took a one-on-one somirsar with John Brown at All Time Trading in May and learned what market action is really about. John teaches market principles, price action and how to spot opportunities with $200 stops. This is in the S&P! His trendline analysis is the best by far and he taught me how to use it. He doesn't necessarily show you how to trade his "system', but how to devslop a trading plan for yourself, based o n your personality. He does show you severe systems that work very well, one in Eurodollars that is profitable and easy. John's methods apply to thres-minute bars, hourly, daily or weekly and again with very small amounts of risk and a high percerage of winning trades. I have entered a trade that started as a day-trade and progressed into a long-term one, so his methods will work on longer-term trading. Two days in Iowa for $1,000 was worth the trip. I have made five times that amount in two months since our meeting. Also, if I have a question, I can call after market hours, 3-5 Central time, and John makes time available. If you want to learn, give John, a call at 515-472-4606. My number is 915-821-7345, mornings only (in Texas). Re: Key to Currencies - Futures Truth

150

We take strong exception to Gerald Greenwald implying that we are unethical and are in receipt of stolen property. This is outright slander. In the first place you cannot copyright an idea. You can copyright a manuscript. We have never received a copy of his manuscript or material except from him (a computer disc) which had a limited life. We worked with him during this period but quit publishing the first time he expressed dissatisfaction. Someone anonymously sent us the logic or ideas which we published the results on. This is not stolen material. As far as we know, the person who sent it to us could have purchased the system. It was back engineered by others to determine the logic. Again, you cannot copyright an idea. We did not turn around and resell the idea which we could have legally done. We merely show the results of other people's ideas. We fail to see how this is unethical or immoral or using stolen property. Our numbers show nowhere near the numbers shown by Dr. Greenwald on drawdown. We believe our numbers are correct , however there is no way of resolving this issue, unless he decides to cooperate. Most currency systems have fallen on extremely rough times in the past few months. Could this be the reason Dr. Greenwald has quit selling his system? Futures Truth started as an idea to bring some truth in the system vending business. Apparently, the NFA and the Federal Government are powerless to act as this interferes with freedom of speech. The article in the last issue of CTCN regarding TBSP is a case in point. It may indeed be extremely profitable, however I have never heard of anyone who has made any money with this program . They continue to point out the enormous profit in their promotions. Frankly, Futures Truth is a thankless and profitless operation. We have been threatened many times with lawsuits and have been sued once. (This suit so far has been dismissed by the judge for lack of jurisdiction.) I guess we continue as we do get some satisfaction out of dampening the style of the many fast buck operators in this business and also reporting on the systems that do show positive results. One should remember that the best numbers a system will show are right after it is released for sale. I have never seem a system which consistently makes money. Many "good systems" will go for 6-12 months and not make money. That does not necessarily mean the system is no good, but most traders will discard a good system right at the turn around time. I have done this on many occasions. The real key is money management and trading a number of dissimilar systems. Re: Chris Ongley's request for information on JulesGreenstein's Prime/Line - Ed Forys 1. Call Bo Thunman and inquire about his experience with Prime/Line several years ago. 2. I bought the manual and went to an all day training session given by Jules and found that Prineline was more suited for position trading than day trading (which I preferred) and so I did not go much farther with it. 3. I also found that Primeline did require some skill in interpretation; sometimes, I had so many lines to consider I could not confidently reach a decision as to where exactly the support (or resistance) was. Further conversations with Jules did not help much, although I must admit that perhaps further conversations might have resolved my problem as to how far back one had to carry the lines from. Also, Jules has had ample time to work out the nitty-gritty details of his system and it might be OK now. 4. At the time I looked at Prime/Line (some time ago), Jules did not keep (to my knowledge) or publish a track record; this might be disconcerting to some, especially if he is still in that mode of operation. And, don't forget, Jules is a broker; how much of his income came directly from trading and how much came from commissions was not public knowledge. Re. Vern Nord's comment "Any type of system is doomed to fail'; 1.If commodity prices are truly non-stationary, then why does someone like Gary Smith (among others) consistently pull profits out of the S&P market over long periods of time? I think that when you really examine your market data, you will find that sometimes, it is nonstationary random; but there are other times when it is trending, other times when it is cyclical, other times when it is a trading market, and other times when it is combinations of the above. The trick is to figure out what type of market it is (more on this next time) and then act accordingly (fade a trading market, never a trending market).

151

Day-Trading System - Simon Bonanno I am a mutual fund timer who would like to attempt trading commodities on a "day-trade" basis. What I am looking for in a "day-trading" system is the following: 1) Today's trade position is to be determined by some arithmetic calculation of yesterdays open, high, low and close of price; 2) The selected trade position is to be entered before the market open and exited automatically at the close of the trade day; 3) Use of computers or quotation systems is not to be utilized. If you have heard of a day-trading system with the above parameters, would you please let me know thru CTCN where I can obtain this information? As a fellow trader your assistance in this matter will be highly appreciated. Letter To Ira Epstein - Russell Sands I have been trading and managing money for ten years. In that time, I have traded through literally a dozen brokerage firms, both discount and full serivce, and anywhere in between. I have I never, ever, called to place an order and gotten a recording machine--if I did I would go totally ballistic. I've also never, ever, boon told to 'hold on' by either a (live) broker or a phone clerk and had to hold for more than five seconds. In a business where literally 'time is money', and every second can cost thousands of dollars, your attempts at explanations' are a joke. There can never be any acceptable explanation for what happened to Mr. Roberts in his letter. Quite simply Mr. Epstein, if your firm is so popular that all your phones light up when the markets get busy, the only solution is to hire additional staff. Mike Daley I've enjoyed reading "Commodity Traders Club News" and thought I would throw my two cents worth in. First, I want to say thanks for all the help you've given me in getting going with Swing Catcher. As one of the people who create and manually update their own files, I probably had a few more questions than the average user. It's good to know that help is only a phone call away and the system vendor will be there when you need him. I haven't noticed much in the pages of CTCN about books your subscribers have found either useful or useless, or somewhere in between. I had the minor misfortune to purchase a copy of "The Trading Systems ToolKit", by Joe Krutsinger several weeks ago. I say misfortune because after reading a short distance into the book, I realized there was little in it that would be useful. If anyone else is considering the purchase of this book, they should be aware that all of the systems were designed on and coded for SystemWriter and TradeStation. There is nothing necessarily wrong with that, by all accounts they are both fine products. But if you don't happen to work with either of them, there may not be too much that you can get from this book - at least not $55 worth in my opinion. In many places the text is choppy and disjointed, jumping from one topic or example to another. As is often the case with books of this type, editing seems almost nonexistent. Among the oddities I noticed was a reproduction of a screen image from TradeStation that was labeled as live cattle 12/92 (page 44) and showed some price bars in the middle to upper ninety cent range. As far as I know, live cattle have never traded at this price level. The next page (45) shows a chart with the same labeling, live cattle 12/92, with some price bars below the 40 cent level! This may have something to do with the continuous contracts and how they are labeled and displayed, but it still looks a bit strange. As a stock trading system Krutsinger advises using Wells Wilder's Parabolic as opposed to a buy and hold strategy. Buying 1000 shares of IBM on January 31, 1962 and holding them to March 19, 1993, he says, would have resulted in a profit of $25,000+ (page 102). Whether TradeStation took into account dividend

152

payouts and stock splits during those years isn't mentioned, but if it didn't I would wonder about the accuracy of the profit number. On the other hand, Parabolic made $138,000+ during the same period (page 103). However, it needed 126 total trades to do this. Forgetting for a minute that the Parabolic System wasn't even available until 1978, when you take into account the commissions generated by trading 1000 share blocks of stock (no discount brokers for much of the period), the dividends paid out while short, and the taxes paid along the way, I'm quite sure that the system profits would have been a lot lower than those stated. Considering all of the above, I doubt that the Parabolic was all that much better than buy and hold, at least not to the degree suggested in the book. I don't mean to nitpick, but it's this kind of fast and loose figuring that tends to make you question some of the other examples in the book. Most of the other systems consist of moving average crossovers, channel breakouts and oscillators in various combinations and time frames. Not a few require that you have access to intraday data for testing purposes, which further reduces their usefulness. As expected, there are plenty of plugs for SystemWriter, TradeStation and Robbins Trading Co., along with an offer by the author to do coding for you for $100 an hour with, apparently, a four hour minimum. On the other hand, Krutsinger does present an S&P 500 day trading method that is very innovative, simple to trade and reasonably profitable. In five years trading (1/4/88 to 12/31/92) it generated $77,000+ after commissions, averaging about $15,400 a year. Being somewhat skeptical, I checked the trades manually using actual market data and actually did a bit better, netting almost $80,000 after commissions. Looking at more recent system performance reveals that it broke even in 1993 and is up $11,000+ through July 31,1994. A minor problem with the system is that it requires the opening price. Now that the clack of mental arthritics who run the Merc have seen fit to implement "stock around the clock", the opening price, at least as published in the financial papers, has become somewhat meaningless. (Perhaps they'll finally rest easy when we can all trade pork bellies at 3 o'clock in the morning, but I'm not holding my breath). In addition to the above system, there are details of many others which could either be traded as is or modified to conform to a person's own risk level. Indeed, the next to last chapter contains 16 trading systems that Krutsinger suggests can be used as the basis for developing your own methods for trading the markets. Part of his purpose here is to stimulate the reader's thinking on the subject. Perhaps I've been too hard on the author. Krutsinger's forte is designing and testing trading systems, not writing, and the fact that the book doesn't come across well speaks volumes about the lack of editorial help he received from Probus Publishing. His candor is certainly refreshing. Toward the end of the book he admits that when he started in the commodities markets he weighed 180 pounds and had a full head of hair. Now, he says, he weighs well over 250 pounds, is almost bald, and has dark brown circles under his eyes. He attributes his present condition to having watched every tick in the markets since 1976. As a result, he explains, he now thinks up mechanical trading systems and has other people trade them for him. He also confesses that what he has put into the book are his best "old" systems. The newer, presumably better systems he keeps and trades for himself. Fair enough. I wouldn't recommend this book for someone just starting out in the markets. A better idea would be to ante up a few extra bucks and get a copy of "Technical Traders Guide to Computer Analysis of the Futures Market' by Lucas and LeBeau. This book does a better job of explaining the elements of trading system design. Apparently I'm not alone in this view because this particular book is cited by Krutsinger on the acknowledgments page of his own book. For more experienced traders, "The Trading System ToolKit" book may be worth a look, particularly if they are running SystemWriter or TradeStation. There are some worthwhile ideas in this book, but you may have to dig a bit to find them. A Strongly Dissenting Voice - Michel A. Gourbault Re: George Bashar's opinion and apparently the Editor's decision - (August 1994 issue of CTCN) - that no mention should be made of Swing Catcher or any other Trend Index product or service in subsequent issues of CTCN. That the System Designer himself does not mention these products, it seems only natural considering the stated purposes of this informal publication ... but it would be grossly unfair to purely and simply prohibit any mention of the Trend Index products by name. First of all, because personally I would want to share the results of my experiments using Swing Catcher in conjunction with Candlestick

153

Forecaster - a very short term trading system which nobody, it seems, has ever mentioned specifically in this Forum after I have tested both systems together over a period of at least one or two months. The second reason why I feel it would be grossly unfair to all of us, readers and users of your software, is that, as you said yourself issue after issue, Swing Catcher, because of its time consuming nature, is no longer being tested and evaluated by Futures Truth (whatever one might think of the objectivity and thoroughness or methodology of these people). Third reason: maybe some of us have devised, or are testing, novel, unusual ways of making trading with the help of this system even more effective. Isn't it something that the other users, and yourself surely, Dave, would be interested in knowing about? Really, Mr. Editor, I would ask you to reconsider your decision. It is only fair that your system and services be evaluated and referred to, by "us", the very same way as any other system or product designed for traders. That's my opinion, and I believe it is as good and valid as George Bashar's (no offense meant, George). I do not find his reasons for an eventual ban convincing. Of course, Dave, as originator and editor of this 'Traders Forum', it is your prerogative to set such rules as you see fit; however, as a new user of Swing Catcher, I am more interested in making the most of this as-yet unfamiliar trading tool - with your help and other users' - than in purchasing and trying the 'hoftest' system on the market. Together, we represent a broad spectrum of experience (from the novice to the seasoned trader) and some of us are less experienced with the use of continuous-contract-based systems than others. I am also very interested in hearing from someone who may already have tried what I have in mind with Candlestick Forecaster - like broker Gerd Gwiss (CTCN May 1993 Issue) of Vienna, Austria. (Are you still around, Gerd?). Many of us, I am sure, are duplicating on their own research, or experiments, that have already been done. Isn't what this publication is about not just expressing opinions, but sharing the results of various experiments? Futures Truth - Kent Calhoun John Hill is a valuable asset to the futures industry. There are few things in life John and I disagree, but the issue raised by Gerald Greenwald is one of them. Club 3000 has refused to publish my letters raising this issue of professional ethics. Fact: If a person buys a stolen TV at a garage sale and it is later discovered in the purchaser's home, the purchaser is arrested and taken to jail despite producing a bill of purchase. This is called receipt of stolen property, and is often a felony. Most system purchasers must sign a non-disclosure document prohibiting them from selling, copying, and transferring any of the system's information to others in any medium. This is a legal contract and also protected by United States copyright infringement law. Those who violate this law may be sentenced to five years imprisonment and a $250,000 fine per offense. Fact: The US Justice Department successfully prosecuted Japanese computer manufacturers for stealing IBM "trade secrets," and awarded IBM a substantial financial settlement. The US Justice Department ruled the architecture of computer and computer component designs belonged to IBM, just like the lyrics and music of a copyrighted song belongs to its author. Does the original design of a trading system belong solely to the developer? When Futures Truth receives an unsolicited trading system, like Greenwald's, should they be held accountable for deriving income from the developer's violated non-disclosure agreements? Is this the same as receipt of stolen property? FT knows most systems are copyright protected, and is more knowledgeable of this fact than purchasers of stolen goods at a garage sale. The person who sent the materials to Futures Truth is clearly in violation of copyright infringement, yet benefits by receiving a Futures Truth trading report. Futures Truth benefits by learning how the -most

154

successful trading systems are designed and financially. Is a law broken? That is a legal question that could have with a very expensive answer for FT. Futures Truth derives money three ways from a developer's trading systems. They sell research reports of the system's performance, track the system's performance monthly in their Futures Truth publication, and discuss system structure in video tapes and at FT seminars. Developers receive no direct financial compensation from Futures Truth, but successful systems benefit from FT ratings via increased sales. FT ratings raise another problem. A conflict of interest exists when FT rates their systems, and FT admitting this does not condone it. Should FT stop publically rating their own systems, and rating vendors' systems without paying for them? These practices detract from FT's credibility, invite costly litigation, and undermine Hill's noble effortsto bring mandatory vendor accountability to our industry. I lost Russell when I Could not convince him optimization is the same for commodities as blackjack. Mr. Sands did not accept the fact market psychology is different for different markets. Anyone trading without the best information available from optimization neglects the two most valuable trading tools available, the personal computer and individual intelligence. Nameless Numbers and Knowing Beans about Bonds "Numbers themselves do not have names." Excuse me? What is this called 0. I call this 0 number "zero" because that is its name! Send Russell $250 for his seminar instead of $2500 and he'll remember its name real fast. You want to identify a 0, call it by its name or you get nothing, not zero. A number with a name has a history, just like a person. Consider the zero. The zero symbolizes life and its cyclical nature, and is the only perfect geometric shape. Arabs believed all men equal in the eyes of God, and saw their lives as a point on the circle equidistant from God, located in center. The circle's inner space, the nothingness of existence, was enclosed by a line that defined its existence, like the body defines and encloses man's spirit. When Leonardo Fibonacci introduced the zero to Europe, the Roman Numeral System became obsolete because it had no zero. "Computers do not recognize the difference between "Beans" and "Bonds." My computer recognizes Beans from Bonds due to the nature of how it tells me to successfully trade those markets. My English System sold December T-Bonds last Friday at 103-16, today they traded below 100-00. English is long Nov beans below 5.60, which closed today above 5.80. English system bought and sold S&P's off the lowest and highest 5 minute intraday vertical bar every day this week. My computer knows. How Prices Are Determined Russell has misunderstood the basic nature of how markets trade from one price to another, by buying and selling pressures! The physical nature of the commodity dictates its price volatility. Corn traders do not expect S&P price volatility. Agricultural and livestock commodities respond to supply demand fundamentals, which do not affect financial trading instruments. This partly explains why S&P's trade a daily range often in excess of $2000, while corn seldom moves over $400 per day. Each market has its own personality, which is the psychological composite of its traders. Market mass psychology is based on individual belief systems about what price a market should be and this is different for corn and S&P's. Traders' convictions are expressed by the dollars they willingly commit to the markets and this determines price. Does a corn trader expect the same risk as an S&P trader? No. Markets are as different as the individuals that trade them, how else could it be? Judging a system invalid because the same parameters are not profitable for every market is ludicrous. It doesn't make sense any more than stating all S&P traders must ware the same shoe size! The key to

155

understanding the real names behind commodity prices is to recognize Joe Smith is buying x contracts and Tom Jones is selling 2x contracts at specific prices, and this determines the closing price today. If Russell sits down to play blackjack with $10,000 and is paid 2 times his same bet and is right 50% of the time, there is a 0.08 probability he will still lose all his money. Optimization tells him what the expected payoff should be and percent wins at the blackjack table and in commodity trading casino. I may never make $400 million like Richard Dennis, but I try not to confuse wisdom and intelligence with material gain. A brokerage president asked me, "if you are so smart how come you are not rich?" He had been a losing trader before my systems made him over $240,000 and I was stunned by the question. "If you are so rich, how come you are not smart," I responded. While Mr. Sands was winning trophies larger than Jake Bernstein, I traded $105,000 into $3.62 million and sent the clients' names, addresses and phones numbers to the CFTC on May 16, 1980. The date is the one year anniversary of buying 60 gold contracts. This fact doesn't qualify me to be a commodity trading expert, but after 31 years of investing, 27 years of stock trading, 17 years of commodity trading, 16 years of intense research and spending over $300,000 on system testing, I have learned optimization is the most valuable trading tool available. I deal in statistically supported market facts, not opinions. It is a little known fact that Richard Dennis sent out tests to Turtle applicants. I scored over 90% and wanted to know and discuss the answers I missed, and why I wasn't selected. According to Dennis, he only selected traders who scored 60% or less. I was told I knew "too much." Apparently in the process of teaching Turtles, Dennis overlooked a few valuable lessons himself. I do not question anyone's honesty, least of all the wellrespected Russell Sands, but I would like to know the names of the Turtles who made $100 million last year. Dr. Edmunson, who is a client of mine, had six figure accounts with four Turtles, and he publically announced at my seminar none of the four were profitable last year. I would like to see a name list of Turtles, for comparison to my client's actual trading accounts. Optimization a crime? No. A crime is disseminating statistically unsupported market opinions as intelligent trading knowledge to traders, who may not know the difference. Anyone can have an opinion. Few traders possess statistically supported trading knowledge. The difference between the two is often the difference between winning and losing, the optimization difference. Here Is the international futures trading activity we discussed over the phone last weekend. These contracts represent the most liquid overseas contracts. Volume figures are average daily '93 as reported by each exchange. The "Start Date" is the first day of CSI data files and usually is close to the initial trading day of the contract. Exchanae Contract Volume Start Date CSI # LIFFE 3 mo. Sterling 47,000 10/29/82 173 3 mo. EuroMark 85,000 4/20/89 182 3 mo. EumSwiss 7,000 2f7lgl 155 3 mo. EuroL!ra 8,000 5/12/92 179 FTSE 100 Index* 15,000 5/3/84 209 Long Gift 57,000 11/13/82 174

156

German Govl Bond* 99,000 9/29188 181 Italian Govl Bond 38,000 9/19/91 284 DTB DAX Index* 16,000 1 1/23/90 131 Long Term Bund' 36,000 11/23/90 132 Medium Term Bund 20,000 10/4191 288 MATIF CAC-40 Index* 22,000 3/l/89 079 Long Term Notional Bond* 147,000 1/28/93 328 3 mo. PIBOR 47,000 3/l/89 078 TIFFE 3 ma. EuroYen 87,000 6/30/89 070 TSE 1 0 yr. Japanese Govl Bond 59,000 414190 158 OSE Nikkei Stock Index* 48,000 9/3/88 248 SFE 90 day Bank Bills 26,000 8/3/84 228 10 yr. T-Bonds* 19,000 1/11/65225 3 yr. T-Bonds 29,000 5119/88231 LME High Grade AJuminum 37,000 6111/87 092 HKFE Hang Seng Index* 14,000 12J31/86 119 *already included in Trendx International In addition to adding the above contracts that are not alread-) included in the Trendx International data files, I recommend removing the SFE All Ordinaries Index #230 and the LIFFE Japanese Bonds #180. These contracts oniy average about 2,000 contracts daily. The new intemational portfolio would be composed of a broad cross section of exchanges with 22 liquid futures contracts. I think that most traders would prefer a database of continuous contracts and the ability to maintain the back adjusted continuous format during rollovers just as you provide your regular Trendx customers. Special Request I ask that you please do us all a favor by making a contribution to the next issue of CTCN. Don't worry about your submission not being interesting or useful to Members...rarely is that true. Usually, most all contributions/submissions/articles are quite interesting and valuable to other traders, but the author usually does not realize the actual value of his knowledge or experiences. Futures Truth Reports The Aug/Sept issue of Futures Truth's Master Performance Table is still available. Contact Commodity Traders Club News so you can get it at the discounted price of only $25.00. New systems that were covered are Jurrasic Trading's Raptor and Bear...two systems designed to trade the S&P on a short term basis. Bear has not been tracked long enough to be ranked.

157

The Best Performing Systems The Futures Truth Top 10 systems for past 12 months are: FutureSoft's Benchmark +162.2%, Future Truth's Universal LT +81.8%, Joseph Stowell's ROCM +81.1%, Joseph Stowell's HAT +79.9%, Arnold's Pattern Probability +69.0%, Welles Wilder's Volatility +52.0, Taurus' Grand Cayman +50.9, PWA Future's DCSII +38.1%, Michael Miller's T-REX +34.6%, Vilar Kelly's Daycare +33.0% The Futures Truth Top Ten systems since release date, based on ranking by annual combined percent returns on required capital (3 X margin) are: Michael Miller's T-Rex +143.7%, FutureSoft's Benchmark +125.6%, Joseph Stowell's HAT +101.4%, Futures Truth's Universal LT +81.8%, Arnold's Pattern Probability +81.5%, Staman's Black or White +81.2%, Taurus' Grand Cayman System +81.0%, Joseph Stowell's ROCM +78.0%, Dave Fox's Dollar Trader +77.8%, Hughes' S&P Pattern Daytrade +65.3% Note: Trend Index Trading Co. Swing Catcher System was ranked for the period 1990 thru 1-94. It was in fact ranked as the 5th best system since release date, with a 78% return, the last time it was rated by Futures Truth. Advertisements Daily Fax Service: Receive precise entries/exits/stops on 30 commodities. No day trades; each winning trade lasts several days to months. From 2/1/94-6/1/94, the profit trading only one contract for each signal is more than $50,000. Introductory two month trial is $2,000. Call 305-251-6762 or 800-392-2664, or FAX 305-254-3272; or mail to Einstein Investments and Trading, Ltd., PO Box 560637, Miami, FL The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. ALL RIGHTS RESERVED. Written permission from the Publisher/Editor is required for reproduction in any form and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members. We do not, and we have not, verified the accuracy of the mathematics or numbers published herein, or the accuracy of the comments and remarks made by the authors. In the event the contributor does not include article headlines and sub-headers they are subsequently written and added to the articles by the Editor, using verbiage the Editor believes highlights important points the contributor is making. Subscription to Commodity Traders Club News...'Your Guide To Profitable Trading and How To Save Money Along The Way' is $80.00 for 1-year (12-issues)...includes FREE First Class Mail within USA & Canada (add $17 Overseas Air Mail). Publisher: Trend Index Trading Co., 2809 E. Hamilton Ave. #117, Eau Claire, WI. 54701 USA. Phone 715-8331515. FAX 715-8338040. Editor: Dave Green. (There's high risk in futures trading) Issue 18. Larry Williams on Copyrights Let me shed some light on the legalities of copyright problems. The following is what I learned because of three trials where I sued people for knocking off my systems. First, John Hill is only partially right that you cannot copyright an idea. Ask George Arndt, in my suit against him that was his main argument. The judge said that if a copy "was substantially similar" it was the same as a copy. He used an interesting analogy; Arndt had converted my copyrighted manual to computer code that was 99% the same. The judge said that to not allow me to be compensated would be the same as letting someone translate Hemingway into French and then freely sell it as it would not be an exact copy of the English version. Arndt's lawyer, a former copyright and patent office employee made a big deal about the

158

" idea " argument but it got him nowhere, other than a $400,000 judgment against Arndt. I am convinced that any unauthorized work that is substantially similar to a copyright protected piece will net a judgment against the publisher/promoter of the copycat work. What's more I have, at various times, sued not on copyright infringement but the legal theory of unjust enrichment. All suits were won or settled in my favor. This theory says that if I produce something and you make a similar version of it, it is not fair for you to profit from my work. Therefore, you will have to turn over all your income, not profits, and are liable for punitive damages as well. Note, this applies to works that have not been copyrighted as well, and includes punitive awards! I'm no lawyer, but I've hired enough of the loopholers to know above will hold up, it did for me, and may give some security to people that do come up with new ideas and at the same time put the fear of large judgments into the copycat cowboys out there who never had an original idea in their life. P.S. Dave, keep up the excellent letter.

Update on Continued Pursuit of Advanced Trident Developments Along With Charles Lindsay & His Whereabouts - Bill Kruse You and I are familiar with the frustrations of others and lack of success in this pursuit. We sent a detailed request (Priority Mail) for information to Charles Lindsay via Windsor Books. Upon receipt of this material, we decided to pursue some adjacent inquiries because of the uncomplimentary nature of many comments, both written and oral, that came up during our past pursuit of Advanced Trident and Mr. Lindsay. Having at last, an address for Mr. Lindsay, Mrs. Kruse contacted the Better Business Bureau in Santa Barbara. The Better Business Bureau's rating of Tradebase Network is "Unsatisfactory for failure to respond to consumer complaints," with 2 complaints referred to District Attorney within the last 3-years. When she phoned the District Attorney's office, she was informed that they handled one complaint and indicated that Mr. Lindsay had been "totally unresponsive." The D.A. turned it over to the federal authorities for postal fraud. (Please let me say at this point that Mrs. Kruse's excellent telephone techniques and determination are a large element in this project and in many others in the past.) Study his materials as to content, and consider my comment on the quality and features: In his book, Mr. Lindsay repeatedly stresses the need for accuracy in thought and action; however, Mr. Lindsay's communications contain spelling and punctuation errors (with attention given to the idea we have no knowledge of Mr. Lindsay's age or his physical or mental condition). Note - We know of one trader who complained to Windsor Books he couldn't establish communications to receive Tradebase signals. (We are offered three days of free signals. Wanted to correspond with you and pool our thinking before proceeding.) Note - Would you or CTCN Members by any chance have a friend or trader in the Thousand Oaks, California, area? Just a thought should we want to eventually check out this address and see just what kind of an establishment Tradebase Network is. Will stop at this point. We do not want to influence your thinking before you have studied the materials, especially software descriptions! We don't want to abandon this yet, but we want to be very careful how we proceed.

159

Editors's Note: The latest address we have for Mr. Lindsay is: 560 N Moorpark Rd. #192, Thousand Oaks, CA. 91360. Phone 805 379-4744. Our data base also has another trader with a different name at the same address (a different apt #), who may be connected to him. A Simple But Very Profitable Approach For Trading Commodity Futures David Stone I have been using this methodology to trade the commodity markets successfully for some time now. The method is really quite simple and easy, but surprisingly profitable. It involves buying higher swing-lows and selling lower swing-highs. Also known as pivot-points. A definition of these swing-highs and swing-lows is appropriate here: A swing-high is a high bar with lower bars on both sides of it. A swing-low is a low bar with higher bars on both sides of it. The more lower bars to the left of a swing-high the better. The more higher bars to the left of the swing-low the better. That makes them more significant and presumably more powerful swing points. However, only one bar on either side is acceptable (but two or more to the left are usually stronger signals). My trading methodology requires two (or more) consecutive swings, with the second one being a higher swing-low than the preceding one for a buy. Alternately, the second swing-high must be a lower swinghigh than the preceding one for a sell. The actual long trade entry takes place on a buy-stop two ticks above the high price of the last bar (the bar following the swing-low pivot bar), for a buy. The short trade takes place on a sell-stop at two-ticks under the low price of the last bar (the bar following the swing-high pivot bar), for a sell. Your stop-loss order is placed 6-ticks under the lowest price of the last swing-low bar on a long trade. The short trade stop goes 6-ticks above the highest price of the last swing-high bar. You can make some really outstanding money using this simple, but very effective trading methodology. The signals look like this:

160

Ideas on Sharing Knowledge So We Can All Benefit - Ismail Valiallah As a new member of CTCN and CTCN being relatively new, I could not help myself formulate a set of guidelines that will be beneficial to all. I take it that our objective is to learn from one another, and also our and other members' mistakes. To gain the most out of CTCN, certain requirements have to be addressed. 1) Traders: some of us are novices, others experienced. If we work on the assumption that all of us are novices/amateurs, everyone would benefit. Not only will the novices understand what is being discussed, but the experienced may uncover details that they overlooked. Articles must contain full disclosure. That is if you are going to write about a particular system or method, don't assume that the readers are familiar with the system or method. It does not make sense to write about a system/method, assess its results and not tell you what the system or method is. Please don't assume that the readers are familiar with your systems/methods. 2) Programs/books/seminars: my guess is that all of us have one type of program or another. The same applies to books. But as you well know, a lot of it is junk! Therefore, I submit: a) If you are in the market to purchase a program or book lets help each other buy the good ones; b) A monthly review of specific programs/books/seminars will go a long way to help each other. The way to go about this is very simple. If you have filled out Dave's survey, we have a starting point. It asks for what programs you own. A statistical analysis will decide which programs are owned by how many. Dave then can request opinions for a particular program in the upcoming newsletter for review in the following newsletter. Your opinions should cover: 1. Name of program 2. Cost 3. Method it uses, i.e.: moving averages, Elliot Wave, trend following, algorithms, day trading, swing, etc. 4. Markets tradable 5. Good in predicting or signaling 6. Deficient in predicting or signaling 7. Ways to improve deficiencies 8. Overall performance and/or statistics if you have 9. Customer service 10. Can a fellow member discuss the program with you? Note: No program is perfect. But what one may lack another may make up for. Some of us may be using a program incorrectly, therefore not getting the desired result. However, someone out there may maybe able to help you. If you need help, place a request in the newsletter outlining your problem and what sort of help you need. Let it be known that the help you receive should be free. The last thing we need is someone trying to make a fast buck. 3) Advertising: Lets not do what other newsletters and magazines do. Often an author/manufacturer will write one or more articles extolling the virtues of their methods and demonstrating their phenomenal profits just to facilitate the sale of their products. I do realize their may be a conflict of interest with the editor, therefore I propose that Swing Catcher may be discussed if it makes it more profitable, reduces the drawdowns, or improves it in other ways. This I think is fair to all parties concerned. It should be treated as any other product being reviewed or discussed.

161

4) Trading method: we are all looking for trading methods. Methods for determining a trend. Methods for determining when not to trade. Methods for determining entry points. Methods for determining exit points. Methods for determining stop loss points. Which markets they're applicable in. What works best in each market? Each month we can cover a particular topic or a little article on each of these topics. 5) Brokers: How to choose a broker. Full service or discount. What services they offer? Bad experiences, if any. This is not an effort to blacklist anyone, but to make you aware of what needs to be checked out and whether they are capable with your trading style. Who offers least fees and is worth it. 6) Complaints/miscellaneous: Often there is a lesson to be learned from someone's bad experience, but lets avoid the name calling. 7) Confidentiality: This information is for our members only. Many times we will discuss articles/products, etc. that will offend authors/manufacturers. To keep from suffering any repercussions, I suggest you submit your articles and ask Dave that you wish to remain anonymous. 8) Bonus: We may want to have best trade for the month. Strictly optional. This may give our readers the confidence they need. Another way is to introduce members to other members in their own area. Someone they can discuss trading with. I would take it that most of the discussions are with either a software developer or broker. As you know, they mean well, but more often than not, getting you to buy the software or making a trade is what counts. Now on a more philosophical note: In all religions, be it Christianity, Islam, Judaism, etc., underlying messages are "give and thou shall receive," "sharing is knowledge," "teach others so you may learn" and "all things come from God," so lets make God proud of us. Amen! If you wish to contact me, my name is Ismail Valiallah and my # can be obtained from the editor. I'm assuming that you have a policy of not giving out member phone numbers. As a result, could you as a favor, get in touch with Ashif Jumma (author of articles in the newsletter) and ask him to give me a call. Much appreciated. Editor's Note: That's correct...members' phone numbers and addresses can't be given out.

On Telerate/CompuTrac Conference and Blackjack - Russell Sands The 16th Annual Telerate Technical Analysis Conference in Las Vegas last month was a great success. I would like to thank Tim Slater for putting on a great conference, and for inviting me to be a guest speaker. I would also like to thank all the people who came up to me during the weekend with kind comments about my presentation. But Jamie, you didn't bring your backgammon set! I also learned a lot by listening to all of the different speakers at the conference. While I still strongly believe in my own trading methods, there is obviously more than one way to skin the market cat. Finally, I found it a little amusing that for all the interest in trading and technical analysis, I think more people actually asked me about Blackjack than about Turtle Trading. So let me tell you right here and now, that Blackjack is the only casino game that can be beaten by the player in the long run! I not only had a profitable result at the tables, but actually got the casino to pick up most of the tab for my stay. I have just written a book on Blackjack, nothing really original, but nonetheless a comprehensive treatise on why and how the game can be beaten. And believe me, winning at Blackjack is a lot easier than trading futures. The book is about 100 pages, complete with tables, charts and everything else you need to

162

know. Retail price is $59.95. CTCN members get a 15% discount. Call me if you're interested (800) 5321563.

More on Futures Truth & Key To Currencies System - Dr. Gerald Greenwald In a grand display of utter confusion or obfuscation (or both), John Hill of Futures Truth has tried to hide the facts, which are: 1. After I explained and gave him the correct procedure for using and reporting on "Key to Currencies Software" he failed to do so. 2. He readily admits to using a system his people programmed, but failed to use my program as directed. 3. When I notified him of his failure to please correct it, he ignored it. 4. He admits to having received an anonymous copy of my system's logic! Give me a break. 5. He believes he can ethically and properly use my material which he received anonymously or back-engineered with his people's help. This is tantamount to my finding. The combination to a safe with $10 million in it, taking the money and saying, "but I discovered or found or was given the combination, so it's all right." Well, John, ask your local DA, if he/she agrees. 6. As for his accusing me of "Slander" Brilliant, John! There is no slander (or libel, which at least would be the correct terminology); but if you think there is, so sue me. But do so very thoughtfully and carefully. 7. You say that "the person who sent it to us could have purchased the system." That is a moronic statement. Why would he anonymously give it to you? 8. I won't argue copyright law, because I don't know much about it. But if there are any lawyers out there, I'd be interested in opinions. 9. I enclosed for Dave Green's personal viewing, a printout of the system's output which was requested recently by a customer. It's for only about 2+ months, but it shows $15,375 profit and 100% profitable trades (9 for 9). It's true that I took my system off the market on 7-94, but felt obliged to start selling and leasing it again, because of global requests. Readers, please scrutinize my ad at the back of this issue. I invite your inquiries, etc. And to John Hill, enjoy your apparent dotage. In this battle of wits, you are unarmed. Editor's Note: I did receive four P&L Report printouts from Dr. Greenwald's computer showing the performance he refers to above. However, there is no way to tell if they are real-time trades, hypothetical or back-tested optimized trades. The only way to correctly judge the trades would be to see actual brokerage statements showing all the closed trades, or alternately receiving the signal reports prior to the opening and following each trade on a daily basis.

Opinion on TBSP Advertising & MetaStock 4.0 - Mike Daley A thought and comment on recent issues of CTCN. First, kudos to George Moldenhauer for his appraisal of TBSP Right-Time Programs. This is a good example of the kind of information that makes CTCN so valuable to subscribers. TBSP's track record looked pretty suspicious, especially the bet-the-ranch style of money management they employed to show such huge profits. It's hard to imagine anyone actually trading this way - you'd likely be broke or retired (probably the former) before you ever came close to the numbers they were showing in their advertising. Even if the program worked, trying to trade 1,000+ lots at a time would be hellishly

163

expensive in terms of commission and slippage for anyone but a floor trader. Enough. Thanks again, George. I don't know if other Metastock 4.0 users have noticed what I consider being a serious flaw in the system testing portion of the program. The problem comes when you try to use stops as part of the testing procedure. When I ran tests on my system, I was constantly showing losses greater than those I had specified when I set up the test. Upon closer examination, I realized that my stops where being activated on a close only basis, though I had intended them to be triggered on an intraday basis. When I called Equis Intn'l about this, I was told that this was the way the program was set up. To my thinking, this makes the stop portion of the test program useless, or worse, because both gains and losses may be overstated. When this happens, of course, all other numbers based on the amount of profit and loss, such as the equity curve, etc., will all be incorrect? If, as a part of my system, I bought T-Bonds at 99.00 and was using a 1/2 point (.500 or $500) stop, I would expect to be taken out at 98.16 if the market traded there during the day. The program, however, uses only the closing price to determine whether you will be stopped out. If Bonds closed at 98.00 you will show a $1,000 loss instead of a $500 loss. On the other hand, say the market traded down to or below 98.16 but then came back to close at 99.00. Over the next several days, it rallies two points and you get out with a $2,000 gain. In reality, you would have had a $500 loss due to your stop being hit, but instead there is a two-point gain, or $2,000 profit shown for the trade. With this kind of situation, it's easy to see how the numbers can become completely meaningless. This is extremely frustrating because if you design a system that looks promising and want to test it with different sized stops, you will lack the ability to do so. If you do, results you get will be very misleading. This is not intended to dump on the MetaStock software or discourage anyone from buying it. The program (with this small exception) is well thought out and support is always top notch. When I talked with the company, I was told they're aware of it. I'm not sure what that was supposed to mean, but the windows version is due out in the fourth quarter and hopefully this problem will be rectified. Words About Optimization - Russell Sands When Kent Calhoun called last month to 'educate' me about my misunderstandings regarding optimization and other aspects of technical analysis, the first thing I told him was that I hope we didn't get into a public pissing contest over this stuff. Then, I read not one, but two letters from him, attempting to correct my 'opinions' with his 'facts', while at same time blowing his own horn about his trading prowess. I will not get into a debate over this issue. All I will say is that everyone is entitled to his/ her opinion with respect to technical analysis, how and why the markets work, or anything else for that matter. In fact, if everyone had the same viewpoint, we would not have a marketplace to trade at all, as there would be nobody to take to the other side of my trades. So Mr. Calhoun, I will stand by my own opinions, as you are welcome to stand by your statistical 'facts'. And thank you for disagreeing with me and thus providing me with a continuous way in which to earn my livelihood.

Don't We All Wish We Had This Much Tax Obligation - Edward Forys

164

Mr. K.'s article 'Rags to Riches' in another newsletter (most subscribers will be familiar with the story) was indeed interesting and uplifting, but his performance table left out some very critical details, like; 1.Who paid the income tax on the profits he made in 1984, 1985, and 1986? 2. Where did the money come from to pay those taxes? 3.There were several large additions to the account; what was the source of those funds? 4. Why didn't he include in the table $30,000 he lost in prior years? Taking his track record year by year, for 1984, his gross profit was $19,515. Withholding 30% (just to keep it simple) for Uncle Sam results in a net profit of $13,660.50 for the year. He shows an account value of $49,515; so he must have added $5,854.50 to the account to bring it up to that value. (In other words, he paid the $5,854.50 tax out of his pocket. This will become more significant later.) In 1985, several large additions (source undisclosed) were made to the account and his gross profit was $203,459. At 30% withholding, Uncle Sam's share was $61,037.70; so the net profit was $142,421.30. Since Mr. K shows an account value of $408,274 he must have added $61,037.70 to bring his account up to that value. (He apparently paid Uncle Sam $61,037.70 out of his own pocket!) In 1986, Mr. K's gross profit was $936,676. Uncle Sam's share was $281,002.80, leaving a net profit of $655,673.20. Mr. K shows an account value of $1,298,467; so once again he added to the account to bring it up to that value (to put it another way, that year, he paid a pretty hefty income tax of $281,002.80 (WOW!) out-of-pocket, so as not to disturb the funds in his trading account. Where did those funds come from?) In 1987, Mr. K's gross profit was $1,589,695. Uncle Sam's share was $476,968.50 (OUCH!), leaving a net profit of $1,112,926.50 for 1987. Summing the net profits; ($30,000), $13,660.50, $142,421.30, $655,673.20 , +$1,112,926.50 Total $1,894,681.50 I realize Mr. K's tax rate was probably not 30% and he didn't have to pay his income tax until April 15 (Aug 15 with extension) unless the account was in an IRA account, so my figures are only estimates. But, without the IRA, someone had to pay income tax on the profits and the money had to come from somewhere (the amounts are not insignificant). To be realistic, Mr. K's track record needs to be adjusted to account for significant end-of-year (or quarterly estimated) tax payments and large out-of-pocket additions. With 30% withholding, Mr. K's net profits, while impressive, are substantially less than what he claims (he didn't mention IRA). I haven't even included the $30,000 he lost prior to his opening this account. Using ratios, I think his total performance record should look something like this (per NFA rules): Beginning Ending NAV Added Withdrawn P/L NAV Comment 1/80 0 5000 0 0 TBD 12/80 5000 0 0 (2000) " 1/81 3000 0 0 0 2/81 3000 10000 0 0 3/81 13000 0 0 0 11/81 13000 0 0 (10000) 12/81 3000 0 0 0 1/82 3000 15000 0 0

165

11/83 18000 0 0 (18000) 12/83 0 0 0 0 1/84 0 30000 0 (119) 2/84 29881 0 0 1233 12/84 52291 0 5855 (2776) Paid tax from account 1/85 43661 0 0 8394 P=(43661/49515)x95l9 2/85 52055 20000 0 (5896) L=(52055/59034)x6686 etc. Too Many Data File Formats & Their Semi-Compatibility - Michel A. Gourbault As I said previously, there are far too many data file formats on the market. Each new trading program that comes along seems to require a different building block (data file format), or a slightly modified version of an existing format. I don't know about you, but I would like to understand where the semi-compatibility or incompatibility problem originates. Could a little logic bring a little order to this question? First, I will try to establish the links between all the parties involved. Who are those parties? 1) The North American Commodity Exchanges; 2) the Data Vendors; 3) the software "trading systems" Designers; 4) the Traders - i.e., you and me. Group 1: The Commodity Exchanges. Group 2: The Data Vendors. The Exchanges sell the raw price data to the Data Vendors, who then resell it to us, the traders. Group 3: The system designers. They design their software programs around the raw data that the Exchanges sell to the Data Vendors, who resell it to us. However, unlike the Group 1 and Group 2 people, these trading system designers also have to keep in mind how the data that will be used with their systems will be collected or otherwise received. So far, so good: nobody has a problem. But then, there is ... us...Group 4: the Traders. We will be using the data and the trading systems. And we will expect the two to work together harmoniously. Trading is a difficult enough business, we certainly do not need computer or software-related problems to complicate our lives. And we will also expect these "systems" to be flexible enough to allow us to choose the musthave data from any of the existing data vendors. We all know from personal experience that everybody claims their "stuff" is copyrighted and that we, the users, the traders, have to abide by their licensing agreements. What are those licensing agreements saying? Usually and basically, that we may only use their data or program for our own purposes and that we may not distribute them to a third party. However, here again, who owns what? It is my understanding that the raw data is owned (copyrighted) by the Exchanges (Group I above). Therefore, logically, only the software program that manipulates (transmits and processes) that data can be owned and copyrighted by the Data Vendors (Group 2). Finally, only the "software trading system" that they designed can be copyrighted by the System Designers (Group 3). And common sense tells me the more complex a program is, the greater the chances for incompatibility. Yet, one thing is sure: all trading programs/systems need the same building block - the price data file.

166

But here too, many choices are possible. In my previous article, I have mentioned several formats: ASCII (apparently several varieties thereof), CSI, MetaStock (perhaps several varieties of these too). Technical Tools, not to mention the broadcasting companies' formats: Signal, Bonneville, FutureLink, FutureSource, etc. From my personal experience, most programs attempt to support as many of these data file formats as possible, but regularly, they omit one or two of even the so-called (depending on who you are listening to) most popular formats. Which means that if you are a trader like me, who takes all "success rate" claims with a grain of salt, you can easily run into this incompatibility problem when you want to combine several trading programs to hopefully increase your chances of making money in this tricky business. Since it is not my intent to promote or shoot down any particular trading program that I am using, I will only identify these programs as Program X, Program Y, Program Z, Programs X and Z effectively support at least one of the broadcasting companies' formats. Program X is apparently a fairly simple programming job. Program Z, which is primarily geared to the Day Trader, is extremely sophisticated and must be installed through Windows. Both are mouse-driven. Although neither of them requires the use of continuous contracts, both can use this contract. Finally, both can issue buy/sell signals. Considering its special concept, theoretically, Program Y can sort out markets by trend and minimize losses and is flexible enough to maximize profit. My intent is to use Programs X and Y to confirm each others signals, and to review the same markets in Program Z which has the most sophisticated and flexible charting tools and overall plotting precision and capabilities. The problem is the only common data file format between these three programs is MetaStock, and this format is only compatible with Program Y. So finally, here we are, at the threshold of a definition of compatibility and incompatibility. Special Definitions: Trading Software Semi-compatibility - The condition resulting from a software program or system running fully in one or more data file formats, but only partially in another format. (Note: In my opinion, this category, this type of hybrid program, should not be allowed to exist.) Trading Software Incompatibility - The condition resulting from a software program or system running fully in only one or more data file formats, but not at all in the other existing formats. Trading software compatibility is the ideal condition resulting from a software program or system running fully in all existing data file formats regardless of their "variety." Of course, this ideal condition does not exist at present time, and is likely never to occur if present proliferation of file formats and computer languages is allowed to continue. Personally, I see no major technical reason why full compatibility could not be achieved. As in politics, it seems the only ingredient that is lacking, is the will to make it happen. As traders and users of these various trading or charting programs, are we not also part of the problem? If more of us complained loudly enough about the incompatibility/semi-compatibility issue, would we not force the Exchanges, the data vendors and the system designers to get together and tackle this issue quickly, reasonably and effectively? Another problem I see with data file formats like CSI and MetaStock is that they cannot be read as to their content from a DOS subdirectory. Only the broadcasting companies' formats, and both ASCII and Technical Tools are clear. Finally, size of the data file format can also be a consideration when a trader follows up to 50 different commodity markets. And it is worse when you trade in stocks, which are far more numerous. It may be good for the computer hardware business, but it is definitely not good for us. Can you afford to constantly upgrade both your hardware and software? I know I can't.

167

To conclude - I hope this overview of the technical aspects of computer trading will prompt more of you to complain to the "proper authorities" about this incompatibility/semi-compatibility problem and move them to tackle this issue quickly and effectively. After all, WHO is the King? We Are, Aren't We? Remember IBM and Apple? "David" moved "Goliath" to give up its monopolistic spirit and lose "his" complacency - at the same time causing "him" to become more competitive. IBM and Apple computers are now interfacing with each other. And the price of computers and computer supplies dropped sharply. Who gained? Everybody, consumer most of all. How long did this process and this result take? How many millions of dollars, how many millions of frustrations did it cost the theretofore captive consumers? Will we wait as long for the data file incompatibility issue to be resolved to our complete satisfaction?

Darts Pick Winners 3 out of last 4 Contests, Experts are 26 vs 25 Against DJIA - WSJ It was a knockout. A team of four investment professionals finally beat the forces of chance in the Wall Street Journals latest stock-picking contest chosen by throwing darts. The victory was sorely needed by the pros, who lost in their three previous outings against the darts. A recent Wall Street Journal contest resulted in a different team of investment professionals losing an average of 10% while the darts gained 16.9% on average, was especially ego-bruising. In a series of 51 overlapping six-month contests that began in 1990, the investment professionals have 26 wins versus 25 wins for the Dow Jones Industrial Average. Against the darts, the pros have done a little better with a 29-21 lead. Editor's Note: Isn't it amazing how these very highly paid and well-known investment professionals have such a minor advantage over the Dow Average and someone who selects based on throwing a dart at the Wall Street Journal price quotation page! The pros mostly use fundamentals. The Wall Street Journal contests once again demonstrate the questionable value of fundamental analysis and how difficult it is for an individual to predict the markets, regardless of his stature or knowledge. Too bad there is no Commodity Futures Contract on the Dow Jones Average itself. Some years ago one of the Commodity Exchanges tried to start one but was sued by Dow Jones & Co and forced to cancel it.

SuperTraders Books - H. Lowell Huber For those who purchased the 1994 Super Traders series of books from Market Movements, Inc. (Frank Taucher) of Tulsa, OK, and are wondering what happened to the remaining two books (i.e. Book of Trend Changes and Book of Spirals), I was told by an MMI rep that both are behind schedule. The Book of Trend Changes that was to be delivered 7/1/94 is to be out approximately 10/26/94. The Book of Spirals which was to ship 10/1/94 will also be delayed, but will not be as late as the Book of Trend Changes. On another subject: I have seen references in advertising brochures that certain traders won't "touch cattle trading with a 10-foot pole." Having traded cattle contracts myself occasionally, I would appreciate it if someone could tell me why.

168

Who Has Done Well? - Ashif Jumma I would like information on Model Accounts/Actual Accounts that have done well trading Futures with publicly available systems over a period of 2-3 years. That should be the acid test for any trading system.

Opinion & Trading Results on Bob Buran's Grand Combo System - Fred Montgomery In 1992, I purchased Buran's Grand Combo Trading System. At that time the cost was $895 plus $240 extra required for Lotus compatible software, which was required to run it. Plus, the cost of buying Lotus 1-2-3, which was $99 for a so-called Competitive Upgrade. My total investment was $1,234.00. Unfortunately, it was a complete waste of money (and time). My expenses were actually much more than $1,234 due to the untold hours I spent learning how to use the system, running it, and back-testing it. The system had several 'bugs'. Not the least of which was the fact the back-tested P&L Reports were not accurate due to the software stating the stop-loss order was hit at the stop price, when in fact it may have got hit earlier in the day at a worse price. More than occasionally that happened at a much worse price than indicated by its back-testing. I saw many examples of that occurring, resulting in the losses sometimes being significantly larger than indicated by the software's closed trade P&L Report. There were a couple of other problems with the design of the software. However, most importantly, the system's overall performance was just plain poor, or at times mediocre at best. When Bob was called about these problems or the system's poor performance, he was for the most part somewhat blasé about these matters. He was also impatient and had an abrupt manner about him. However, all those flaws and bugs could have been minimized if the system actually performed as good as it's heavily publicized and highly hyped track record indicated it did. Unfortunately, Grand Combo's performance, both real-time and back-tested was far from good. Bob's extensive promotional activities (mostly appearing over a long time period in a competing letter, similar to CTCN), claimed he made over one-half million trading it. However, when I ran the system over my own CSI data base the results were far inferior. I tested the identical commodities over the same number of years of data (10 markets), Bob Buran used to make his alleged half-million dollars. My back-tested results revealed an average profit per trade of only $26 with zero allowance for slippage and commission. When I tested the 35-commodities that comprise my large data base, the performance was slightly better, averaging $51 average profit per trade. However, once again that was with no allowance at all for slippage and commission. Note: One reason for the somewhat improved P&L over 35- markets (vs. 10) is that the system did comparatively well in a few markets not traded by Buran at that time, including Lumber, Orange Juice and Japanese Yen. In some markets, such as Coffee and Cotton (and some others, when they are volatile), a typical slippage and commission figure is likely to be as high as $200 or more. Even when not volatile, the average slippage and commission that most trading systems employ is typically between $50 and $100. You can see how this system would have actually lost tons of money if a realistic slippage and commission was factored into his P&L Reports. In fact, the losses would have been extremely high if multiplied by the many hundreds of trades Bob seems to have made during his track record time period.

169

When Bob was confronted with these facts about poor performance, he did not deny my evidence, and gave some very unsatisfactory and puzzling responses. For example, he said he somehow managed "to consistently beat the system" by getting positive rather than negative slippage and commission, a feat no one else seems to be able to do. He also said he was successful in bypassing certain losing trade signals his system generated (occasionally due to a gut feeling!). These things Buran somehow managed to do can't be done successfully by others, and in fact they should not be done with a mechanical system. I will likely do a follow-up article about this in a future edition.

???? Trading System & Market Timing Group - George Moldenhauer I just received an advertisement for a trading system. I would like to know if any members have had any experience with the system. The system is not disclosed by name in the flyer...it is only referred to as The ???????? Trading System. It is being sold by Peter W. Aan in Arlington, Texas. I would appreciate members' input. They can contact me direct at (801) 647-9478 during market hours and/or respond to CTCN for publication. (I would prefer the personal contact to help speed up response time.) I am looking for members that have direct experience with Market Timing Group and the trading system developed by Steve Kelson. His claims are almost unbelievable. I would appreciate a candid review of it by anyone having firsthand experience, including, but not limited to profits (or losses) drawdowns, avg performance on a per trade basis, etc.

TX Products - Prime/Line - John Maglovsky I received my September CTCN and couldn't put it down until I read it completely. The information was very useful and helpful. I would like to support the idea that you continue to give information about your software trading system. Many of us became members of CTCN because of your trading system. I have a comment about Prime/Line. Prime/Line is not a computer generated program giving buy and sell signals. It is for me, a time-consuming program assist. Prime/Line provides many of the same tools found in SuperCharts. Prime/Line is not for someone like myself, with a very limited time schedule. Thanks Dave, for your support, assistance and editing CTCN. New International Portfolio - Recommended Based on Volume & Liquidity David Lancaster Below are the international futures trading activity. These contracts represent the most liquid overseas contracts. Volume figures are average daily '93 as reported by each exchange. The "Start Date" is the first day of CSI data files and usually is close to the initial trading day of the contract. Exchange Contract Volume Start Date & CSI # LIFFE 3 mo Sterling 47,000 10/29/82 173 3 mo EuroMark 85,000 4/20/89 182 3 mo EuroSwiss 7,000 2/07/91 185 3 mo EuroLira 8,000 5/12/92 179 FTSE 100 Index* 15,000 5/03/84 209

170

Long Gilt 57,000 11/18/82 174 German Gov't Bond* 99,000 9/29/88 181 Italian Gov't Bond 38,000 9/19/91 284 DTB DAX Index* 16,000 11/23/90 131 Long Term Bund* 36,000 11/23/90 132 Medium Term Bund 20,000 10/04/91 288 MATIF CAC-40 Index* 22,000 3/01/89 079 Long-Term Nat Bond* 147,000 1/28/93 328 3 mo PIBOR 47,000 3/0l/89 078 TIFFE 3 mo EuroYen 87,000 6/30/89 070 TSE 10yr Jap Govt Bond 59,000 4/04/90 158 OSE Nikkei Stock Index* 48,000 9/03/88 248 SFE 90 day Bank Bills 26,000 8/03/84 228 10 yr T-Bonds* 19,000 1/11/85 225 3 yr T-Bonds 29,000 5/19/88 231 LME High Grade Aluminum 37,000 6/11/87 092 HKFE Hang Seng Index* 14,000 12/31/86 119 *already included in existing International Portfolio In addition to adding the above contracts that are not already included in your present CSI International Data Portfolio, I recommend removing the SFE All Ordinaries Index #230 and the LIFFE Japanese Bonds #180. These contracts only average about 2,000 contracts daily. This new international portfolio would be composed of a broad cross section of exchanges with 22 liquid futures contracts. I think that most traders would prefer a database of continuous contracts and the ability to maintain the back adjusted continuous format during rollovers. Editor's Note: I have asked CSI to setup this new International 22-market Portfolio for downloading and will let you know when it's available.

Editor Comments

171

Reference Larry Williams' article. John Hill said in last month's CTCN "you cannot copyright an idea." That may be correct but at the same token I agree with Larry that if a copy is "substantially similar" you likely will lose a copyright infringement lawsuit. In reference to Mr. Huber's article...it's true, historical testing of Cattle reveals that market usually does worse than other markets. There's an excellent and highly recommended book by Bruce Babcock titled "The Dow Jones-Irwin Guide To Futures Trading." In the book Bruce tests a wide variety of well-known trading approaches and systems in 10 diverse markets covering a 5-year time-period in the mid-1980's. For some odd reason Live Cattle ranks at or near the bottom in most of the runs. In fact, Live Cattle was profitable in just 11 of the tests and lost money in 58 tests. There is no clear explanation about why that market is so poor compared to others. Bruce Babcock also says in his book that he's never been able to understand the reason why the meats are so difficult to trade. Perhaps some CTCN members know the reason for LC's poor historical trading record. Perhaps someone could ask Hillary Clinton the real secret to trading Live Cattle, as it seems like no one else can trade it so successfully! If you study the Futures Truth rankings in this issue, you will see that suddenly several systems have much improved performance and rank at the top or high on the top-ten list. Unfortunately, a lot of that is mostly attributable to the fact that just by luck they happen to trade for the most part (or exclusively) specific markets that are trending well (i.e. Currencies). Because a number of individual markets have been steadily moving for some time now, many of the Futures Truth Top-10 ranked systems have made lots of money as a result of simply following good trends. In fact, almost any system, such as a simple moving average likely would have made substantial profits of late in certain markets. The true test of these top-performing systems will be how they do once the markets stop trending, get choppy, or reverse direction. Then it's very likely these top performing systems will either start losing lots of money and (or) have large drawdowns. In all likelihood their performance will decline significantly. Perhaps enough to knock them out of the top-ten list. Most traders do not realize just how important the specific market is to their trading success. In fact, it is my contention the performance of the specific market itself is just as important, perhaps even more important, than the trading system being used! That may be difficult for most traders to believe, but I am certain this statement is correct. Does anyone agree or disagree with me? Please write with your feedback. A poor trading system can perform well thanks to an excellent trending market. The opposite is also true, in that a well-designed 'good' system will likely lose money if trading a market having poor trending characteristics, including choppiness, or too much or too little volatility. Few traders realize this.

Special Request I ask that you please do me and other members a favor by making a contribution to the next issue of CTCN. Don't worry about your submission not being interesting or useful to Members...rarely is that true. Usually, most all contributions/ submissions/articles are quite interesting and valuable to other traders, but the author usually does not realize the actual value of his knowledge or experiences. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product. P.S. Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your subscription renewal.

172

Thanks to all who made contributions to this edition of Commodity Traders Club News.

Futures Truth Reports The October/November issue of Futures Truth's Master Performance Table is now available. Contact Commodity Traders Club News so you can get it at the discounted price of only $25.00. Detailed Report this issue-Joseph Stowell's ROCM, Hat & NCR. Detailed reports on individual systems are also available thru CTCN. The Best Performing Systems The Futures Truth Top 10 Systems For Past 12-months are: R&W Tech. Serv. Currency Master +116.6%, Lee Gettess' BondPat +113.6%, Joseph Stowell's NCR +104.5%, PWA Futures' DCSII +89.0%, Joseph Stowell's ROCM +55.4%, Jurassic Trading's Bear +43.6%, Jurassic Trading's Raptor +43.3%, FutureSoft's Benchmark +43.2%, Chuck Hughe's Destiny +41.6%, Future Truth's Universal LT +28.4%. Futures Truth Top Ten Systems Since Release Date, based on ranking by annual combined percent returns on required capital (3 X margin) are: Dave Fox's Dollar Trader +89.4%, Staman's Black or White +85.3%, Jurassic Trading's T-Rex +72.8%, Hughes' S&P Pattern Daytrade +69.6%, Taurus' Grand Cayman System +66.6%, Joseph Stowell's ROCM +56.9%, Joseph Stowell's HAT +56.2%, Dr. Jenkins System +46.2%, Futures Truth's Universal LT +43.7%, R.C. Allen's Miracle Trading Mthd. +42.6% Note: Trend Index Trading Co. Swing Catcher System was ranked from 1990 to 1994. It is no longer tracked by Futures Truth. That's because they only have sufficient staff and resources to track a fixed (nonchangeable) market portfolio. Using its built-in Trend Ranking Module (which selects and ranks the best markets to trade each week from a 35-market portfolio) would result in Futures Truth tracking a variable (changeable weekly) portfolio. It was ranked as the 5th best system since release date, covering a four year period, with a 78% annual return, the last time it was rated, using a fixed market portfolio. Advertisements By popular demand - Key To Currencies Software is again available. It position trades BP, SF, DM, JY; Profits on margin over 17 years average almost 400% per year. Costs $85,000 to buy or $18,000 to lease for 3 months. Also newly available is Key to Currencies Fax for $5,000 every two months. New Daily Fax for 38 Futures. Position trades with specific entries/exists/stops. Profit in past 6 months exceeds $100,000 trading one contract. Will accept only a few more subs at $2,500 for 2 months or $6,500 for 6 months or $12,000 for one year. Note: Software and FAX each have full money-back guarantee. We are not CTA's. Please inquire about managed accounts (minimum $35,000) and custom-made software for your favorite futures. Call 305-251-6762 or 800-392-2664, FAX 305-254-3272. Limited Availability. Act Now! We made $74,230 in 1994! You can do it to, in 15 min/evening! Trading two S&P futures contracts with our system, you would have achieved a 400% return on margin. No guesswork, our system is fully automated for SuperCharts or TradeStation. Try our real working demo system free for 30-days, call now: 510-652-5010. Hurry, call now. Supply limited to the first 500 callers. Or fax to: 1-510-652-1487 Hennessy Corporation, 169 Avenida Drive, Berkeley, CA 94708 Seasonal Spreads Newsletter - Bob McGovern's "Commodity Futures Spreads" a dynamic bi-weekly commentary on best spreads! Documented actual spread trades for 1994 shows $10,000 equity on January 1, increased to $50,393 before commissions by October 17! Discover the advantages of futures spreading. 26 bi-weekly issues/yr. Only $200. Call for free sample (714) 363-6667 The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. ALL RIGHTS RESERVED. Written permission from the Publisher/Editor is required for reproduction in

173

any form and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members. We do not, and we have not, verified the accuracy of the mathematics or numbers published herein, or accuracy of comments and remarks made by the authors. You also should be aware that advertisements are frequently based on hypothetical (not real-time/actual) trades. In the event a contributor does not include article headlines they may be subsequently written by the Editor, using verbiage the Editor believes highlights important points being made. Subscription to Commodity Traders Club News...'Your Guide To Profitable Trading and How To Save Money Along The Way' is $80.00 for 1-year (12-issues)...includes FREE First Class Mail within USA & Canada (add $17 Overseas Air Mail). Publisher: Trend Index Trading Co., 2809 E. Hamilton #117, Eau Claire, Wi. USA 54701. Phone 1-715-833-1515. FAX 1-715-833-8040. Editor: Dave Green. (There's high risk of loss in futures trading) Issue 19. Step-By-Step Advise on How to Correctly Select a Broker Simon Campbell Choosing the right broker is a critical aspect of trading. While it is easy to obtain recommendations for a broker, the actual selection process itself is often overlooked. What is a great broker to someone else, might not be a great broker for you. For this very reason, I have avoided giving out my own broker recommendation (plus, I don't want to detract from the selection procedure itself). The following is a checklist of the process that I go through when looking for a new broker (any additions are welcome!). Many of these steps will be universally applicable, others will relate only to my personal needs. So, pick and choose the ones that apply to your situations 1. First and foremost, clearly define what your needs are. Are you a novice or experienced trader? Are you a day trader or position trader? Do you trade in both Chicago and New York? The answers to these questions will determine the 'category' of firms you will want to look at. 2. Based upon your needs, obtain a list of 4-6 different brokerage firms. You can get such a list from recommendations or advertisements (or even by glossing through Futures Magazine annual 'SourceBook 'for firms that may be suitable). For the purposes of illustration, as a day trader (only) in the Chicago markets who is interested only in fast execution and fill quality, my initial needs are: Broker must be located in Chicago. That's where the business is, so that's where I want my firm; firm is a clearing member itself on both the CBOT and CME. I prefer not to have to go through a 'middleman' Introducing Broker (IB) and pay a middleman's commissions. However, not many clearing firms deal directly with smaller individual retail accounts, so you have to do your homework to find the ones that do; I prefer NOT to use one of the large wellknown/heavily advertised discount firms (personal bias/opinion - based on prior experience). Once you've got your list of 4-6 possibilities together, call the NFA at 1-800-621-3570. Ask them to mail you a written copy of all disciplinary actions taken against a firm (do this for all 4-6 firms). If your considering an IB then be sure to obtain the disciplinary information for both the IB and the clearing firm that it uses. Note - Some firms with a poor disciplinary history may have changed their name and registered with the NFA under a new name to try to 'hide' their history. So ask the NFA how long each firm has been registered under their name. If not long, then ask the firm for their previous name, and get the NFA to check under that name! Going a step further - you could even ask the potential brokerage firm for the name of the floor broker/s that it uses in the pit/s that you trade, and have the NFA check up on them too!

174

4. Once you get your NFA reports, you may choose to automatically rule out a few firms with poor disciplinary records. There are two things that I look for in these reports. Firstly, any major 'problem' like a huge fine/fraud/big lawsuit etc. Secondly, I look for an excessive number of reparation complaints against that firm, relative to other firms. I'm not overly concerned about occasional minor rule infringement. 5. With your surviving 'possibilities' - contact them! Be sure to let them know that you are speaking to a few different firms, and that you won't be making a decision until after you have spoken to everyone. Not only is this a good idea, it's also a useful negotiating tactic. Make the firms compete for your business! 6. Ask each one, any probing questions that you can think of e.g.: If dealing with an individual person (e.g. full-service broker), how experienced is he/she? Will he/she help you with order placement if you need help etc? If dealing with a discount order desk, where is it located? (preferably on the exchange floor) How many phone calls before your order reaches the pit? How fast is their turnaround time in the markets you trade? (especially important in New York markets). You don't want a broker that is slow to report your fills. Does the clearing firm use salaried pit brokers, or independent pit brokers (in the markets you trade)? Preferably you want independent pit brokers, because they will likely have a greater vested interest in giving out good fills, as opposed to a salaried employee, who is merely doing a 'job'. It is also easier for a firm to switch from one independent pit broker to another, than to get rid of a salaried employee. Is the clearing firm financially sound? Is it a member of all the exchanges that you trade on? (If not, find out the other clearing firms, and check their disciplinary records). 7. Negotiate the best commission rate you can, based on your account size/trading activity and experience. Make sure that you negotiate all fees (except the $0.16 NFA fee) into the commission rate that is quoted to you, otherwise they'll show up as 'extras' on your statements! Tell them about a better competitive offer (if you have one)! Don't commit to anyone until you've sized up all the offers. 8. Then, based on all criteria (not just commission rate) pick a firm that you feel will best suit your needs and personality. Don't necessarily go with the lowest commission rate. Go with the best 'all-round' offer. If commission rate is in the middle of all your offers (and other intangibles look to be the best) then you've probably made a good choice. You don't want to be penny-wise and pound foolish! Finally, my personal belief (contrary to the opinions of some), is that even if you are a novice you are better off going with a quality discount firm (as opposed to full-service) in order to reduce your trading overhead. If a (full-service) broker's 'advice' was so wonderful then he wouldn't be a broker, he'd be a trader. If you are a novice who needs help in learning how to place orders, and wants a thorough understanding of the order process itself, then order Joe Ross' course "How to Place Trading Orders." You'll likely learn more about order placement from this course than you will from your full-service broker, and save yourself lots of money in the process.

Does Futures Truth Use of Systems Result in Copyright Violations & Should They Get Income From Them? - Kent Calhoun John Hill is a valuable asset to the futures industry, and my respect for him has matured over 15 years. Our friendship is greater than my viewpoints of this issue. Others have refused to address this complex legal issue. I am not a lawyer, but have studied law. When I was informed last year of the suit against Futures Truth (FT), I told John Fisher the case would be dismissed due to a lack of jurisdiction. It was dismissed on that basis. Now let's examine the Hill-Greenwald controversy, etc.

175

The US Justice Department successfully prosecuted Japanese computer manufacturers for stealing IBM "trade secrets," and IBM was awarded a substantial financial settlement. The Justice Department stated to effect "architecture of computer software and computer hardware component designs belong to IBM," just as lyrics and music of a copyrighted song belongs to its author. Feist Publications, Inc. v. Rural Telephone Service Company, Inc., 1991, reaffirmed the original constitutional historic interpretation of copyright law which "copyright rewards originality, not effort." Feist had a telephone directory that overlapped Rural Telephone's directory listings, which the court ruled could not be covered by copyright law. This ruling reinforced Harper & Row v. Nation Enterprises (1985) that no one can claim authorship in facts or other non-original material. "Originality," is the operant word concerning copyrights. The second legal aspect to consider is that rights are legally recognized negotiable entities and may be legally viewed the same as personal property. Any attorneys out there please respond. If a person buys a stolen TV at a garage sale and it is later discovered in the purchaser's home, the purchaser is arrested and taken to jail despite producing a bill of purchase. This is criminal law applied to receipt of stolen property, and is often a felony if the object's value was over $50. FT knows most system purchasers must sign a nondisclosure document prohibiting purchasers from selling, copying, and transferring any of the system's information to others in any medium. "Original design," is protected by United States federal copyright infringement law. Violators may be sentenced to five years imprisonment and a $250,000 fine per offense. When Futures Truth receives an unsolicited trading system, does copyright infringement take place when FT reviews the trading system? Is FT in receipt of stolen property, since property and copyrights may be legally treated the same? Should FT be held financially accountable for deriving income from the developer's system, when they do not have the developer's permission to review the system or have paid the developer for his system? These are legitimate legal questions that could have expensive answers. Why expose FT to these potential lawsuits?

Does Futures Truth Benefit from Others & Have A Conflict of Interest - Kent Calhoun Does the original design of a trading system belong to the developer? I believe it should. At what point is the new system design original? I do not know. Many systems use my 1981 opening breakout system for their entry. This system places buy and sell stops equidistant from a price reference point, like an open or close. Are these developers in violation of my original copy-righted material. I do not think so, but legally they could be. A system purchaser, who sends system materials to Futures Truth (FT), is guilty of violating a nondisclosure document, a civil matter, and copyright Infringement, a criminal matter. FT would be required in deposition or court to reveal person's name who sent then the system. FT benefits by learning how the most successful trading systems are designed, access to trade good systems, and financially profits from the system's design without paying vendors. Is a law broken? Again, the Justice Department has already stated the "original design'' of software, computer chips, and hardware is protected by existing copyright law. FT knows systems of "original design" are copyright protected, and is more knowledgeable than purchasers of stolen goods at a garage sale. Futures Truth sells research reports of a system's performance, sells FT's newsletters tracking the system's performance, FT discusses the system's design in video tapes, and presents system design information at their seminars. All these things financially benefit FT and help sell their products.

176

FT was started to drive one well-known system marketer out of business. The vendor allegedly sold trading systems belonging to a system creator's widow, who received no compensation from the vendor of others' systems. FT now uses vendor's systems to produce their income without purchasing them or compensating the vendor. FT does not sell the system's rules, that's the only vendor's difference between them and the well-known system marketer. A conflict of interest exists when FT rates their systems, and FT admitting this fact does not condone it. Independent testing reported in another newsletter last year showed FT's Universal 44% less profitable than reported by FT. The error was ascribed to bad data used to produce results; FT was not responsible for their misrepresentation of their system's results. Without FT, where is an honest vendor to turn to have his system results verified? I have spent over $13,500 to this end with FT, because I want to produce the best trading materials available. FT's testing has helped me improve the trading results of my systems, and this helped increase their sales. Should FT stop publicly rating their own systems, and using vendors' systems without paying for them? Absolutely! Both practices detract from FT's credibility and reputation for honesty, invite further costly litigation, and undermine FT's efforts to being needed vendor accountability to our industry.

Info on TBSP/Pocket Quote Pro/PrimeLine/ Reply to Russell Sands & An Opinion Curve-Fitting is Desirable! - Paul E. Diehl I appreciate the answer to my question on TBSP Right Time Stock Program (RTSP) from George Moldenhauer. His experience is the same as mine. I had a broker from Chicago contact me to tell me that he can trade the OEX successfully with the RTIP program, but he had to invent his own rules of entry and exit. I didn't open an account. Why buy an expensive automatic computer trading program if you have to make up your own rules? I also appreciate the response from Don Good on the Pocket Quote Pro. I will stay with my Quotrek which gets good reception over a 50-mile radius from the St. Louis Arch. It is expensive, but when one S&P 500 tick is worth $25.00, it's worth having that accuracy. Quotrek also separates the Globex range from today's trading numbers which solves the problems mentioned by John Bowley. I have purchased the Prime/Line System mentioned by Chris Ongley, but have not as yet figured out how to use it. I have been a trader for over ten years, so I am not a novice but this book seems to leave some information gaps. I haven't called Mr Greenstein for support, but will report on my results in a later CTCN after I give it a fair trial. To Mr. Sands: I mostly trade S&P 500 futures and options with some OEX and stock options. I have learned a number of golden principles for trading that works in all markets, but I find that specifics vary from market to market almost as though each market has its own personality. Some markets are as giddy as a school girl. Others are stoic. Some plod along like an old man while others run sprints. Some are swingers while others are slow and steady. It therefore seems to me that you must "curve fit" your systems to match the personality of the market that you want to trade. I have a hard time believing that one system works in every market without modification for that market. I would be very happy to get one really good system to day trade the S&P and forget all the rest. There is more than enough action in that market to keep me busy.

Bob Buran's Grand Combo System Only Makes Money If You Are Paying $2 Commission! - Mervin Pearson

177

I recently became a subscriber to CTCN; October 1994 was my first issue. I did however get all the backissues and have enjoyed reading the articles. The editor has requested more input about Bob Buran. Here is my experience. I purchased the video and system from Bob when it first came out. I usually don't buy systems because I have never found one that fits my trading style. The reason I bought Bob Buran's system was the way he touted that he was all for helping the little guy. Also the reason he sold so many was because he included monthly and yearly statements. The statements to say the least were deceptive. The profit he actually did make; but not by following the Grand Combo System to the letter. A lot of the profits came from fills other than from the system. In other words, he used judgement in entries and exits. Also, in reviewing the statements, a lot of the profits came from crude oil and heating oil, leading up to the Gulf War or during the war. There were some months that if he didn't have the oil complex he would have lost money. I traded the system for about two months. The markets I used were Mid-Am T-Bonds, Silver, Soybeans, Live Cattle, Crude Oil, Cocoa and Sugar. I called this my lucky seven portfolio. I followed the signals to the letter. The system actually made money! (not much per trade) but it lost because of poor fills on stops. Every entry order is in a stop. If the trade gets stopped out, than you have a chance for 2 bad fills. I was paying $25 in commissions and in two months I lost about $2,000. The system would work if you were a local only paying $2.00 per round turn. Editor's Note: I spoke with Fred Montgomery who wrote about Buran last month. He says even paying $2 commission would still result in large losses due to slippage being a major negative factor.

A HARD LOOK AT DAY TRADING - Reprinted with permission of Technical Traders Bulletin Part One We receive more requests for articles and advice on day trading than on any other topic. Beginning traders are especially interested, particularly those that have been attracted by the glamour and intensity of the pit traders who seem to be constantly jumping in and out of the markets and reaping enormous profits. It seems like almost all traders have tried day trading at one time or another. After all, it is very tempting to try and slug it out with the pit traders. Every tick is exciting. Every rumor or news item that affects the market either creates euphoria or is another nail in the coffin. When you have a position on, you can't stand the pressure, but if you're not in the market you tear your hair out every time prices act the way you predicted. Your heart pumps fast, your adrenaline surges, and you feel like you've finally arrived in the wild and woolly world of fast-paced futures trading. All of this sounds like fun, but as you might imagine, there are many, many pitfalls along the way. We've come to realize, after talking to numerous traders who have attempted or are about to begin day trading, that most traders who start are not fully aware of the scope of the problems they face. To some readers the following discussion may be redundant, but we suspect that many of our subscribers may be embarking on a venture with only a limited grasp of the basics. Cost of Doing Business is High The day trader enters and exits trades during the same market session, normally a period of only four to six hours from opening to close. The very short term nature of day trading presents both advantages and disadvantages. The major advantages are the lower margin requirements and the absence of overnight risk. The disadvantages are the bad odds, time and effort required, the limited profit potential, and the burdensome costs of frequent transactions.

178

The transaction costs consist of both commissions and slippage. The commissions are a large and obvious cost of doing business. However the slippage is much more difficult to quantify. The trader might have a mental image of trading at the prices shown on a computer screen, but in reality he must continuously buy at the offered price and sell at the bid price. The spread between the bid and offer becomes a very substantial but hidden cost of doing business. In addition, as most of us have learned many times over, it is unrealistic to expect stop orders to be filled at our stop prices. In the meantime, to offset these unavoidable costs, the day trader is limited to very small profits when he is correct in his analysis and completes a winning trade. Under even the most optimistic scenario, the day trader's potential profits are limited to a portion of the price range that is likely to occur within a few hours of trading. Let us assume that our day trader has negotiated a discounted rate on his day trades and is paying twenty dollars per trade. Next let's be optimistic and assume that the spread between the bid and offer amounts to ten dollars buying and ten dollars selling. In order for the trader to complete a trade that nets $100 he must be smart enough to identify a move of $140 according to the prices on the screen he watches. On the other hand, when his timing is wrong by only $140 he is going to lose $180. It doesn't take a Ph.D. in mathematics or an M.B.A. from Harvard to figure out that this is far from an ideal business environment. In fact, even the professionals on the floors of the exchanges must be intelligent, highly disciplined traders just to survive. The public doesn't realize how many of these professionals fail in spite of the advantage of being on the floor and paying only minimal costs per trade. Imagine how small the odds for success must be for an offthe-floor trader faced with the costs we have described. To have any hope of success, the day trader must strive to maximize the profits on the winning trades so that he can overcome the tremendous disadvantage of both the obvious and the hidden transaction costs. Unfortunately, the day trader has very little control of the potential profit to be obtained because the extent of the price range during the day absolutely limits the maximum profit that can be realized. No trader can reasonably expect to buy at exact bottoms or sell at exact tops. A very good trader might hope to be able to capture the middle third of an infra-day price swing. That means that to make $180, the total price swing must be three times this amount or $540. How many futures markets have a daily price range of $540 or more? Very few. How many futures markets can produce a $180 net loss? Almost any of them. Don't forget, the trader that is smart enough to find markets with $540 price swings and then smart enough to trade them correctly so that he nets $180 is only going to break even unless he has more winners than losers. To make money in the long run, the day trader must have a percentage of winning trades that is far better than 50% or he must somehow figure out how to make more than $180 on a $540 price swing (or best of all, do both). This also assumes that the trader is smart and disciplined enough to harness his instincts and emotions and carefully limit the size of the losses. Beating Tough Odds As you can see, the day trader is faced with an almost impossible task. We would venture a very educated guess that less than one out of a thousand day traders make money over any sustained period of time. Our best advice is to not even attempt it unless you are one of the many traders who is actually trading for the recreation and mental stimulation rather than the money. If you are serious about making money, your time and energy will be much better spent perfecting your longer term trading skills. Even if you should succeed at day trading, it is difficult to reinvest the profits and continue to compound them. Day traders can only operate efficiently in very small size so don't expect to make your fortune at it, it's only a very enjoyable but hard earned living at best.

179

In spite of our sincere warning, we know many of our readers will attempt to beat the odds and become day traders for a while. Fortunately the lessons learned while day trading can be applied to more serious and productive trading later on. In the meantime, we will do our best to explain as much as we can about day trading and hopefully make the learning process less costly. Obviously, we don't have all the answers ourselves or we wouldn't have such a negative outlook on the probability of success. We certainly have learned a great deal about this subject over many years of trading and the fact that we have elected to no longer play this game simply demonstrates our personal preferences in the allocation of our productive time. We hope whatever hard-earned information we can pass along proves helpful. Selecting Best Markets For Day Trading As we pointed out earlier, there are very few markets that have wide enough infra-day price swings to make them suitable candidates for day trading. Because they must monitor the prices so closely, day traders generally prefer to concentrate their efforts on only one or two markets. In addition to the fact that the prices must be watched continuously, there are very few markets that are suitable even if we had the capacity to follow more of them. Presently, day traders seem to have given up on pork bellies and tend to favor the stock indexes, bonds, currencies, and energy markets. From time to time other markets may become candidates for day trading because of temporary periods of high volatility. We ran a test (several years ago) to see what percentage of the time various markets had a total daily range of $500 or more between the high of the day and the low. There were only five markets that had a $500 range at least two days a week or 40% of the time. In addition to looking for a wide daily range, liquidity and the size of the minimum spread should also be factors to consider when selecting suitable markets for day trading. Our previous example of costs included paying a spread of only $10 on each side of a trade. In the S&P market a minimum spread would be $25 each side while in the bond market a 1/32 spread is $31.25. If you are day trading bonds with $20 commissions, you must overcome total costs of $82.50 added to losses and subtracted from gains. Your average winning trade must run $165 farther than your average loss just to break even. This assumes a one tick spread which is the best case possible. The element of liquidity comes in to play in determining the number of ticks in the spread between bid and offer. A one tick spread is the best you can hope for and most markets have a wider spread than that. You can usually assume that the higher the average daily volume, the tighter the spread. For that reason, you will want to concentrate your day trading in only those markets with very high volume. Otherwise, you can be making good timing decisions and still be assured of losing money.

Too Many Data Formats - Michael Gourbault from Canada - Part II Which brings us back (by a giant step forward for Mankind) to "Alan's" current troubles. Now, after connecting with his data vendor via modem, then converting the data to the MetaStock format, Alan decided to try his new MetaStock continuous contracts In all three programs. Three programs, three perspectives. In they go in Program #1. Oh, how lovely, and educational! Everything works fine. Now, Program # 2 . . . , Bravo. (Ah, yes, perhaps we should tell you that Alan - well, Michel, if you must know - was also a professional French translator. Not an American, of course, but European French - this as a way of "explaining" his peculiar Ideas.) Where were we? Yes, Program #3. Nothing doing: the program rejects the appetizer being handed to it. Michel insists... even stooping as low as trying to coax the beast. No way, Amigo! His hot Latin temperament now fully aroused, Michel sees red, gets hot under the collar, loses his temper... Well, you get the picture.

180

Soon, the battle between the Beauty and the Beast was in full swing. (Don't get me wrong: a Beauty he is not - that's just a figure of speech.) Michel gets all of his wits and debugging tools and knowledge together and fires them one by one at the insolent target who acts like the stupid donkey that "it" is. For days on end he successively and systematically uses the following reasoning and investigative techniques: 1. He tries three continuous contracts (PL, SF and PB) in CSI format that came with his program which was in CSI format from the CSI company. The program works fine in every respect. 2. He tries the same three contracts from CSI-converted data from his own choice of vendors. 3. Now he uses the MetaStock format. A message appears that speaks of zeros in the data or insufficient amount of data. It quickly blocks any further processing. 4. He fires a barrage of faxes to the program designer to inform him of the problem and of the different things he is doing to try to make it work. The designer, at first, does not believe there is really a problem; even gets a little fired up when he thinks Michel expects his program to be compatible with every other trading program on the market. He also takes exception to the comments made by his client regarding the "illogical" use of three different date formats, YYMMDD, MMDDYY, and DDMMYY, in the English-speaking countries. Calls it a 'trivial issue," not worth discussing. Michel, of course, was relating this to the possible file data incompatibility problem, if one vendor used one date format and another a different format; but failed to explain his thought clearly enough. No, I won't tell you the end of the story. By order of my sponsor and, in any case, because my sense of ethics requires that I protect the identity of the guilty parties. But I will add this, as the morale of this story: Once upon a future time, a group of data vendors and software program designers will finally come to their senses and do like the Europeans and the Japanese have done at least for decades past: they will get together and, if only for their own sake in this Darwinian world of dog-eat-dog and survival of the fittest that they have helped create by their apathy or indifference, will try to stop the confusing proliferation of compatible, semi-compatible and incompatible data file formats, and agree at last on just two formats: one for all the modem oriented services, and the other for the FM/cable/satellite data vendors. And finally the consumer or end user will live in a sane world. But this, alas, will be the world of the seventh generation to come.

How Welles Wilder's ADX Indicator Can Improve Other Trading Systems - Giampaolo Bulleri from Italy I write this article to share with CTCN's readers some experiences about the use of ADX indicator coupled with a typical trend following trading system (in this case Swing Catcher, but I want to speak in general and I want to know if these considerations can be applied to all trend-follower trading methods). In the graphic below, I have represented a "stylized" ADX just to be clear in the exposition: Chart in Print Copy We can divide this graphic in 5 zones (A1,A2,B1,B2,C): Zone A1: ADX flat or descending with readings greater than 45, overbought territory, trend is over.

181

Zone A2: ADX flat or ascending with readings greater than 45, overbought territory, high probabilities of end of the old trend; Zone C: ADX readings less then 25, oversold territory, high probabilities of born of a new trend; Zone B1 : ADX is descending: no trend; Zone B2: ADX is ascending: trend. These are in my opinion the general rules to follow if you trade with a trend-follower method: Zone A2 and C: trade with a conservative approach (low risk) Zone A1, B1: do not trade this contract Zone B2: trade with an aggressive approach (high risk) Well, the discussion is open!

Why Cattle Trading Is Difficult - Andy Dmori Following is a response to H. Lowell Huber's wondering why certain traders do not trade cattle (CTCN October 1994). Curtis Arnold, developer of PPS, opined in PPS News, Issue 1, Fall 1992: "The meat markets, despite occasional sharp trends, are not considered to be good 'technical' markets. They tend to chop around a lot and are replete with false breakouts and inconsistent price action. Being largely domestic markets, they have often been rumored to be manipulated or controlled by insiders. With the exception of a very few fundamentally-based professionals who specialize in these markets, the majority of the professional trading community shun them for the reasons cited."

What Exactly is A Swing-Low? - Rointan F. Bunshah I am responding to David Stone's contribution on page 2 of CTCN's October '94 issue. It is a very simple system that is discussed. Unfortunately, a very important definition has been left out, i.e., what is the Swing-Low Pivot Bar? Is it the swing low for the second swing whose low is higher that the previous swing low? Perhaps a better set of diagrams would clarify the issue. They could have a horizontal line on the price bar to indicate the bar and price of entry. If you can send me David Stone's address or FAX, I will be happy to write to him directly and he can then send in the clarification for the next issue. If you know the answer, please send it to me by letter or FAX. Thank you and keep the good work. I enjoy CTCN. Here is my chart, it is correct? Chart in Print Copy Editors Note: I have also printed a chart below Rointan's chart showing Swing-Lows & Swing-Highs.

The Facts about Futures Truth - John Hill For the record, the facts are as follows: 1. Futures Truth(FT) will continue to publish the performance figures on publicly offered systems as long as a reasonable number of people want this type of publication. 2. We will stop publication when interest ceases. We do not depend on this publication for a living. 3. Profits after a reasonable amount of working capital, will continue to be donated to a homeless children's school. I personally have never taken a salary from this operation. We let one key computer employee go for lack of funds to pay salary.

182

4. We do not now, nor have we ever traded one single idea from all the systems we have seen without written permission from the owner. A pool we organized quit trading publicly offered systems about 3 years ago. Today, we only trade our own ideas and none of them include ideas that are not our own. 5. We do not intend to respond to the Futures Truth "Bashing." Life is simply to short. We ask our clients to consider the source. 6. In our judgement, we have done nothing wrong either legally or morally. We are the only persons we have to satisfy on this point unless someone would like to go to court. If our clients feel that we are wrong they will simply stop supporting this effort and we will quit. It's that simple. 7. We will continue to offer a few of our own systems for sale, as this small amount of income is needed to support the computer effort. This is a conflict of interest but it will continue. 8. We have never revealed anyone's system at the few seminars we give. 9. We also give Futures Truth "Bashers" one more source of complaint. As of 10/3/94, Futures Truth became a member of NFA and we are now a CTA.

Definition of A Swing-Low - David Stone A Swing-Low is a low day surrounded by higher lows on each side. The more higher-lows on each side the better or more powerful the Swing-Low is. However, just one higher low on each side is sufficient to qualify it as a Swing-Low. A "higher Swing-Low" is a secondary consecutive Swing-Low who's low is HIGHER than the preceding Swing-Low. After it occurs, entry on the long side is on the next days open, or on the close of the day after the low day, if you can identify it and get in before the close. The reverse is applicable for Swing-Highs and subsequent short side trades.

The Specific Markets Performance Are Indeed Very Important - John Bowley This is in response to the editor's comments in the October issue. The specific markets used by any trading system are indeed very important. Many use only S&P, Bonds or currencies because these have the most liquidity. Each market may be trending or not at any point in time and is easily seen by drawing trendlines on price charts. For example, I conclude that the Futures Truth Universal and Swing Catcher trend following systems make most of their profits when any market is trending up or down. Wilder's ADX, VHF and Bollinger's BWI all can help avoid trendless markets where the worst drawdowns occur. It is suggested that each market's equity run be optimized in this way before combining several markets in a portfolio if desired.

The Mother of All Systems - By Robert Alberto (submitted by Alfred Wong) This stock trading system needs two sources of info and has four trading rules. You need Investor's Business Daily and Standard & Poor's Stock Guide. Although the newspaper prints daily, looking at it weekly is fine. Standard & Poor's has yearly books. You need to took at a monthly guide. Investor's Business Daily is at most libraries. Standard & Poor's Stock Guide is not. But you can get a trial subscription.

183

Rules one, two, and four involve looking at Investor's Business Daily. Buy stocks that pass rules one, two and three. Sell stocks that pass rule four. Trading Rule #1 - Buy stocks that have doubled their 52-week low. Scan the paper for "N H." This means new 52-week high. Then compare the close to the high. Trading Rule #2 - Buy stocks that have an earnings per share (EPS) and a relative strength (RS) of 80 or better. Investor's Business Daily alone prints relative EPS. Trading Rule #3 - Buy stocks that are making all-time highs. This means for the life of the stock. If Standard & Poor's does not cover the stock you'll have to call the company or a knowledgeable broker. Trading Rule #4 - Sell stocks immediately whose relative strengths (RS) drop below 75. Of course you can sell earlier if you have a good profit. Some Fine Points - Don't buy stocks that have risen more than 10% past where they've doubled. Only buy stocks selling for $2 dollars or more. Use a discount broker. I haven't been able to test this system. Clearly it is a relative strength momentum system. It definitely selects few stocks now. A quick glance didn't reveal any recent buys. Maybe there are plenty at market bottoms. I wonder about past stock price history. Do the two sources adjust for stock splits? I seem to recall some inconsistencies between the closing price and past price ranges. Trading rules one and three depend on accurate prices.

A Solution to the Problem of Graphics Output to A Laser Printer Dennis Kubeldis I received and installed a trading system upgrade recently, and was pleased overall. However, a little disappointed not to find graphics support for my HP LaserJet Printer. I considered trying to find hardware adapters mentioned in the system's "readme" file, but decided to check with friends that have been into the computer scene for many years. Well, as it turns out, between their suggestions, something I was told a while back, and some experimentation on my own, I now have no problem printing my trading system's graphics to my LaserJet IIP Plus. It turns out to be rather easy, and my suspicion is that this method will almost certainly work on a variety of other printers. I thought I'd share my findings with you, and any others who have an interest via the "Club News." When I first asked if I could use my LaserJet, I was told that I might try replacing the "GRAPHICS.EXE" file in the system directory with DOS's "GR.APHICS.COM." This didn't work. A friend told me about a DOS command that would load a small memory resident program which would then be used on all "Print Screen" commands. The command is graphics. It needs to know the printer type, and the drive and path where DOS files "Graphics.Com, and Graphics.Pro" are stored. Several switches are also available for use with this command. These files are in my DOS directory, and since DOS is included in the path statement within my Autoexec.bat, I was told that all I needed to do was add a line to the Autoexec (after the path statement), as follows: graphics space laserjetii. (Laserjetii is one of 16 parameters or printer types available with graphics command)...this didn't work either. However, after a fair amount of trial and error combinations, I found that loading the graphics program at boot-up (through the autoexec), and deleting "Graphics.Exe" from the system directory, (actually, I just moved it to a temporary directory), allowed all graphics to be automatically printed during

184

my system's auto run, or printed with Print Screen command when doing a manual run. The only abnormality appears to a message reported on the screen by DOS when loading it as follows: Unable to reload with profile supplied. It now appears that the initial suggestion didn't work because there was no way to specify laserjetii from within the system directory. It would need to be called from the system's code. When the graphics command was executed by the program, it had no parameter for type, and I believe defaulted to "hpdefault," (the first type parameter listed in Graphics.Pro). Also, loading the correct profile for my printer at boot-up was basically changed back when it was loaded, as long as Graphics.Exe existed in the system directory. Editors Note: The solution is to write a new boot-up batch file that includes the correct graphics driver and switches.

Member Requests Kenneth Phillips is interested in recommendations, opinions, comments or evaluations on Jeff Rickerson's, The Advanced Market Optimizer II, for sale again at $3,000, not sold since October 1990. Ken Periso wants to know how to create continuous contracts and where to get software; how to collect cash prices to figure basis? Karl-Hans Mohr wants to be in contact with other German members of CTCN. They can call me in Germany at 011-49-6221831301, or write c/o CTCN. Steven Burningham wants info on Futures Pro. Member George Moldenhauer is looking for members that have experience, real-time with the Recurrence IV Swiss Franc System. Editor Comments Per my request CSI has setup a new International 22-market Portfolio for downloading. They also have given a super low price of only $19 per month, via long distance access, to download the above portfolio. In fact, if you agree to prepay for one-year ($228) they will even waive the regular $59 cost of account initiation and their QuickTrieve Software. Domestic users may prepay $288 if toll-free access is desired. Note: You do NOT have to be one of our software clients to download the new portfolio. To sign-up for it simply call CSI at 1-800-274-4727 or (1-407-392-8663 for foreign callers) and request the new Trendx/Dave Green/CSI 22-market International Portfolio. Be sure to mention that you are a Commodity Traders Club News Member. This portfolio is available for immediate downloading. Thank you to David Lancaster for doing lots of research on this optimum portfolio based on volume, etc., as referred to in last month's CTCN. Reference the Futures Truth discussions and issues. I know John Hill and George Pruitt. Both John and George are extremely honest and have great integrity. I am also convinced they are unbiased and try to do an honest and accurate job. Their work reporting on the many trading systems available to the public is difficult, complex and at times a thankless job. There are a number of legal and ethical questions involving Futures Truth's operations that have been raised by certain parties in this issue and others. CTCN Members are invited to give their opinions on these complex issues involving Futures Truth.

185

Issue 20. Walk Forward Tested System Is Better than the Best Optimized One - Larry Williams It looks like the history of technical analysis has been largely influenced by optimization. That is, we studied the past, found something that looked significant, then optimized rules and procedures to trade the observation in the future. Sometimes that has worked. Often it has not. That's our dilemma. What are we to do? In the past, we answered these questions by doing more optimization, more curve fitting. Indeed, we treated historical data like prisoners of war. Our thesis was, if you beat them often enough they would reveal anything. Which is true, but you want them to reveal everything, not anything. This brings me to one point. I think we will all make much more headway with system development by spending less time on optimization and more time on walking systems and procedures forward. If on a walk forward test, the system holds up, we probably have something. And for sure, what we have will be better than the very best optimized system when it comes to real time trading. Hence, let's see what we can learn from each other about conducting walk forward tests. Any ideas will be appreciated by all, I am certain.

How I Consistently Make Money Day Trading...a Very Positive & Contrary Response to Last Month's Negative Article about Day Trading - Anonymous Trader I am writing in response to the article "A Hard Look at Day Trading" (11-94 CTCN). I'm a professional trader for seven plus years and a day trader to be exact. I get so disgusted with the experts on trading methods, systems, etc. If I had listened to all these opinions about how difficult day trading is and how it is almost impossible to make money, I probably would have believed it and quit many years ago. I make excellent money day trading most every day. I find it exciting, enjoyable, challenging and very profitable. There are many advantages to day trading: 1. No overnight exposure on a regular basis occasionally I'll hold a profitable day trade overnightto get an extra pop at the beginning of the next day's session, where as a position trader will hold losers overnight regularly. 2. My risk is very small per trade. 3. I can multiply my money many times over during a day or week than the position trader. One thing I must say though, is that day trading (like the article said) must be done in a liquid and volatile market. Which in my mind only makes day trading feasible in the S&P500 and possibly the currencies. I only trade the S&P500. There is more than enough money to be made in this market every day than a human can want. Why look at anything else? You get a tremendous bang for your dollar and risk reward. Face it, S&P500's daily ranges average regularly $1,500 - $2,500+ per day. The average five minute bars (which I trade) have a range of $200 - $300. That's almost as much as most markets' daily bars. If a trader is disciplined, trades with the trend, uses stops and lets profits run, he can make excellent money day trading the S&P. I only risk $250 per trade and regularly take profits of $500 - $750 - $1,000 per trade, sometimes larger. But on general, I'm not greedy and when I have a good profit, I look to take it. I love it, and I get to do this 2-5 times a day. Sure, I have losses, but they are few and small. As far as all this mathematical babble and analysis on more transaction costs and slippage - who cares? A trade is, a trade, is a trade! If a trader makes 10 trades a year and I make 10 trades a week, there is no difference in slippage or costs. All that counts is if you made money. If that guy made $2,500 off his 10 trades per year and I made $2,500 or lets say $1,000 - $1,500 off my 10 trades a week. I'll take my 10 trades a week, because I'll multiply my money many times over during the year. Cost per trades are all the same. If you're a profitable trader, it pays for you to trade more, not less.

186

I'm not knocking long-term trading. Good traders make money at both long-term and short-term. You must trade what psychologically fits your style. The very short-term works for me. It is very profitable, enjoyable and cost efficient. Also, I pay $16 round turn, just to let you know I'm not much different cost wise than anyone else. People say they don't know many day traders who make money consistently. Well let me tell you, it has nothing to do with day trading. I hardly know anyone who makes money trading. Long, intermediate or short-term, most people I know are too messed up in their heads to trade profitably. I believe there is just as much, if not much more money in day trading than anything else. If the trader has learned his craft well and developed a successful and simple methodology and (most traders never get this far) get their psychological or mental attitude changed to the right mode for successful trading - this is the true key to winning. Let me preface all this by saying, I believe the S&P500 is probably the only market worth day trading on a daily basis. Bonds don't have enough range and with currencies (most of which make the majority of their moves overnight). Now and then you'll get a $1,200+ intraday day in the currencies, which is a very dead day in the S&P's. So intermediate to long-term trading would be better in most all other markets. In closing, day trading can be extremely profitable, and long-term. You just have to learn how to trade. As I wrote this on 12/2/94, I made $1,800 per contract on three trades in the S&P for about 5 hours work. How many long-term traders made that much in one day on a one lot - very few on very few days, I'd venture to say. I do this at least once a week in the S&P. As far as burnout, I don't have that problem. I look forward to getting up and being at my monitor throughout the day. I love trading. However, one must be balanced. I take breaks and days off to relax and vacation. I'd rather be at my monitor every day in the comfort of my home from 8:30am to 2:30pm, with my family, doing something I enjoy, rather then going to an office and putting up with that nonsense. What's so hard about day trading and watching the monitor - beats working. I think day trading provides a great lifestyle.

When You Get a Hit, Keep Running Until You Are Tagged (Stopped) Out - More on How 90% Winning Trades Are Possible Selling Commodity Options - Robert Edwards Well, it is early Wednesday, 12/21/94 and I have already liquidated my S&P500 "Christmas trade" which I bought on the close of Monday, 12/19, and it is not even Christmas. Yes, I made just enough to pay my commission with a little extra to go out to dinner, leaving the big dollars sitting on the table. After buying, I placed a $2,500 stop. I was never losing even $1,000, yet I'm already gone. Another potential home run wasted. Why didn't I make the market take me out of trade? I cut my losses short, but seem to consistently cut my gains even shorter. I watch the daily gyrations of the market and can get better fills than guys with their Hotlines and market calls. But when the market makes a small profit I take it, usually in the $100 to $300 range. I tell myself I'll get back in, but rarely do. Then a few days later the market really moves and I'm not in. I recently bought the lows in orange juice, but rarely made more than a dollar or two o n the trades and sometimes took unnecessary losses. I somehow manage to always get out just before the market booms. I'm a very short-term trader, it's just the type of player I am. In my mutual fund account, I'm up about 16% for the year, remaining almost totally in cash, except a few trades lasting a couple days here and there. The same would be true, I guess if I were playing baseball. Using the baseball analogy, several times this past year I was at the exact right place in the lineup to come up to the plate with the bases loaded and the starting pitcher was running out of gas (momentum fading). I picked the right pitch and turned the ball back the other direction, hitting it so hard and fast it was heading for the bleachers for sure. (I had picked either a top or bottom of a market and had a quick profit and all I had to do was sit back and place a stop where I got in).

187

The market would never have stopped me out, just as there is no way an outfielder can catch a ball hit high into the bleachers. Yet, while everyone else was rounding the bases, I decided I better play it safe and stay on first base or worse, I didn't even make it to first because I ran into the dugout and was called out leaving the base path. This happened to me recently when I bought December Cotton at 70 cents but got out at 72 cents while the market soared up another $12 or more. This happened several times in coffee. I bought in the 70's for a 2-3 cent profit, when I would never have gotten stopped out and could have road the contracts to the moon. Research shows that most trades (85% to 95%) are either small winners or small losers, and these tend to cancel out each other. In fact, with commissions, these trades usually result in a net loss. However, the few successful people who make it to "pro" status, put themselves there and stay there by hitting a few home runs each year. My memory of past losses--times I struck out at the plate, the proverbial "Casey at the bat" scenario, continues to paralyze me. I'm talking about baseball because commodity trading is the "big leagues." I've traded since 1980 and I've learned to pick my pitches as good as anyone. I have a phenomenal batting average, running between 65% to 80% winning trades. Yet like most average traders, I will make a profit for the year before commissions, but will show a small loss after commissions. I must change my patterns. If I don't change, I know I will never be anything but a journeyman, going back and forth between the majors and minors. Just switching teams regularly every time I decide to try a new program or advisor. I will end up on a minor league bus someday heading for a town with a name no one would recognize, with hardly enough change in my pocket to buy a hotdog! My new year's resolution is to get some "guts." I may strike out even more next year, but that is fine--most home run hitters do strike out a lot. But they are among the highest paid players because the home runs make up for it. The same is true in commodities. A "supertrader" is consistently successful because he or she hits a few big winners to make up for the many mistakes. The few big trades that occur in a year are responsible for the profits of the pros. It is what makes a "supertrader" claim that title and maintain it over time. If I can just learn this one point, I know I can become a "supertrader" too! I must quit taking myself out of the market and force the market to take me out. When I hit those big hits, I will keep running the bases until I am tagged (stopped) out! To diverge a second from baseball, I read that every time one takes on a position, it's like throwing an opened pocket knife in the air and catching it with one's bare hand. Eventually, one gets bloodied pretty good. With every throw, the chances of getting cut are increased. You don't want to make any more throws than you have to, and likewise in commodities you want to limit your trades and respective commissions. The more you trade, the more chances there are of making a mistake. If you trade, you will error. And yes, every trader gets bloodied. The laws of physics work the same, whether it's a "supertrader" throwing the knife or just me. Although everyone gets bloodied, the super traders have made enough money to buy themselves some padding, so the blade never actually pierces their hand. They rarely feel the pain of the loss. They have the confidence to keep throwing the knife, when I will have already given up. I may lose next year. If I do, it must be, it will be, because a better team beat me. It will not be because I beat myself. Recently Dave Green called me for the first time in several months, on my birthday 11/30/94. During that call, I explained to him that I had recently been quite successful selling out of the money calls and puts in the Cattle market. Although I was intermediate term bullish on the market, Cattle was in a short-term correction going down. It just happened to bottom the day Dave called. I had sold calls in the February all

188

the way down to the low that was hit that day, while selling additional April Cattle puts at higher and higher premium values. Because February Cattle was falling faster than the April, the profits I was making on the 12 short February calls was equaled to the short-term losses I was experiencing in the 20 short April puts, although none of the April puts were ever in the money (I sold April 64, 66, and 68 strike puts and April Cattle bottomed at 68.20). With cattle bottoming on 11/30, I took profits on all calls the following morning and bought 2 April Cattle futures contracts and went long a January Feeder Cattle. Now, all I had to do was hold the short April puts and hope the market held the low. The market more than held up, it rallied strongly in my favor and on 12/5/94 I was now at near break-even on my April puts, so I dumped them all and also took profits on the 2 long April futures, and Jan. Feeder Cattle. Even though it looked like a good move for one day, based on the drop that occurred on 12/6, the market has since rallied greatly and I never got back in. It took several days to put that position on and I could not get myself to ever get back to selling puts to put it all back on. The $9,000 total dollars of put premium I received when I sold the April puts, has dropped to less than half of the original amount, to about $4,000. If I had waited to liquidate the position today, I would have a $5,000 profit in only 3 weeks. With the rally present in Cattle, it is likely April Cattle will close above 68.00 and all puts will go off worthless. It appears likely I could have kept all $9,000. I told Dave Green that day on the phone, 11/30/94, when cattle happened to be at the bottom, that selling the 64 April Put for over 60 cents ($240) was the best trade on the options board. Editor's Note: That is correct, Bob did say that on Nov 30!) Today, three weeks later, the 64 April Cattle Put is trading at 20 cents ($80). It looks like the option will expire worthless. Another home run wasted. I wrote an article in the Nov 93 CTCN explaining that 90% of options buyers lose, and 90% of options sellers win. I don't think there is any better trading strategy in commodities than selling out-of-the-money puts and calls. But I am still working out the bugs.

Don't Judge Trading Info By Its Size But By Its Content & Value - Bill Adams As a new subscriber to CTCN I received two inconsequential Special Reports. These little two page throwaways are "inconsequential" in size only - content is what counts and there is real merit to both the Swing High/Swing Low concept and the Drawdown Minimizer Logic. As I studied the Drawdown Minimizer Logic, which basically determines the maximum adverse excursion (intra-trade drawdown) experience for all profitable trades in the study universe, to help determine a logical money-management stop loss placement, I had a thought. Instead of placing your stop based upon a maximum adverse "dollar" excursion, why not use a more logical maximum adverse "percentage of recent volatility" excursion? If the latest 10-day average true range is a small number, a $500.00 M.A.E. might be meaningful, while such a small amount would be of no real significance in the recent coffee markets. Obviously, this could be confirmed by some of you talented programmers out there. What do you (and your computers) say?

After My First Year I Have Made Money & Some Comments on A.Elder/ J.Murphy/Investograph/L.Williams/ Commodex/Synergy - Lee Taylor

189

I have just completed my first full year trading commodities. I consider it a success, since I have more money than I started with. However, my equity curve leaves a lot to be desired. This is because I tried several advisors and systems. It seems to be human nature to search for the Holy Grail or a commodity guru to tell you all the right moves to make. In reality, you are in a battle with your own personality flaws, which if not kept in constant check will doom your trading regardless what system or advisor you are following. Here are a few of the books and advisors I have encountered: 1. Trading for a Living by Alexander Elder - The best book on trading, if I had to pick one. The author is a psychiatrist in addition to a trader. The book delves into the mental barriers that cause trading failure. The basic technical analysis is covered, as are some trading systems. I use a variation of his triple screen and have found Elder Ray to be effective. 2. Technical Analysis of the Futures Markets by John Murphy - A lot of excellent information on analysis. I consider Dr. Elder's book more balanced, but Murphy's perspective is also valuable. 3. Investograph Plus Software and a New Look at Technical Analysis by Robert McCullough - The book is more effective if you own the software, which I do recommend. A lot of the information I have not seen in any other book. I most enjoyed trend channels, oscillator patterns and look-ahead envelopes. Investograph Plus Software has an oscillator called formula X that is detrended. It is the best I have ever used; most closely resembling slow stochastics, but doesn't get pinned into OB/OS range. I definitely suggest checking out the demo. 4. Larry Williams Commodity Timing - The monthly newsletter is extremely informative and the subscription price is reasonable. Larry is a nice person and excellent trader, but trading his nightly updates are like trading black box signals (unless you pay $1,500 for a video of his seminar, which I didn't do). I spoke with Larry and told him I had read his book "How I made $1,000,000" and made some good trades using his %R oscillator and moving average. He chuckled and said that stuff is too old. Larry did call some profitable trades, so I took one shorting sugar. That's when I realized he doesn't tell you what you're risking until the next night's update. Needless to say, the market came down just enough to stop me in and head straight up. The stop loss point was almost 10% of my account! What's worse, Larry kept moving the stop farther away! I now recognize the range volatility concept of his trading, but you can imagine how I felt when I was in the trade. I was too busy looking for a guru, to see if I was comfortable trading the system. Know the system you're trading; know the risk before you execute the trade (you could lose more than you risk, but that is beyond your control). 5. Commodex - This advisory illustrates how technical the markets have become. Once upon a time it called 100 wins in a row. Nowadays you are whipsawed to death. The cost is prohibitive and the bottom line is that Commodex does not teach you how to trade. The records of Commodex are deceiving because it assumes exit with no slippage and ignores gaps, limit moves, etc. The stop loss is close only, which I consider suicidal. 6. Tom Bierovics Synergy Fax - Tom uses a combination of moving average, oscillators, Japanese candlesticks and chart patterns. The bottom line is that everything is spelled out to help you learn to trade better. Another interesting feature is the goal of every trade. Tom exits at 2 times the risk, which works out better than it first sounds. This exiting method works incredibly better if you trade optimal F (2% of your account risked on every trade). Tom has answered my every question and has taught me more about trading than any other person or book. To the novice, I would recommend "Trading for a Living," Investograph Plus Software and a few months of "Synergy Fax." I also suggest that when you paper-trade a new idea or system real-time, you print the charts and give them to an associate with a full explanation of entering, exiting and risk.

190

After Big Profits My Broker Then Denied Me My Fill - R.C. Meaders I was working full-time as a corporation executive and trading, hopefully to make money, but somewhat for entertainment. I purchased 38 contracts of cotton. In the next four days, cotton made a vertical rise. On the fourth day, I flew 2000 miles for a business meeting. Before the market opened, I phoned the broker to tell him I could not properly handle my responsibilities in the business meeting with Cotton in my head? I told the broker to get me out by three orders. At a break in my meeting I called the broker. He said that one-third had been sold on the opening, one-third three minutes later and the final contracts six minutes after the market opened. For the next 2-½ hours cotton never sold as low as the highest price I received. The market was closed about an hour early, because it was inundated with sell orders. At the normal two or three days later, I received the standard profit and loss statement by mail. A couple of days after the cotton transaction, I sold lots of corn. Sufficient to require a major portion of the cotton profit for corn margin. Three weeks later, I received a letter from the executive VP of the brokerage firm stating the cotton transaction had not been executed for my account. What did that mean? I had lost a lot of profit; the broker had carried short sales in corn for three weeks without proper margin; the broker had waited for the mail to reach me to make the claim that no sale of cotton had been made. Another result was an elevation of my temperature! I was very busy in my job, so I really could not spend a lot of time on the matter. As a matter of fact, during the next 2-½ months, I flew three round trips from Toronto to Switzerland. We reached an agreement at less profit. Strangely enough, I did not continue an account with that broker. Warning to the novice. Only believe half what you hear, and one fourth the systems you buy!

Trading Advice From A Trader Of 30+yrs - Is the Secret To Success Every Week & Only After A Big Move Takes Place On Long Term Charts? - Max Robinson Hey, I like your newsletter. You are doing a great service to a lot of people. You responded very quickly to my order and subscription to CTCN. The material that I received had some really valuable information in it. The two special reports had information that is very hard to find anywhere else. I have traded and studied commodities for over 30-years. My real problem is that I am looking for the Holy Grail. I cannot stand to be wrong 5 out of 10 times. Also, I am looking for something easy! If someone wishes to trade on a long-term basis, I do not believe there is any better way than the Swing High and Swing Low Trading Technique. I have bought many systems over my 30-years, most of them were all hype. I bought the system that named Club 3000. However, every system had at least one point in it that was valuable and when you put them all together, you may begin to see some light. In other words, if one wishes to succeed, he has to keep trying. But watch out, because the price for success may be more than you want to pay. By the way, I have found no broker over the years that could help me make money. I have found only one money manager who could make money. I have two friends who are farmers. They don't study charts and make fun of me. One of them tells me you can't tell a thing about the market. There is no way of telling what it will do. One farmer makes money nearly every year hedging hogs, and the other sells 500,000 bushels of raised corn at a price that is very near the top of the market every year, so it must not be the system, but the man.

191

These two farmers' success comes from not trying to trade every week. They only get interested in trading after the market has spent its time going up, and is near the high end of the long-term charts. Try rereading some of the information that you bought 5-years ago, you'll be surprised at what you did not see the first time you read the system. Two of the best cheap systems that I have read are Spike-35 and the Colver Trading Method. Spike-35 is the only truly mechanical system I have ever seen that might work. It has a very exact way of defining the trend. This is the only information I have ever seen that defines trend. These systems are available from Windsor Books. Here is a truly mechanical method of entering and exiting the market I have developed. Gann stated, "expect a trend change or an acceleration on the 7th, 14th, 21st or 28th of each month." I believe the 14th and 28th are the most important. However, the 7th and 21st are interesting. Simply watch the market establish a range on the 14th or 28th. Then buy a close that closes above that range. Use a stop that is the first daily close under that range. The market seldom reverses more than once. Do the opposite to sell. If the 14th or 28th occurs on Saturday or Sunday, use the previous Friday's range. Point: the 14th or 28th is probably the best time to apply your best trading system. By the way, if the market is near the top of the chart page and has spent three to four weeks in congestion sell it. Point: Most people who have enough money to trade the markets, are not in need of money to buy food. So the important thing about trading is not how much money you will make, but how much money you do not loose. A big loss could even hurt your food supply. Really, commodity trading for most people is just a toy to play with. The only difference between men and boys is the price of their toys. This toy can get very expensive and devastating, if proper money management is not followed. The best way to loose big money is to risk big money, while trying to make a killing.

V-H Indicator Can Help Identify Trend Near Its End & A Trading Range Near Completion - Adam White I would like to share with my fellow CTCN readers three insights about the VHF (Vertical-Horizontal Filter) indicator that I devised a few years ago. VHF is a "trend intensity" indicator, similar to ADX in aim but simpler in design, It is now included as a packaged indicator in MetaStock 4.0, but as review, here are the four steps in its calculation: 1. Select a period, i.e., the number of bars used to calculate the indicator. 2. Calculate the range of the period: the highest close minus the lowest close. 3. Calculate what I call "progress": the sum of the absolute value of the consecutive close to close changes of the bars that make up the period. 4. Divide value #2 by the value #3. This calculation returns a value between zero and one; in practice the VHF usually stays between .2 and .6. Like ADX, the VHF climbs during trends and falls during trading ranges. By implication, relatively high

192

readings can suggest a trend is nearing its end, while low readings can suggest a trading range is nearing completion. Here are my three latest insights about the VHF: 1. MetaStock defaults at a 28-bar period, but I now prefer a shorter period, for example a 18-bar maximum. 2. Above I mentioned that VHF resembles ADX; actually, it more closely resembles DX because it is so sensitive and does not generate a very smooth line. Smoothing the raw VHF with a moving average gives a perhaps more meaningful indicator that more closely resembles ADX. The smoothing moving average need not be the same length as the VHF indicator itself. For example, a sixbar moving average supplies enough smoothing without suffering too much "lag." ADX is simply a smoothed DX, but the smoothing factor always uses the same period as the indicator period. In this regard VHF offers more flexibility than ADX. 3. Finally, the absolute value of the difference between the period's first and last closes can be substituted for the period's range in the first step of the calculation. Obviously, this value tends to be higher during trends than during trading ranges. The values of these three insights are of course relative to the trader's style and technical needs. That is why I always look for flexibility (without sacrificing simplicity) when designing new indicators.

Both Positive & Negative Points Regarding Essex Trading Co Futures Pro Software - H. K. Houston This is in reply to Steve Burningham's request last month for info on Futures Pro: As an owner of the system here are my views. "Futures Pro" is a breakout system program by the Essex Trading Company and combines their former programs - "Eurotrader, Tradex 21 and Ace System"; Long, medium and short-term respectively. What you are basically buying is a core system. You then have to add the markets you are interested in, i.e., Currencies, Grains, etc., long, medium or short-term are all extra. Usually about $200, sometimes on sale for $100, or some package deals. In other words, for $200 you get all the currencies for long-term only, or medium-term only, or short-term only, or $600 for all terms. I would strongly recommend, if interested, to call and ask for their special deals - (800) 726-2140 - since my information may be dated. The positive points about the system are: 1. The company has been in business for long time. 2. The people are efficient, courteous and will answer your questions in a professional manner. 3. The software works under "Windows" and is a joy to manipulate, with orders as you would read them directly to your broker. 4. The manual is executed in a professional manner and the best in line with "Omega" manuals, The negative points about the system are: 1. The data bank is their own system including rollovers, which are automatic. As a result, in my case I cannot use my 35 commodity CSI/Trendx data bank to feed Futures Pro. Of course, you may get data from CSI and other vendors. Also, you can update it manually, which is a real joy. 2. My biggest concern is the parameters with built-in filters. The company provides updated disks every three or more months for an extra charge. The parameters seem to be tested on 10-years or so of data. Over the long haul, I am sure it is a money maker. The drawdowns meanwhile are tremendous and suitable for huge bankrolls, which leaves me out. For this reason, I have stopped using it except for confirmation. In all fairness, I have not tried to calculate parameters myself for shorter periods of testing time. The company believes in 5-years minimum testing time. That should about cover it. Again, these are my opinions only, and I hope that you get more input on this matter from other users.

193

How I Have Tried To Keep Futures Truth In Business & Out Of Trouble & How They Have Wronged Me - Kent Calhoun Everyone knows the pathway to hell is paved with good intentions. This applies to my letter to try and keep Futures Truth in business. Mr. Hill has "forbidden" me to contact him or his office over the letter published in CTCN (Nov. 1994). I discussed the facts of my letter with John Hill over a year ago. He ignored them. I faxed him a copy of the letter to be published in CTCN, so he could respond at the same time it was published. Mr. Hill assumed this was to be a personal attack on him, it was never intended to be so. The following is part of a letter I sent to John Hill. Per your wishes this will be my last communication with your office. My recent contribution to the (CTCN) newsletter was intended for you to seriously consider an issue I raised over 12 months ago. The issue is your questionable business practice, which John Fisher stated you had stopped, the acceptance of vendors' trading systems and profiting from them without their permission. You have left Hill Financial, Futures Truth, and John Hill legally vulnerable for litigious action that some vendor is now trying to capitalize on. You are responsible for this situation, since you choose to conduct business in a questionable at best, and possibly at worse an illegal manner. The legal questions I raised were excellent points you should consider. If you want to stay in business with Futures Truth, perhaps you should review the manner you conduct business. You may have forgotten a few facts, like the way Futures Truth once reviewed my systems. You gave me your word, I would be able to review your trading results of my 5 VBTP before you published them. Based on your word, I invited you and John Fisher to my seminars. At my seminar, I gave you the fact the Dow would drop 100 points in one day in 8/91, and a Monday day trade that made $550. I bought you three meals, allowed you to address my attendees and accorded you every possible respect. In your absent-mindedness or arrogance, you never thanked me. Later that year, I faxed you daily my actual trade results the exact week the Dow again fell 120 points in one day. (I never did that before or since then.) When I received your results of my system, I immediately recognized you had not calculated any price objectives or knew the difference between the standard or conservative 5 VBTP strategies. It was too late you said. The Futures Truth issues "were already in the mail." So much for your word. I forgave you. You convinced me to send you $2,000 for programming to improve the 5 VBTP and I did so. After spending over $10,000 with you and turning the 5 VBTP into a system that made over $1 million on an equity drawdown under $40,000 (your numbers not mine) you wrote to magazines trying to get them to delete (the name of) Futures Truth from my ads. I forgave you again for trying to suppress your own "Futures Truth," related to the 5 VBTP advertising. I paid you to run the results on Ultimate II to help me in a lawsuit (I won.) Yet when you created the Universal Trading System someone took the Ultimate II volatility protective stop and changed it by one tick for your stop. I forgave you. In 1983 you sold me a copy of "Serial Analysis," for $35. I had already bought it from another vendor for $25. As a contrast, I gave you Ultimate II for S&P's for free. I had made $5,000 the month before. It made over $25,000, including a $13,300 day trade in October 1989, during the next six months.

194

Your diatribe ranting against all system vendors' results in Club 3000 also backfired against you, since it offended all who read it, including Peter Aan (who responded to Hill's allegations.) I opened up an account with your trading company and was overcharged the commission fee you stated we had a deal on. It was never rebated to me. I forgave you again, John. I forgive you again, John, for not knowing the true intent of my letter was to keep you in business, because your business benefits my business. I forgive you for not realizing the only difference from a vendor's viewpoint between you and another system vendor (you are reportedly trying to save the world against) is that he sells the rules and you do not. You both profit from vendors' systems without asking permission, without paying for the work. By the way, you never called, wrote or thanked me for helping you beat your lawsuit. You have typically used every trick in the book, to nickel and dime me, to undermine my credibility, and berate me for years John. I forgive you. You were once kind to me and invited me to a seminar when no one knew my name. You gave me good advice about many things, including life. When I moved to Chicago, My floor trader friends ordered your books daily. I paid homage to you in my first article praising your trading expertise and books. I choose to remember the John Hill who risked $500 on a trade that made $8,400 the first week I had ever heard his name. Not the petty, vindictive and foolish man who sent me an angry FAX. I wish you nothing, but good fortune and health throughout the rest of your life. When you someday realize you were wrong, call me and apologize. It takes a man to admit he has made a mistake and you have John. I have only two regrets concerning John Hill. First, you did not recognize the true intent of my letter was to seal any legal loopholes you leave exposed whereby some vendor might sue you. And the second regret is that you will never know how much I truly respect you as a teacher, trader and human being. As a human being who raised three children to become successful adults, and raised himself from nothing. The John Hill I choose to remember is like the father I never had, I will never forget your kindness, and always hold you in the highest regard. God Bless you and your family and have a prosperous New Year.

Opinion On Rickerson's Market Optimizer - C. Collee From The Netherlands This is for Kenneth Phillips who is interested in comments on Jeff Rickerson's, the Advanced Market Optimizer II System. The track record that goes with this program is too good to be true and that is the point, it is not true. It is a program that gives buy signals after each swing high and swing low. There are some vague rules to interpret the buy and sell signals. I had to ask twice to get the track record (it was handwritten and hard to read). After several times asking for the exact rules for entry and exit, I did not get the rules. Also the brochure stated the track record was easy to check with the software. I could not and Mr. Rickerson has not explained it (after several requests). So, I would strongly advise not to buy this program.

Should FT Have Canceled CTCN's Ad Because They Didn't Like Criticism of FT's Policies Being Published? - Dr. Ken Wozny It is ridiculous for Futures Truth to both cancel the ad in their publication and their editorial recommendation of CTCN, because they did not like Kent Calhoun's article being published in last month's issue. It would have been censorship for CTCN to not publish it.

195

I Bought Omega SuperCharts To Program My Own Methods - George Cooper On December 4, I purchased the Omega Super Charts program. I purchased this program for just one reason, Omega's assurance that by using their new program, I will be able to write and program my own analysis methods into a computer. I am assured this one feature of their program will enable me to develop and use my own analysis indicators. Over the years, I have developed and successfully used my own "home grown" analysis methods (manually) to spot reversals. I am anxious to see these methods work by computer!

Members Have Knowledge - Mike Coleman I want you to know how much I value your publication. I look forward to reading it when it arrives each month. It is refreshing to know there are people out there like you, who care about and are looking to protect the public from all of the pitfalls of commodity trading. It seems that you have a very knowledgeable membership and I believe you put out a top-rated publication. Keep up the good work.

More on SuperTraders Books - H. Lowell Huber It looks like the books of Spirals will now premier in 1995. For those of you who already ordered one like me, you will receive it, but it will be in mid-1995. For those of you who ordered the book of Trend Changes, this book will now appear as two books - the Book of Numbers and the Book of Ratios. The Book of Numbers is at the printers now and will be shipped at anytime. The second book will follow somewhat later, because they have to get Frank Taucher's SuperTraders Almanac out now too. As for comments on cattle trading - maybe now that congressional motivations have changed, we may all have the opportunity to learn the Hillary System of cattle trading. If not, I would think she is missing a tremendous opportunity to market a "very successful mystery system" used in making her own calls, especially now that she left the realms of cattle futures trading.

Are There Reliable Trading Systems So I Can Make A Steady Income? - Wade Geary I recently started receiving the newsletter and back-issues and have scanned through most of the backissues. Your newsletter is excellent and I found it all very interesting. Your willingness to offer advice over the telephone is particularly commendable. I have many questions that you might be able to help me with, considering all the years of experience you have had trading, and the fact that you are on a first name basis with many of the great traders, such as Larry Williams. 1. In your opinion, is it possible to trade commodities with a small account, such as $25,000 and predictably make enough money to rely on as a yearly income? The reason I'm asking, is I'm contemplating taking an early retirement in Sept. 95 and will need a supplemental income to survive. 2. Are there trading systems that are reliable enough to consistently make money over the long run, if followed with a disciplined approach? How can a neophyte trader such as myself evaluate the many systems on the market? 3. Will any system accurately catch the "big" yearly moves in futures?

196

I have been trading about 1-½ years now, primarily following Ken Roberts and the Larry Williams Hotlines. I really can't say that I'm ahead of the game using either one of these Hotlines. The Ken Roberts' stops in my opinion are unrealistic and have wiped out most of my profits. In the Larry Williams program last fall, I received a margin call because of the sudden drop in European currencies. I was in 3 currencies at the same time and in one day I was down about $4,000. In retrospect, I don't believe I should have been in 3 currencies at the same time with my small account. I find the futures field fascinating and love to trade. I read every book on technical analysis that I can get my hands on. I would greatly appreciate any advice that you (or CTCN Members) could offer me in this area.

Hard Facts on Day Trading - TTB - Part 2 Maximizing Profits - Day traders, as we discussed, are constantly faced with the problem of capturing as much profit as possible from a relatively small range of prices. This situation naturally leads traders into the strategy of buying dips and selling rallies rather than attempting to follow trends. Most trend-following strategies tend to be much too slow for day trading. Counter-trend strategies seem to be the logical choice because they offer the potential of extracting the greatest profit from a small range of prices. However, counter-trend strategies as a general rule tend to be less reliable than trend-following strategies. Correctly and quickly spotting turning points in prices is much more difficult than simply trading in the direction of a trend. We have observed that the best day traders manage to incorporate elements of both methods. Successful day traders try to buy dips within an up trend and sell rallies within a downtrend. The day trader who consistently makes money must be good at defining trends and good at finding short-term turning points. Most traders lose money because they are not very good at either task. We will look at examples of possible day trading strategy. We have tried to explain the potential pitfalls of day trading, the realities that cause most day traders to fail, and {next month} something of the methodology of those that we are aware of that have to some extent succeeded. Similar to other phenomena in the world of trading, day trading, which seems at first glance to be one of the easiest, most productive methods of trading, turns out to be not so easy and not so productive. We know that despite our warnings most of you will try day trading for a while to see if you can beat the odds. We hope our basic advice and observations will help you succeed.

Tidbits on Financial Astrology - Carol Murphy Free advice and help with Financial Astrology is available to CTCN members.

Too Many Data Formats & Problems Michel Gourbault from Canada - Part 3 5. Michel creates a new continuous contract directly from the CSI-supplied files that worked fine. He does this using a utility from EQI that can convert from ASCII, Lotus 1 2 3. CSI and a few other formats. He converts it to the MetaStock (MS) format. Tries the new contract. No luck: The same darn blocking message appears.

197

6. Now he reasons there is "no bloody way" the program designer-supplied CSI file, which worked in the CSI format, could be of "insufficient length" or could "contain zeros" in sensitive areas of the data. There's got to be something else. 7. He disconnects his FM receiver, and even his internal modem/fax card telephone line connections. Just in case - against all logic - they could interfere somehow with this particular program. Tries the MS contracts again. Nothing doing. Same message. 8. Noticed earlier that his drive b:, from which he loads most of his programs has been sticking lately. So he takes the CPU to the shop to replace the drive b: system, taking this opportunity to also turn his 386 system into a 486 with Math coprocessor. Tries out the new monster. Removes the bugger of a program and reinstalls it completely, including original CSI portfolio. Tries out the MS contracts once more, and again gets the sentinel message that refuses to let him pass. 9. Then, one Sunday when he has a little more leisure time, Michel tries the same MS files - different contracts - and... incredible as it may seem, without having done anything different than before, the sentinel lets him pass! The program runs fine on that one file he tried. Exactly as on the CSI contracts. Hurrah, he shouts! (Little did he know the sentinel-message just had a little snooze at that time.) One hour or so later, he tries out the same file again - and here goes that blocking message again. And again, and again, on every other MS contract he tries to get through. 10. No, I won't tell you the end of the story. By order of my sponsor and, in any case, because my sense of ethics requires that I protect the identity of the guilty parties.

Member Requests John Jenkins and two other members want information on Precision Day Trading System. Dr. Sid Schuman 1-305-566-2495 wants to trade currencies and wants to know which is the best system to buy. Your help is appreciated. New member Mike Diaz would like to be in contact with other traders in the Siloam Springs, located in extreme NW Arkansas (501-524-8437). Neil Sterritt would like opinions on Bruce Gould's Money Machine. In your "Member Requests Nov. 94" Ken Periso asks "How to create continuous contracts and where to get software? I, Christian Holzner offer a program which, among other things, can do that for CSI files. Also, I would like to get in contact with other CTCN members in Austria, Germany and Switzerland. They can call/fax me at +43 662 820757 (after from mid-Jan. 95 +43 6245 78568).

Editor Comments This is our Special End-of-Year Expanded Issue, which covers 12 full pages. There have been lots of great articles and we all look forward to more of the same during 1995. Some exiting new things are planned during the new year, including an optional Computer Users Group. This optional group will concentrate exclusively on the use of computers in trading. It will not detract in any way from your Commodity Traders Club News, which will continue with the same content matter, including occasional articles on computer related matters. Some other important news: By the time you read this, Commodity Traders Club will be incorporated as a nonprofit educational organization. That will result in you qualifying to receive several important and

198

valuable new benefits during 1995. Benefits we are considering include, random drawings for free computer software, educational publications, educational seminar invitations, etc. These extra benefits will be funded with any extra income we have as a result of our membership fees and advertising revenues. In other words, all profits will be passed on to you, the members, thanks to our nonprofit organization status. About Larry Williams' contribution in support of Walk Forward Testing. Whatever Larry says has great validity, as it's coming from probably the most famous and most knowledgeable trader of modern times. It's certainly correct that if done properly, walk forward testing has great value. For those of you not aware of walk forward testing, it's first setting your system parameters and then testing the results in the future using those pre-set parameters without benefit of additional or new optimization. Some people refer to that as "hypothetical real-time trading." However, walk forward testing can in fact be a trap if done incorrectly. That's because there's a problem in deciding what pre-set algorithm or parameters to use prior to the so-called walk forward test. If we arrive at those parameters by an optimization process, then we may be guilty of optimizing the walk forward test without even realizing we have done that. Another pitfall, is the great tendency to optimize the walk forward testing time period itself. Possibly the only way to do it correctly, is to first arrive at a set of parameters and algorithm based on logic, experience, or sound trading principals that won't be subject to change. Then do a walk forward with no attempt to improve results via optimization. In reference to the Futures Truth controversy. As alluded to by Dr. Ken Wozny, and as you may have noticed if you subscribe to FT, the Dec/Jan 1995 Master Performance Tables, CTCN has been deleted from the Futures Truth's publication! For the last 4-months, CTCN had a small paid display ad running in the FT publication. In addition, John Hill recommended both CTCN and a similar competing newsletter to his readers. Unfortunately, John Hill, the owner of Futures Truth, was very upset over CTCN's decision to publish Kent Calhoun's article in the November 1994 issue. John believed we should act as a censor and not publish the article because he considered it negative against him and Futures Truth. Your editor did not take sides or indicate he supported Kent's allegations. In fact, he openly praised John Hill and George Pruitt for their honesty and integrity in last month's Editor Comments section. However, that did not satisfy John as witnessed by his surprising decision (done without any notice) to yank our paid ad and no longer endorse CTCN from an editorial standpoint. John Hill's action is most regrettable. He seems to be implying by his actions that he can criticize vendors and their trading systems as much as he wants by publishing their negatives, but he cannot stand any criticisms himself. This unfortunate dispute does not detract from FT's valuable work in testing systems. FT serves a purpose and is an asset to the futures industry. Their system testing and maintaining track records is a difficult and at times a thankless job. However, the truth is that FT should not be so sensitive in that they can dish-out negative (and positive) statistics on vendors' systems for many years, but can't take a very rare negative opinion of some of their operations being published about them! I am not judging the issues Kent has raised, but at the same time I tend to agree with him on some issues involving legalities and moral issues.

199

You should also know that John Hill has told me FT has now ceased doing some of the things Kent refers to or is critical of, including selling their own systems and accepting copyrighted and non-disclosure systems from system owners. It is interesting to note that I have been informed by several sources that a competing newsletter refused to publish Kent's article. As an interesting aside, and a subject to be discussed in an upcoming issue, you should know the so-called competing letter has in the past refused to publish a number of articles and contributions about or authored by various vendors, both negative and positive articles. What do the CTCN Members think about this situation? Please reply via CTCN, so your opinions can be heard in our next issue. Getting back to positives rather than negatives. My nomination for the most positive and promising article during 1994 is the article by Anonymous Trader, which appears on page 1-2 of this issue. His article counteracts much of the negatives we hear on how difficult it is to trade commodities successfully, in particular with regard to day trading. Though day trading is admittedly difficult, it can also be highly profitable if done correctly, and good discipline and money management is used. Perhaps Anonymous Trader will agree to share some of his trading secrets with members. I will write and ask if he would be so kind to do that in the near future. Of course, he may not want to share his techniques because of fear that if his methods were publicly known, they would not be effective anymore. However, I personally doubt that would in fact occur. The markets are too big and traders' discipline and money management is usually too small and weak for a successful methodology to be widely duplicated by others.

Issue 21. Comparing Commodity Trading to Casino Gambling - How To Obtain The 'House Advantage' Dave Reiter I'm a 29-year old part-time commodity trader. When I'm not trading commodities, I'm helping my father on the family dairy-farm (located in Gainesville, TX - 60 miles north of Dallas). The purpose of this letter is to share my thoughts and experiences as it relates to trading. However, I first would like to provide you with some background information. I took my first real-time trade on January 2, 1992. During the past 3-years, I have made a grand total of $145,357.93 ($37,135.10 in 1992; $43,745.35 in 1993; and $64,477.48 in 1994). These results do not include interest earned on U.S. Government Securities. Including earned interest, my net profit for the past 3-years is $155,533.96 (account statements are available). In my opinion, if I can make this kind of money trading commodities, anyone can. The key to being successful is to maintain "consistency." My trading methodologies have provided me with fairly consistent profits during the past 36-months. Don't get me wrong; I do have my share of losing months. But I always seem to "bounce back." My trading approach is very conservative. I only trade one contract per signal and I never pyramid my trading positions. Also, I have a tremendous amount of respect for the markets. As you know, commodity markets can be extremely volatile at times. Therefore, I have developed a healthy "fear" of the markets. If you want to be a successful trader, you must be conservative and cautious. Since I did not begin real-time trading until 1992, I did a tremendous amount of paper trading and research from 1987 to 1991. During this time period, I watched a few of my friends do some real-time trading. Not one of them managed to show a profit during a single 12-month period. Occasionally, they would "catch" a couple of big moves, but they always gave it back over time.

200

The one "common thread" that my friends possessed, was the fact they never developed any type of trading plan or method. Their trading was very erratic and lacked any type of systematic approach. They would all rush out to purchase the "hottest" new system on the market. After trying it for a few weeks (or months), they came to the conclusion that it wasn't as good as the vendor had advertised (sound familiar?). Therefore, they quickly moved on to something else. This "cycle" continued until they all became frustrated or lost interest. In the meantime, I observed their trading patterns and tried to learn from their mistakes. I also continued to do a tremendous amount of research and "test" various trading methods and ideas. I spent a great deal of time reading books about the laws of probability and "gaming theories." One of my favorite books dealt with the subject of casino gambling. The author book explained how the casinos were making billions of dollars each year, while only having a 2% to 5% advantage over the players. I was absolutely amazed by this fact. After reading the book several times, I came to the realization that this was the best way to make money in the commodity markets on a consistent basis. All I had to do was get the "odds" in my favor by just a small amount. After that, the rest would be easy! My goal was to locate various trading patterns that were fairly predictable over a long period of time. To my surprise, this task wasn't as difficult as I thought it was going to be. Using my historical database, I made two very important discoveries: 1) During various times of the year, certain commodities will move in a very predictable pattern. Some people will classify this phenomenon as "seasonal tendencies" while others will say that it's based upon "natural cycles." Frankly, I don't care what you call it. All I know is that some (not all) commodities exhibit very predictable price movements throughout certain times of the year. 2) If a commodity closes higher for the day, there is a greater chance that it will go up the next trading day (versus going down). Vice versa; if a commodity closes lower for the day, there is a greater chance that the commodity will go down the next trading day (versus going up). The next logical step was to develop a systematic approach to "exploit" these predictable trading patterns. I knew that the "odds" would be on my side for each trade that I took. To use casino terminology, I had the "house advantage." During the last 6-months of 1991, I developed a system which would generate about 8 to 10 trades per month. The trades were fairly long-term (3 to 12 weeks) and the stop-loss levels were reasonable ($1,000 to $3,000). During the past 36-months, the system has produced fairly consistent results. Don't get me wrong; I do experience some "painful" drawdowns from time to time. But the system always seems to "bounce back" very quickly. In 1993, I began searching for a method which would allow me to capture short-term (1 to 2 days) price swings in the various markets. Based on my past research, I knew that if the market closed higher (or lower) for the day, then the "odds" were greater than 50% that the market would go up (or down) the next day. My goal was to develop a trading plan which would allow me to "exploit" this phenomenon. My first idea was very simple. I decided to "buy the market long" if it closed higher than the previous trading day. For example, if the market closed higher on Wednesday, I would simply buy one contract on Thursday's opening and sell on Thursday's close. On down days, I would do the exact opposite. Based on my historical testing, this idea did not work very well. Why? Because the markets have a tendency to "gap open" in the direction of the previous day's closing trend. For instance, let's assume that the Coffee market has closed at 173.50 on Thursday (up 230 points from Wednesday's close). According to my rules, I will buy one contract on Friday's opening.

201

The Coffee market does indeed "gap open" on Friday morning. It opens at 176.50 (up 300 points from Thursday's close). Therefore, my order is filled at 176.50. The market closes at 174.00 and I liquidate my position on the close. What's the outcome? I actually lost money on the trade ($937.50) even though the market "obeyed the rules" and closed higher for the day. However (as is usually the case), the Coffee market "gaped open" in the same direction of the previous day's closing trend (which was up). My "system" lost money because I did not profit from the "gap opening." I was buying after the "gap opening." By that time, most of the "easy money" had already been made. I had to find a way to position myself in the market before the "gap openings" took place. The logical solution would be to enter the market on the close instead of waiting to enter on the following day's opening. That idea seemed to work fairly well. It did make money. However, I found a better solution. During my research, I discovered that very often the markets would close at (or very near) their extreme highs or lows for the day. For example, if the Cotton market was having an "up" day (i.e. higher prices), it would (more often than not) close near its high of the day. Therefore, I wanted to find a way which would allow me to "get on board" somewhere in the middle of the move. I determined that I could generate greater profits if I entered the market during the middle of the move, instead of waiting until the close of trading. I tested a couple of parameters in order to find the best place to enter and exit the market. After a few weeks of testing, I settled on one parameter which seemed to work quite well on all of the commodities I tested. On March 17, I began trading the system on a real-time basis. My intentions were to trade it for a few months on a "trial basis." My "experiment" lasted from March 17 through July 1. My real-time results confirmed the results that I had achieved from my historical testing. The system worked great! During 15 weeks of real-time trading (3/17 - 7/1), the system generated a net profit of $19,673.73. I traded 8 commodities (1 contract per signal). Of the 8 commodities, 6 were profitable. The drawdowns were negligible. During the remainder of Summer and throughout Fall, I was very busy helping my father on the dairy-farm. Therefore, I simply did not have time to trade the system on a real-time basis. However, I did follow the system on "paper" to the best of my ability. It continued to generate substantial profits, especially during the months of October and November, 1994. This type of system works, because it "exploits" the short-term price swings that occur in the various markets on a regular basis. It doesn't capture the entire move. Instead, it simply takes a "chunk" out of the middle and gets out with a nice profit. All markets have a tendency to move in the same direction for a day or two before reversing course. This system simply gets in during the middle of the move, and usually takes profits the following morning when the market gaps open in the direction of the previous day's closing trend. The "secret" to this system is being on the right side of the "gap opening." That's where the money is. I'm thoroughly convinced that the best way to make money in the commodity markets on a consistent basis, is to use a system that will "tilt the odds" in your favor on a daily basis. It doesn't take much of an advantage to "beat the markets" on a regular basis. Remember the casinos; they enjoy an advantage of only 2% to 5% over the players and they're making billions of dollars on an annual basis. In my opinion, it works the same way in the commodity markets. I have my account statements to prove it! I'm always searching for new trading patterns that will give me an advantage over the markets. There are many profitable patterns that do exist. For instance, I discovered a pattern last year that worked perfectly on every trade I took in 1994. In other words, every trade made money (based on real-time trading). I tested

202

the "system" back to 1992. During the past 3-years it has lost money on only 3 trades. The worst drawdown was $292. The trading methodologies used are not perfect. I "suffer" through drawdowns just like everyone else. However, my "systems" have made money over the long-term. Hopefully, that will continue. My systems are not for everyone. I tried to start a daily fax service in 1994. However, it didn't work because my systems went through a drawdown during the first 2-months of 1994. Consequently, all of my subscribers quit using the fax service during the drawdown. For the remainder of the year, I made a great deal of money. Unfortunately, I was the only one who participated in the profits. In my opinion, most traders (including myself) simply do not have the discipline to follow another trader's system for any length of time; especially if the system is in the middle of a "painful" drawdown. That's why it is vitally important to find a system that you're comfortable with. I would like to publish real-time results in CTCN on a monthly basis, to prove to traders it's possible to make money in the commodity markets on a consistent basis using simple trading techniques. Editor's Note: I have contacted Dave Reiter and asked if he would like me to test his systems and methodology on behalf of all my members. If he is willing to do that, I will report to all members on his systems. Presuming they do in fact perform well, I am sure many members would then want to learn how they could actually trade his systems or perhaps form some type of "joint partnership" with Mr. Reiter.

How I Successfully Day Trade the S&P500 - Anonymous Trader In trading, I would recommend trading with the trend. I know it sounds cliché, but I have found it is the most rewarding (I found this out - like everything else - the hard way). Selling tops and buying bottoms is like being a salmon. You are always swimming upstream against the trend. You may get a good trade now and then, but a market will wear you out in the process. I have always found these trades looked great going back on a chart. In trading real-time from the hard right side of the chart without the benefit of hindsight make these trades difficult to not only see, but see through to the profitable end. So trade the trend. Enter on pullbacks, use reversal bars that make pivot lows/highs and close back in the direction of trend. Move stops quickly. Take reasonable profits from the markets trading that day. If market is slow and in a trading range mode, go for less. How do you know what to go for? Your experience will tell you. There are no hard and fast rules, sometimes I get out way too soon. Sometimes I stay in too long, but in general I do OK and get my share. I hate to say it, but good trading is not 100% mechanical. I wish sometimes it was, but that's what your there for. I find that good trading will be 80% mechanical or/so and 20% will give you the flexibility. To use your experience and feel for the market to enhance your method and make it comfortable. I'm not saying you can't be 100%mechanical. I believe your most profitable trading will be a system that allows you some input on entries and exits. I use a 3 and 5-minute chart, side by side and take the first signal. I get in the direction I want to trade. Sometimes a 3 will get me in and a 5 won't give me the reversal bar, and vice versa. This way I don't have many moves pass me by. One of these usually will get me in. I have been told that many people have called Dave Green wanting to share my system. So I will, but I told Dave it's ridiculous. I know these people are thinking, If I can find out what and how this guy is trading, I'll use it and I will start making money. I'll be rich. All I need is a good system. It sounds like this guy has something really hot! If he will just divulge it.

203

Well, if you really look at what I'm doing, it's waiting for a trend to begin and getting in on pullbacks that usually come into a 38 - 50 - 62% retracement of the last swing and reverse out of there back in the direction of the trend. Very simple. This was probably being done before 1900 - you can do this. So why are most people losing money daily - read on. (By the way, this simple method is the best way I've ever seen to trade. I just put my own little wrinkle in it with common sense money-management). I'm not doing anything new or secret. My method is very simple and easy to trade. I hope this gives readers some ideas. However, I want to make some caveats and warnings for all the wanna-be-traders who want to trade for a living and/or think they can. I'm no market wizard. I still trade mostly one and two lots and I don't live in a $500,000 home or drive a rolls royce. My trading has become very consistent and profitable and continues to get a little better every month. My method is my tool. It's an excellent tool and works extremely well when I use it the way it should be. If more money is lost than normal, if stupid or random trades are taken, it's not my system or method that has failed, it's me, myself, and I. (Yes I take stupid trades now and then) I'm human. I just try to keep them at a minimum and allow for them. My first 8-years of trading results would probably make you throw-up. Lord knows my wife did! The point I'm trying to make is that learning how to trade profitably is very difficult. Once learned, it becomes simple and fun, like I mentioned in the 12/94 CTCN article. I feel sorry for the people who write to these newsletters or forums. Most of you are missing the boat (just like I did my first 8-years). I see you squabbling over data vendors, system vendors, methods, hotlines, new and old systems. People who made false statements about their product. You are too concerned with continuous data or the other kind of data (I forgot what it's called). Optimization, back-testing, % wins, max drawdowns, broker problems, new software programs, books, articles, seminars. (Oh, I just remembered the other data is called perpetual, I think) etc., etc. All this is crap. It will not make you money and is a complete waste of time. Believe me, I know. This stuff is all secondary in nature to success. People need to work on what's inside them. Your psychological makeup, how you interact with the market and how you deal with fear, greed, anxiety, etc. It's you against you everyday. Not you against the market. Not you against another trader. The market is going to do what it's going to do everyday. Whether your in or not. The only thing that determines if you make money or not, is how you react to market action. Only you can give yourself money or lose money trading. Not the market, not the system, not the data, not the software package you use, not the hotline, book or seminar you purchased. Just you! Do you would-be or aspiring traders finally get it! Most of you are looking in all the wrong places as the song goes. A perfect example, is in last month's CTCN article, page 2 by Robert Edwards. He wants to improve his trading and I'm sure he is trying very hard. But as I read his article, Robert has missed the boat and will never truly succeed until he works on his psychological flaws. For example, he continues to let fear and greed ruin his trading. He's afraid to let a profit run, for fear of giving back a small profit (greed). These are serious problems and deep rotted in his psyche. However, he's not seriously dealing with it. How do I know? Robert made the statement "I may lose next year. If I do, it must be, it will be, because a better team beat me. It will not be because I beat myself." Now Robert, what kind of stupid statement is that. Editor's Note: Anonymous Trader's methodology is depicted on the chart below: Chart in Print Copy It shows you take no responsibility for your losing, some other team or guys beat you! Robert, if you lose next year, it will be because you traded poorly. You didn't react well to market action. Nobody or no market is out to get you. They don't even know or care that you exist.

204

Your assumptions are not quite right on what it will take to turn your trading around. You say you must change your patterns - get some guts - you believe as you stated "If you trade you will error" and "Trading is like throwing a knife in the air and catching it in one's hand and getting bloodied pretty good." That's a real positive view of trading, isn't it! It is no wonder your having trouble. You truly view trading as a very negative thing. You really do! You must work on changing your views into a positive attitude. Can you be honest to yourself to do it? You must, if you are to succeed. I trade 2-5 times a day. If I felt as you do, I'd probably blow my brains out in a week. I look forward to each new trade. I can't wait for the next signal. I'm confident enough to know I'll make money 6 to 7 out of 10 times. That's the attitude to have - positive with confidence. I don't mean to pick on you, but your case is typical (I was there once). I hope you will take this in a constructive way. It will change you. It will take sometime, but you can do it. I'm writing this letter for therapy to keep my concept in the front of my mind, as well as helping others. I speak from real feelings and experience. I started writing a short letter, which has turned into a lengthy dissertation. I hope I have awaken some of you. It makes me sick to look back at my horrendous years. I went to all the seminars, bought systems, books, tapes, software. None of them made me money, because I had some real psychological issues to resolve that only manifested themselves in trading. If you have any personality flaws, trading will bring them out. Do you really want to trade for a living and enjoy the kind of lifestyle it affords? One of freedom and money. Then you better be prepared to deal with your dark side and confront your psychological weaknesses and be honest with yourself (painfully so) be willing to change. It is not easy - but can be done. I have come far enough to turn my trading around - but I work on it everyday. Do you have problems with placing stops and taking a loss? Do you get mad at the broker or the market when you lose. The market doesn't do what you thought it would do. Do you get mad at that stupid system you bought? The system went into its largest drawdown the day you started trading it. The list of questions goes on and on and yes I've done all this and more. Resolve to turn your quest for trading excellence and profits inward - yourself. Learn to expose all your weaknesses and then work on them. Be very honest with yourself and humble. Get rid of your ego. You want to be right on a trade attitude. Risk 2% or less of your equity on any one trade. Do this and you'll make money with any system. You will be in control, not the markets or the Holy Grail Gizmo's associated with it. I wish everyone the best and hope you don't have to go through what I did to succeed. Cheer up, because it can be done and it's worth the price when you have success. P.S. - I've said my piece - got it off my back and hopefully helped some. I'm not one for much interaction and have made myself somewhat of a hermit with trading (It helps to not talk with traders) to be successful. Too much B.S. gets in the way. So I will leave you all to ponder my thoughts. I don't care if people don't believe I'm right, because I know I am. I speak with experience, conviction and compassion for those on this journey. I will not be writing again and will now disappear into trading obscurity to enjoy trading for a living!

Opinion on Anonymous Trader, DayTrading, Commodex & Others - George Bashar After bouncing around last month's issue (12/94), I would like to submit the following observations: First, three cheers for Anonymous Trader. It is about time a successful day trader countered the critics of day trading. As he points out, it's absurd to criticize day trading simply because one has to pay a commission every day. If one holds a trade for two weeks, pays the commission and exits with a profit, is

205

he better off than a day trader who does ten trades in the same two-week period, pays ten commissions and has a higher net profit? This would seem to be analogous to saying he would rather make $100,000 per year instead of $200,000, because he would have to pay more taxes on $200,000. No matter how intensively you analyze it, the bottom line is net profit. Granted, it may be more difficult for a neophyte trader to make a profit day trading. A neophyte trader may switch to day trading for all the wrong reasons. He's correct when he says it is just as easy, if not easier to make a profit day trading, provided you know what you are doing. There are many successful day traders who just go about their business making money year after year by day trading, and not trying to sell systems or run seminars. I would imagine that successful traders like Kent Calhoun and Larry Williams could make a good living by day trading, rather than medium and longterm position trading as they do now. A trade is a trade, a good trader is a good trader! I do have a slight disagreement with Anonymous Trader about what markets can be successfully day traded. While he may have a system that works well with the S&P 500, TBonds and the currency markets can also be profitably day traded. One simply has to have a good system or be comfortable reading the daily pulse of each market to be successful. Anonymous Trader seems to make a good living day trading the S&P 500. If one compares the range of the S&P to the margin requirement, both are much larger than the range and margin requirements of TBonds or currencies. Simply put, if a trader can successfully trade both the S&P and TBond markets, he would be better off with the TBond market, unless he could make five times more net profit on the S&P, based on the respective margin requirements. I 'm not criticizing Anonymous Trader, but simply trying to make members realize that they can profitably day trade the TBond and currency markets provided they have a sound system. But, I do highly commend Anonymous Trader for his insightful submission, and hope, as Dave stated, that he would share his secrets with CTCN members, if feasible. With respect to Lee Taylor's comments on Commodex, I fully agree with him. About 2-years ago, I took out a short trial subscription to Commodex's advisory and hotline. Phil Gotthelf and his father have been in business for a long time and seem very knowledgeable about trading commodities. The problem I had with their performance figures was their hotline would put out a buy or sell signal after the markets closed on Thursdays, I believe. To follow their recommendations, a subscriber would have to buy or sell on the next day's open, which would not necessarily be the same fill as the Commodex fill the previous day. I felt that this was somewhat misleading, and could greatly influence and change the performance results that Commodex advertised. Besides this problem, I felt they provided some very good market forecasts. To Max Robinson, how good to hear someone else admit that he is constantly looking for the Holy Grail. This would seem to be the problem for most of us. If we are consistently making $100,000 per year trading commodities, we will be tempted by the system seller who claims that he can make $101,000 per year. Kudos for your honesty, Max To Kent Calhoun, about your disagreement with John Hill, none of us can be certain of what the facts are; only you and John Hill know. But I would commend you for taking the high road and not taking the opportunity to attack John. Hopefully your letter last month can put the matter to rest.

Always Use Stops - Brian Long When I share my trading experiences and knowledge, not only do I feel good about helping others, but (and very selfishly) trade better, because it causes me to practice what I preach. So lets get to it. For those of you who have trouble taking a loss, let me give you something to think about.

206

I have traded professionally (stocks & commodities) for over 10-years. I have seen many good traders blow their financial brains out, because once they refused to take a loss. They would say they couldn't believe how unlucky they were, which was true on that individual trade. What they failed to realize was, even though there was a small chance of this occurring on that trade, by trading long enough this small chance becomes a certainty. So how do we protect ourselves. I use the analogy of Russian Roulette as this tends to have more of a lasting impact. Picture yourself holding a Magnum 45 with one bullet in the chamber pointed directly at your head. Now start pulling the trigger (trading). Eventually, if you play long enough with no protection, your going to blow your financial brains out. Were you unlucky? Yes, on that one pull of the trigger (trade) you were, but statistically because you have played so long this was to be expected. So, how do we avoid blowing our financial brains out? USE STOPS. Next time you trade without a stop loss in the market, picture yourself pulling that trigger with the gun at your head. Remember, you and you alone are responsible for controlling your losses. Do it and you have a chance for success. Don't do it and....well they're happy to pick up some of your financial brains.

Major Problems With Tick Data Co & Glad I Am Now With CSI - Randy Stuckey There seems to be a proliferation of new price data vendors the last few years. How good are the various sources? Here's one person's experience. I originally subscribed to Genesis end-of-day price service. They seemed OK with a couple of odd exceptions. Several times they just stopped sending several commodities in my nightly download. A phone call always got the commodities re-instituted to my portfolio. Irritating, but not catastrophic. Then came disaster. I concluded I needed tick- by-tick data. Well Tick Data Inc was having this super, colossal, astounding sale of tick data. I took the bait. The next year was a myriad of phone calls and letters. The data sent was so defective, their own software refused to correctly process the data. 41 phone calls, several letters and the threat of a horse's head on their bed failed miserably. They make Scrooge look like a rank amateur. These guys were tough-not a penny would they refund. The good news is they did send "corrected" data. The bad news unfortunately, it too was defective. The following is really hard to believe, but it did happen on one of my phone calls complaining about the "corrected" data being defective. A Tickdata employee explained that I was being unfair--"There were just too many errors in the data for us to fix all of them." Well they won the battle--hopefully they'll lose the war or change for the better. To help the rest of you, they sent me defective data on Euro $, Coffee, Gold, Soybeans, T Notes, T Bonds and Silver. The only good to come from this experience, was when I regained a lot of hard drive space, as I erased the Tickdata directories and files. I currently download end-of-day data from CSI. No problems. How refreshing.

Fibonacci/Gann/Numerology Value? - A Past(a) Life Experience - Randy Stuckey During the last two years, I've been conducting research into many of the common technical analysis methodologies as part of a larger system development project. One part of technical analysis that often comes up, is the use of "astounding" numbers and number series. My internal "Radar" turns on every time I hear clichés like "amazing", "astounding", "uncanny" "greatest discovery ever made" and so on. My numerology study first looked into the construction of Gann Lines, but soon gave up. "They're everywhere! " Is there anything that isn't a Gann Line? But Fibonacci. Now there's a real number series.

207

The sound just rolls off of your tongue. As you know, this number series is formed by summing the last 2 numbers in the series to get the next number in the sequence, numbers like 1, 2, 3, 5, 8, 13, 21, etc. As these numbers increase in size an "amazing" thing happens. The ratio obtained by dividing a preceding number by a succeeding number in the sequence approaches .618 (it's actually .618034 but who's counting). More importantly, there are "astounding" examples of this .618 ratio in nature-and many would say in also predicting stock and commodity prices. The magical ratio even has its own name, "the Golden Mean." Further more, the .618 "Golden Mean" is peculiar ONLY to this specific time series. WOW! Much to my dismay, when I tried numerous objective tests of this magical number series and its "Golden Mean," it just wouldn't do any meaningful projecting. Why was it being so stubborn? Was it me? What if it didn't like me? There was only one way out, I had to try. Maybe I could develop my own astounding number series-one that would behave like good little number series should. My computer whizzed. I sweated and toiled. My teeth gnashed, and finally -Eureka! I invented the amazing Spaghetti number series. This is similar to the Fibonacci series but "astoundingly" takes it to the next natural level. The Spaghetti series is formed by summing the last 3 numbers together. Well no wonder Fibonacci didn't work. He wasn't using the "uncanny" powers of the number 3. This gives a number series 1, 2, 3, 6, 11, 20, 37, 68, 125, 230, 423 and so on. Naturally(?), I immediately tested it on my December Coffee contract data. Clearly Coffee was muddling along in the 80's until 4/26 ("amazingly" close to 423-a Spaghetti number). Then it started to take off. Exactly 20 days later, it formed a clear cut price peak around 125. Whoa! 20 is a Spaghetti number. Whoa! So is 125!. I don't think I can take any more, but get ready to be further "amazed." 37 (Oh dear, yet another Spaghetti Number) days later it hits its all-time peak at -you guessed it, around 230 (I just don't believe it, another Spaghetti number!). But wait a minute. Let's not forget the Fibonacci Golden Mean ratio. I wonder? The Spaghetti series also has a magical ratio. As the numbers become larger, just like the Golden Mean, dividing a preceding number by a succeeding number -amazingly always gives you the same ratio-.544 (actually .543689 but who's counting). In the future, this astounding ratio will come to be known as the Primavera ratio. This, of course, gives us Spaghetti Primavera. And it is unique. No other number series in the universe gives you Spaghetti Primavera. Seriously, I have yet to see any objective evidence of a special number or number series with predictive powers. On the other hand, it is easy to subjectively make a case for almost anything, as I just intentionally did in a silly way with the above nonsense. I don't mean to offend the Gann and Fibonacci followers, but we should all seek a different perspective from time to time. Just remember that one can always find tons of co-incidental relationships for any number. Not amazing, uncanny, or astounding, just coincidental.

Lessons Learned in 10-Yrs of Trading - Bjorn Rump from Switzerland I received my first CTCN, and as you encourage contributions, here is mine. With the availability of small computers, I started to realize a dormant project to systematically analyze markets. Fortunately in 1985, I didn't realize how long it would take to do something productive. With an APPLE II, I naively bought the Kroll-Wilder System and CompuTrac and thought to become rich fast. After some serious paper trading, two friends and I opened an account at Cargill and started trading rigorously with all the discipline possible with the Kroll-Wilder System. They publicity advertised a maximum drawdown of 5%. Well after some 32% drawdown, we stopped trading it. The commission at that time was $74.

208

Easy, do-it-yourself, I thought and started to optimize systems with CompuTrac. After a while, I found highly profitable formulas, but at the same time the "curve fitting syndrome" started to haunt me. Why? I was able to duplicate one of the formulas given at a CompuTrac seminar, and found that what was profitable in the past was not so in the future. As the PARAGON system allowed to test it without being in the market, our group bought it and tested it, luckily on paper. It was another sobering experience. The best of it was the HP-41CV calculator which served me for many years to come to convert price quotations. In addition, I realized the value of computer simulation. Back to CompuTrac. Studies (self-written strategies) were the next fad. The limited memory of the APPLE 36 Kbytes did not allow fancy exercises and Basic Code was hard to edit and debug and had to be interpreted. To find out more on the reliability of trading models, I let the existing "optimized" models run to do some paper trading, a tedious and slow way of "forward-testing". Few people living in America realize the comfort of the European 6-hour time shift. At 8 am, you can download the data, CSI Perpetuals in my case, let your routine run (45 min) while you eat breakfast to have the trading instructions printed out well before the market opens at 2 pm local time. Well that means, when you got your data and when your system is all right. I didn't know much about risk or money management. I traded, but not good nor bad, it was not yet right. The PC changed several things: CompuTrac completely changed format, and the trading and charting software available at that time did not allow me to do what I intended. At the same time, I came across George Appel's MACD system. I modified it so that it produced fabulous results on simulation. I traded it and made about 100% profit annually during two consecutive years, just to give back the profits the following 2-years. It was sobering. I had learned to program a quite complex trading and accounting system, including graphics in Power Basic, but the nagging feeling that I was chasing the rainbow did not disappear. In 1992, I attended a seminar in New Orleans on psychology, discipline and risk management that answered many of my questions. I included rigorous risk management according to the formula of Tom Basso in my program. Still haunted by the "optimizing syndrome", I made a quantum leap. I programmed the system so that it would self optimize, and then trade forward according to the latest parameters. The method could be called "forward testing" as the simulation tells you how well the system performs in the "future." The result was a revelation, an answer to my optimization worries: The worries were completely justified for the strategy I used, optimization was worthless! The old system was thrown out, but not without regrets. Based on that long experience, I found a strategy that does well. I can not yet quantify it, but it stands up in actual trading. Well where do I stand now? I know that trading systems are doomed to fail as soon as they are published, even in very large markets there are enough piranha around to sink it. Examples, the Kroll-Wilder, PARAGON, Great Combo, and the PPS. Publishing or selling a good system is like telling people how to make gold, either it doesn't work, or if it works, gold soon looses its value. This may explain that a publication like Stocks and Commodities Magazine almost never gives real-time results of the methods presented in its articles. However, I learned that meaningful (that is statistically relevant) "forward-testing" by simulation is able to evaluate the merit of a trading strategy. Perhaps the most important lesson is to realize, that if countless claims the industry advertises would be true, we would all make mountains of money. For me a publication like CTCN is of great interest, as it warns of piranhas, teaches testing and outlines principles. However, I would be extremely suspicious of any system explained specifically in detail; after too many traders know how to make gold, gold looses its value.

209

On another subject, referring to Fred Montgomery's remarks, CTCN Oct 94, p.7. Testing the Great Combo with perpetual CSI data yields consistently less profit then using actual data.

Questions for Anonymous Trader - Don McCullough Got to thinking about questions I'd like to ask the Anonymous Trader, (successful S&P day trader). Here's the list, and wonder if it's possible to get answers to these questions? 1. Did you have help from a pro? 2. Did you trade with daily bar charts at first? 3. Do you use Signal Data for your day trading? 4. How long did it take you to find out how to trade? 5. What were your biggest mistakes before becoming successful? 6. Do you enter your position a little at a time or all at once? 7. Why do you think you succeed when most people don't? 8. Do you use breakouts, or dips and bulges to enter, or both? 9. Do you trade the near, second or third contract of a particular market? 10. What got you interested in the futures markets? 11. Do you know of day traders who are better than you, and if so, have you figured out why? 12. Do you move your stop loss up quickly after taking a position? 13. Wouldn't you agree that being able to consistently act on your market knowledge is even more important than the knowledge itself? Is this the last hurdle to market success? This guy (and I'm sure most other members would agree) is the most interesting of all. How can you take advantage of that and yet not take advantage of him? Larry Williams has tremendous knowledge of the markets and has made millions. But, he has lost millions too. Anonymous Trader appears to be much more, if not totally, consistent with his winnings. As you know, that is the goal!

Re: Max Robinson's 12/94 Article & My 30+ yrs Trading Experience & Trouble With IRS - Eugene Sherman The letter from Max Robinson in the 12/94 issue could have been written by me. I've also been trading for 30+years and agree with virtually everything he said. In the 60's and 70's, I was a pretty steady loser. Having a good income, I chalked it up to recreational expenses and apprenticeship experience. By the mid-70's, I was convinced that precious metals were going to explode in price and was a buyer of futures and options for years, all of which expired worthless. By the time gold exploded in 80-81, I was tapped out and missed it completely. Since then, I have traded in a more subdued mode, making a few thousand some years and losing a few thousands other years. In 1985, I had an exceptionally good year, clearing well over $50,000. I showed it on my tax return, but offset it by a $100,000 loss carryover from my early follies. The IRS called for an audit. I only had tax

210

records and brokerage statements going back to 1978. It was my misconception that tax records needed to be kept for 5-years. I was told that capital gains/losses had to be kept forever. For 6-months, I was in close personal contact with my own special agent. In many interviews, I was grilled about secret overseas bank accounts, hidden assets, etc. There was a steady stream of correspondence, as they demanded more and more information and documentation. I could only explain why I was unable to supply most of it in my replies. I had used the same broker in all those early years. I was told that if he could be produced to corroborate my claims, it would be most helpful. I spent over a month tracking him down and finally found a telephone listing in Greenwich, CT, only to be told by his widow he had died the previous year. Ultimately, the IRS allowed the deduction and I owed them nothing. I knew they were investigating me thoroughly all that times. I now save all my records, no matter how many boxes fill up the attic. I also have a 20-year collection of trading systems. There must be 60 or 70 of them. Some of them have merit. If I had the patience and perseverance to stick with them a while, some could have proved quite profitable. I still get a rush of adrenalin when I pull out an old system that I had forgotten and reexamine it. I must explore the legality of lending or renting my collection to computer buffs for optimization. I surrendered to computer trading about 2-years ago. I bought TradeStation and a bunch of software, but like Mr. Robinson have found Swing Highs-Swing Lows to be the most profitable. I have a very simply swing system that averages over $1,000 a day in my back-testing of the S&P500. I would like to refine it to reduce the slippage more before I trade it. I would welcome any comments on my rambling and can be reached evenings at 1-518-674-5491.

They Can Do The Talk, But They Sure Can't Do The Walk - Gary Smith Nearly every trader that I've spoken to over the years has expressed a burning desire lo quit their day job and become a full-time S&P day trader. They have been spurred on by a greedy and manipulative vendoring establishment, whereby means of hindsight and retrospection, successful day trading is presented as being an easily attainablegoal. Several prominent vendors offer mega priced seminars, one-on-one trading tutorials, or software systems and trading manuals to aid a naive public in their quest for financial independence as S&P day traders. Yet, other than one CME floor trader turned vendor, absolutely none of these dream merchants has ever been able to back-up their outrageous hypothetical rhetoric by providing multi-year real money brokerage statements. Instead, what you will get are 1001 lame excuses on why they are unable to produce real money, real-time documentation. What you will receive are numerous glowing endorsements from satisfied purchasers of the vendor's products. These testimonials usually are totally bogus. They are either close personal friends of the promoter, or former customers who have been offered discounts on future offerings. Again, as with the vendor himself, these references will talk a good talk, but furnish nothing as verification to support their babble. (Editor's Note: That is Gary's opinion. Over the past several years, I have personally spoken to a large number of testimonial authors...and never spoke to anyone who I thought had been bribed, offered discounts, or personal friends, etc). The only way to eliminate the crooks, con-men, and charlatans that infest this business is by demanding that they either put up or shut-up. I fully anticipate that some of the targets of my wrath will appeal in future issues of CTCN with very persuasive arguments on why they won't show their statements. I've heard their whining and complaining many times before. Comments like their attorney advises against it, or that real-time statements can either be altered or may not reflect other active trading accounts at the same firm. What these vendors really are doing is camouflaging the fact that they either don't trade or can't trade.

211

Don't misunderstand my point here. I am only suggesting that real-time statements should be presented to ascertain the credentials of the vendor. It's foolish for anyone to believe that they will be able to emulate the results of another winning trader. Successful trading involves much more than blindly following a system or methodology of someone else. Instead, it consists of independently developing your own disciplined trading approach by means of integrating your knowledge of various trading techniques into your years of real-time trading experiences. In other words, learn what works for you and how you are comfortable trading. Unfortunately, the average trader seems unwilling to devote the time and effort necessary to become successful. For this reason, they fall prey to the seduction of some fraudulent vendors promising success on a disk.

Trend Intensity Indicators - Adam White I agree with Giampaolo Bulleri's summary of how to interpret ADX. (CTCN November 1994.) I would like to contribute a few of my own thoughts on the general topic of trend intensity indicators. First, I like to think of trend intensity indicators not as measuring trends but as measuring trading ranges. The reason is since all indicators lag, by the time the indicator starts to rise the trend is well on its way. On the diagram below, section AB of price is both the end of the trading range and the start of the trend AC. But we don't know that until B extends towards C. Note that ADX will not rise until B, even though an ideal "crystal ball" ADX would start to rise back at A. So from the standpoint of nomenclature, I think it's more accurate to say that the upturn in ADX shows the end of the trading range rather than the start of the trend. Chart in Print Copy Secondly, it is somewhat difficult to objectively define a "climbing ADX" (or for that matter falling or flat ADX). Our eyeballs can do it easily enough, but how do we define it logically? Is a climbing ADX when the last reading is greater than the previous reading, or greater than the reading X bars ago? I have run tests that suggest comparing the latest ADX reading to the reading four bars ago is better than comparing it to the previous reading. Or, might an ADX breakout be the proper definition of a climbing ADX? Clearly, if the present reading is the highest reading of the last N bars, ADX can be considered climbing. Again, tests can be run to suggest situations where this interpretation is either better or worse than other interpretations. Another observation follows from the fact that DX is essentially an unsmoothed ADX. This can be important because ADX represents quite a lag from price action itself. Using the quicker DX might eliminate some lag, but at the price of greater volatility and the uncertainty that it brings. This second chart illustrates the natural "jaggedness" of a raw DX. Here is one way that I've used DX that tries to address the difficulty of defining its direction of movement. The last chart shows an oscillator that represents the difference between a 16-bar DX and its value 8 bars ago. (I favor basing the "look-back" on half the DX's period. A 20-bar DX would use a 10-bar look-back, and so on.) This calculation generates an indicator that oscillates between extreme levels and above and below a zero line. I have set the extreme levels on this chart to plus and minus 20. Two ways to read this trendiness oscillator. When it is above zero, we can assume the market is generally trending, and when it is below zero we can assume the market is generally in a trading range or congestion. And because the reading is relative to zero, some jaggedness and volatility become irrelevant. Secondly, extreme high readings often correlate to the termination points of strong trends, and extreme low readings sometimes pinpoint areas where trends begin.

Tidbits on Financial Astrology -Carol Murphy On 2-20-95, we have an important signature (Saturn 45° to Uranus). This same signature occurred on 5-16 and 9-23-94. Check your daily charts for the past dates and let's see if the same cycle repeats.

212

For the past 6-years, I have ordered Ray Merrimau's Forecasts for the Year. He covers cycles and signatures related to the economy, interest rates, the Dow, silver, gold, grains and weather. Cost is about $22...well worth it. Seek It Public'n (Forecast 1995), PO Box 250012, West Bloomfield, MI 48325. 8106263034, fax 810-6265674.

CSI Data Rollovers to Keep Continuous How to Keep Both Historical & 18-mo CSI Data Files Current - Tom Dyste Using Quicktrieve Manager's data file copy command, I can copy new contract months that start on CSI rollover days into both short-term and my long-term historical data directories. I do this first, then use my new trading system's rollover process on files in each directory. Now, my long-term history includes current market action at all times. As a SuperCharts user it is good to have continuous historical data right up to the current day. Though I consider the close-open rollover method inferior to close-close adjustment, this ease of keeping continuous historical data completely up-to-date is a boon. Perhaps others would like to do the same thing. Since this is not directly related to your system and could be of use to others, pass this idea along. If anyone has tips on doing similar things using the Quicktrieve 4.06 rollover tools, or even successful experience using QT to do rollovers, I'd like to hear.

Recommended Reading, New High-Tech Product, & Delta Neutral Trading - Tom Boyett In my ongoing search for trading knowledge, I have read two books that I would highly recommend. Their relevance to any trader is without dispute. Jack D. Schwager's Market Wizards and The New Market Wizards (published in 1989 and 1992, respectively) touch upon a variety of trading subjects in his conversations with some of the best traders of our time. Futures, currencies, stocks, floor traders, trading psychology, program trading, neuron-linguistic Programming, the Turtles, fund managers, fundamentalists, quants - it's all there and much more. Most significant to me have been the consistent tenants of what makes a successful trader as seen by those who have been the most successful of all in the endeavor of trading. I have a new appreciation for the role that a trader's psyche plays in his overall success to trading the markets. The books are available in soft cover. I think the books are highly entertaining and extremely educational for the average retail trader (and probably most professionals too). I have also come across an interesting new product from USEMCO Technologies, the Mobile Trader. It is basically a computer hardware/software solution. Mobile Trader's software utilizes a wireless modem with your personal computer to get real-time quotes, execute and confirm orders, receive market commentaries, and send faxes and E-mail. The system links the PC to a mobile wireless communications network with over 7,500 locations covered in the US. Pricing for limited, but real-time quotes starts at $295 per month. For additional information, call USEMCO at (212) 432-7000. Finally, I would like to solicit feedback from those of you who have experience trading delta neutral - the combination of futures and options to form a risk neutral position. I can be reached at (713) 496-9400 during the business day or (713) 395-4408 after that.

Opinion on John Jeffries Precision Day Trading Method - Harold Fowler

213

My compliments on an excellent forum for the honest exchange of ideas and information. Keep up the good work! This letter is in response to your subscribers who desired feedback on the Precision Day Trading Method. I purchased the Precision Day Trading Method in 6/93. Prior to the purchase of the system, I discussed my personal needs at length, regarding a day trading system with the designer, John Jeffries. The most stringent requirement being due to my inability to follow the market all day due to my job. I was assured that only two to three phone calls per day to my broker would typically be required. Right from the outset of trading, the system failed to make money. It was also apparent, that in some cases, as many as eight phone calls were necessary in a day to move up (or down) a trailing stop. After three months of using the system and losses well in excess of the cost of the program, I returned it to Mr. Jeffries for a refund. I also included my brokerage statements and a trade-by-trade listing of all my closed out trades. He never bothered to open my package, but instead had his programmer send me an official track record based on exchange tick data. Close examination of the official trade-by-trade listing was a real shocker! No deductions were made for slippage/commission. I couldn't believe my eyes! Notwithstanding this oversight, several signals I received (all losses) were not shown on the official track record. Mr. Jeffries returned the program to me and called to discuss the problem. In an attempt to reconcile the disparity in trading signals, he indicated that I should try loading both combined-session (Gloebex + Day Session) and Day-Session only data and trade only signals germane to both data sets (give me a break!) I paper traded the system for another nine months and the losses continued to mount. In the 7/94 issue of CTCN, a subscriber, M. Kuhn, indicated that he had difficulty receiving a refund from Mr. Jeffries. In the end, however, he relented and refunded the money. You can well imagine my anger. I immediately called Mr. Jeffries and you guessed it, he had his programmer send me another official track record covering the entire period that I had owned the program. Adding my own deductions for slippage/commission, the markets that proved profitable were the S&P 500 and the NYFE. The profits in these two markets were less than half of the amount indicated by the official track record. On a subsequent phone call, Mr. Jeffries informed me that I was the only purchaser of the system that was dissatisfied with its performance. However, he refused to divulge the names of any of the satisfied customers nor was he receptive to testing of the system by an independent party (Futures Truth, CTCR, etc.). Since his omission of slippage/commission costs in the sales brochure is clearly deceptive advertising, I am contemplating a lawsuit for mail-fraud to recoup my purchase price. I'm quite sure even the CFTC required disclaimer would not protect against such a misrepresentation. I feel strongly that fellow subscribers would be well advised to avoid purchase of this system. If anyone would like to contact me for a copy of the official track record or to discuss the system, you can write to me c/o CTCN.

W.D. Gann - A Great Trader?- Don McCullough In the book, "Trading For A Living" Dr. Alexander Elder states that he interviewed Gann's son and found out the following about this one-time super market guru. Gann's son told Elder his father could not make a living for the family from his trading and supported them mainly with money derived from his books and selling instructional courses. When his father died in the 50's, his estate was worth about $100,000. Not a small sum, particularly in those days, but hardly what one would expect of a man reputed to be one of the greatest commodity traders of all time. So who's your guru(s)? Do you really know that they really, really know what they're talking about? Dr. Elder's book, "Trading For A Living" is one of the best. Out of the 120 or so market books I have, this book ranks in the top 6 and maybe at the top!

214

Accurate Data A Must - Don McCullough Have you checked your data against other data sources for accuracy? I have, and found some differences. Not a lot, but some. Data accuracy has to be one of the major concerns of the serious trader. There is no way to get accurate tests from inaccurate data! When you find differences, how do you know which data is correct? At this time, I don't have a good answer to that question. Thus far, I checked my Dial Data, data against a couple of the popular paper chart vendors. Happily, I can say there were few differences. However, those few differences do make me wonder how accurate nearly everyone's data is. To put it in a more vivid way, are we looking at the "same" charts the top market pros are looking at? It's a sure bet that if the difference is substantial, our bank accounts will never equal theirs.

A Simple Way To Predict Market Turning Points (and impress your friends) - Bob Pelletier (President of CSI) This brief report is designed to advise those who may have an interest in systems, methods, or services which predict market turning points far into the future. If you have been solicited by any firm that does this, you may gain some important insight into this area by reading on. Whether you plan to purchase such a service, system or secret is your personal choice. CSI has no preference for one commercially available procedure over another. We simply wish to point out facts that may be helpful. If I were to tell you to "Pick any date in the future, for any commodity, and I will show you the next turning point that will occur relative to that date." You might think I'm crazy, or strongly doubt my claim. The truth is, that anyone can do this within an accuracy of, say, three days about 70% of the time, or within four days 80 to 90 per cent of the time. The secret depends upon how one defines "turning points". Suppose we define intermediate market swings or turning points to occur about 25 times per year, or twice per month. Since there are about 250 trading days per year, this allows for one turning point per 10 days. With a dart and a calendar into the future, the dart will hit some seven day time interval (the day hit plus or minus three days) each time it is thrown. If turning points occur, on the average, once every 10 days, then there is a 70% chance my dart will include a turning point within three days. Additionally, if I knew that last week there was a definite low, my next turning point will be a peak. I'm not interested in 1997; I may not live that long. I can only make money if I can bet on the next immediate turning point for various cycle lengths. There is not enough room in this Newsletter to show how market turning points can be predicted with more reliability, but it is possible to provide an unbiased estimate of the next peak and the next trough for each given predominate cycle period. Using a method which treats peaks independent of troughs can produce a non-regular period between peaks and troughs (a more realistic behavior) for future market cycles. Before spending your hard-earned funds on any system, be careful to discover what you can do under purely chance conditions without it.

Reply to Wade Geary - J. R. Stevenson When you retire, your risk adversely goes way up as you must protect your retirement funds - unless you are a very strong disciplined person, I doubt that you can make a needed supplemental income on a $25,000 account.

215

A good day trading system for S&P or Bonds might take some of the over-night risk out of your mind, but I assure you, your approach will be different when you retire. I have been retired several years (I'm 72) still trade, but I don't have to! It makes a difference. If you wish to talk, call me at 901-751-0605.

Member Requests George Bashar, 1-407-624-5057 seeks information on Bruce Gould's Money Machine, Mike Chalek's Squeeze and Steve Cox's Natural Order. Also, Jim Muhlstein wants info on Money Machine. Russ Norwood would like to speak with anyone who has had experience with the "Vibra System" Trading Program from Burnett Nordine at B & B Educators in Early, IA. You can call evenings collect at 314-4362187.

Editor Comments As you may recall, if you have been a CTCN Member for a while, our number of pages has been growing considerably. We printed 8-pages from 1983 thru May 1994. We then expanded to 10-pages and last month's CTCN was 12-pages. This month it's a full 14-pages, to make room for all the educational articles I want you to read. Our printing, postage and miscellaneous costs have increased rapidly due to the larger editions. In fact, the cost of a 14-page issue is almost 100% greater than our earlier size, without even counting the recent postal increase. In addition, Commodity Traders Club average revenue per new member has decreased over the same time span, due to our reduced cost special offers. However, I do not mind the increased expenses, as you getting this money-making and money-saving unique information is far more important than CTCN's expenses. The articles from Anonymous Trader and Dave Reiter are excellent and of great benefit to Members and should be read carefully. However, though extremely valuable, some of you may be somewhat disappointed by Anonymous Trader's latest contribution. That's because I have received calls and mail from a number of members who had hoped Anonymous Trader would reveal a money-making 100% mechanical approach. Unfortunately, Anonymous Trader could not do that, as his approach is NOT 100% mechanical. In other words, there seems to be some 'art to the science', and other important factors involved in his success. Thanks to everyone who shared their knowledge by contributing to this issue. All members are urged to make contributions to our next issue. That way we can all benefit. Issue 22. Anonymous Trader Makes Lots of Money Trading & Why Others Don't or Can't Do It This is in response to the letters written concerning requests for personal instruction and education on daytrading. 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.

216

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.

Small "House Advantage" Is Preferred over Wild Claims Werner from Germany I want to congratulate CTCN newsletter. It is really a great product and thinks every trader, no matter how experienced, can benefit from it. There are several reasons for writing this letter. I have been trading Futures since 1983. I started with an account of about $10,000 and haven't added any fresh money. After some great profits in the late 80's, there came some great losses. So, I realized the most important purpose is to achieve constant results. I developed mechanical systems for my own use. I trade strictly with a confidence that arises from trade-totrade. Never in this time, have I acted against my plan. So what I want to say is, the only way to achieve constant results is a mechanical system with some restrictions. You must develop a system of your own. Referring to the contribution of Bjorn Rump from Switzerland in the 12/94 issue, it is absolutely true, that gold becomes worthless if everybody can make real gold. If you develop your own system, you know the weak points. If you have done a serious job, you can rely on it and know in which cases it is absolutely vital to pay great attention. According to Dr. Mandelbrot (I hope you know his work) and other "Random Walkers." I think we are acting in 'efficient-markets', better I should say in nearly efficient markets. That means, as traders, it is our only chance to find out the few times when the market is not quite efficient. In other words, there cannot be a great percentage of inefficiency, otherwise the market will quit to exist. (See Bjorn Rump). If everybody takes the same highway to get to certain destinations, this highway will be blocked and nobody will get there. I don't know whether you have a similar proverb in America, but in Germany we say, if you want to get to Rome, there are many ways to do this. I absolutely agree with Dave Reiter (CTCN 12/94 issue), to get the 'house-advantage'. This advantage is somewhat from 2 to 5%. In my opinion, if you get a trading system brochure with figures like 82% winners and say $10,000 in the test period, there is something wrong with this system. Either it isn't a serious work from the statistical point of view (for instance: sample size), or the system is optimized, I should say over-optimized. My experience in testing systems, are the fewer filters you choose and the closer you get to the 50% level (presupposition >50%), the better your chance this system will work in the future. Next I have some questions: Inspired by the article of Anonymous Trader (12/94 issue). I was caused to reflect on my opinion referring to day-trading, because I was a position-trader always. I took my system to a friend, who has S&P Tick-Data to test the system intraday. The results of testing nearly four years intraday was astonishing. They were quite similar to my results referring to positiontrading over the last 12-years (historical and real-time trading). I read the 1-95 issue and got a hit reading the article by Randy Stuckey (Major Problems with Tick-Data) because the vital point in any testing is how reliable the data is. How has Randy discovered that the data is defective, because by my information, Tick-Data has no bad name. My question to you Dave, or Randy: Are there other services that provide tick-data, say 5-minute data of S&P? If anyone can help me, write in. Second question: I am interested in the following books, mentioned in several CTCN issues:

217

Dr. Elder - Trading for a Living; Jack D. Schwager - Market Wizards and New Market Wizards (soft cover issues). I am interested in the book Dave Reiter mentioned in his article (12/94 issue) about casino gambling. Perhaps you can get the title and author and tell me where can I order these books? Editor's Note: See Pg.13 Editor Reviews for book sources.

Don't Let CTCN Degrade with Negativism & Constant Vendor Bashing & Arguing Like A Similar Competing Newsletter - Joe Ross I admire what you are doing in CTCN. You must be very careful not to allow it to become like a very similar competing newsletter. It is one of the most disgusting rags I have ever had the misfortune to read. Their membership has a lot of pitiful saps hungry to learn from the phony wolves who write from time to time. Mostly, these phonies tear each other apart, call each other names, and never allow the readers to know anything of value. It has become a piece for the benefit of a few "famous" (or should I say "infamous") names to promote themselves and the crapola they are pushing. When I first read that similar competing newsletter, I wrote a few articles for the benefit of the members. My articles were positive and upbeat. I called no one names, insulted no one, and tried to present useful and helpful essays. I soon realized that I was a voice crying out in the wilderness. Rather than expose myself to possible attacks from some of the "big" names who write there, I quietly quit reading and writing anything for it. When I received CTCN, I was appalled to see some of the same fakes and phonies writing here. Have any of these guys ever really traded? Have any of them anything of value to teach? Are any of them even willing to show others how to trade, or are they just there for the sake of publicity'? Dave, I am very particular about the company I keep. I will not get involved in writing for a publication where the contributors argue, insult, or carp at each other. A good example of what you should allow is the article in Vol -2-12, by Anonymous Trader If I'm not missing my guess, that article was written by (name withheld by Editor due to Anonymous Trader's request), a longtime student of mine. He went through a living hell to learn how to day-trade. He almost lost his wife and kids over it. He lost a lot of money on the way to becoming a successful daytrader. His article is genuine and well stated. If it's (name withheld) who wrote, you ought to get him to write about the rough road he traveled on his way to success. Such an article would be tremendously encouraging and useful to your readers. Editor's Note: I'm working on that. I have recently talked to and written him trying to get him to go into more detail on his trading methods. I also just tried to call him again, but he was on a long vacation so I couldn't reach him. When you are such a successful trader, you can afford to take long vacations. Also, as he pointed out earlier, it's good to occasionally get away from the markets. Dave, if you are going to continue to allow articles like a certain negative article in Vol. 2 No. 12, then please cancel my subscription and send me a refund. This article, in which this vendor does his usual howling, bitching and moaning, is precisely why the similar competing newsletter I mentioned before has never grown. I don't want to read about anyone's personal arguments with someone else. If I want this kind of sensationalism and garbage, I can pickup "Star" at the checkout counter of the supermarket. On the other hand, please continue to feature articles by the people most of us have never head of. They are genuine and heartfelt and a real joy to read. One person trying to help another - great! Commodity Traders Club News should be strictly for the little guy. That's its appeal. You should exclude anyone who has something to sell. Therefore, I have to exclude myself from writing any articles and signing them with my own name. If I do write, I will send it under an assumed name. You will never know from whence it came,

218

or that it was from me. That way, I will not be promoting myself or anything I sell. It will simply be one trader talking to other traders via CTCN. I tried that with the competing newsletter, but the Editor will not publish anything written by a nonmember. This, much to the deprivation of his membership. Dave, I have been an active trader for 38 years. I've seen it all. There is nothing left for me to learn, but I'm learning always. Please do not allow commercialism to get into your publication. If the big names want to write for it, make them do so under an alias. Frankly, you don't need the big names - including me. There were some wonderful articles by "nobodies." I read the whole notebook (back issues). Those nobodies are the real somebodies of trading. Without them, we would all be a lot worse off. I'm not trying to dictate your editorial policy, but you have a chance to break new ground with your publication. It has the potential of being a great benefit to those who read it, and can be a refreshing relief from the kind of garbage usually made available to traders.

Opinion on the Kent Calhoun/Futures Truth Controversy - Al Dougherty As a new subscriber, I was struck by the vitriolic nature of the Kent Calhoun letter about John Hill and Futures Truth (12-94 CTCN issue). I've used Futures Truth on occasion for detailed examination of systems that I might buy and have always found their materials to be very helpful. Vendor materials are always full of hype. Unless you have the means to do detailed, trade-by-trade testing, you'll never know whether you can withstand the inevitable drawdowns of any mechanical system without help from an outfit like Futures Truth. Based on my own experience, I'd never take the word of the vendor, or even the word of his references, his happy customers to whom he refers you, about the numbers concerning a system. If they'll give a full refund after you've traded a system for a period, whether profitable or not, that's another thing. Most won't. Guess why! So, back to Futures Truth. It's my impression that it's being systematically undermined. Maybe it will be destroyed as a useful service, by vendor attacks on its methods or publication of the results of the performance of the systems it tests. You can well understand vendor discomfort, if you've ever bought and traded most of the heavily hyped systems out there. God forbid, that we'd have an independent Consumers Report for commodity trading systems! I'd like to know more about the flap between Mr. Calhoun and Mr. Hill. I propose that both sides release all of their correspondence with each other for publication by both CTCN and Club 3000. With a release from legal liability for such publication or disclosure from each party. If this is not satisfactory, I call on Mr. Calhoun to publish all of his correspondence with Mr. Hill in CTCN. I'd also like to know if either side has threatened legal action, especially Mr. Calhoun. I suspect the threat of legal action and the attendant costs of lawyers, discovery, etc., is what's really behind the demise of Futures Truth. We need more, and hopefully more complete information on this dispute. Editor's Note: I do not believe Futures Truth has in fact demised, as mentioned by Al in his interesting article. However, they have announced to no longer sell their own Universal and S&P Daytrade systems due to a possible conflict of interest situation. Futures Truth is to be commended for their action in deciding to no longer sell their own systems, even though it means a loss of revenue. I also spoke to John Hill who said "we do not plan to quit." John also prefers not to air this dispute by releasing correspondence for publication.

Build a Fortune by Using Volume, Open Interest, Commitment of Traders Data & Probabilities Michel Arimoto, CTA

219

I would like to see all members of CTCN make money. How can we do it? Unless you are a God, you may find that the market is not always predictable. To make money, you must try to keep the odds in your favor. To begin with, make sure that you program or remember the seasonal moves as an overall direction. You should always go with the direction of seasonal moves after carefully combining data from at least, two seasonal chart service companies. ‚ Program the Open Interest daily. The Open Interest will peak right at price top or price bottom. ƒ Watch the large speculators' moves in the Commitment of Traders Report. This is inside information, and make sure that you note the direction of the money: is it going South or North? „ Watch the Volumes. The volume will tell everything. If the price is up, but the volume is down, watch out for the reaction. If you watch only the numbers, or believe in the day-trading systems, you could be getting killed many times. Unless you know for sure that you are trying to find out "peoples' reaction to news" or "mass psychology" through the volumes, make sure you know that there are equal number of buyers and sellers. It is up to you to find out which side is the right group. More on this subject, please read my book which is advertised in this issue. … The entry point can be chosen using any software, as long as the condition in items 1 through 5 are met. But, use a bar chart which is at least one hour long or more, and go with the direction of the weekly chart. Never forget the Gunning the Stops Trick ( explained in detail in Appendix of my book). Editor's Note: In case you're wondering what "Gunning For Stops" means, there was a detailed article in the first issue of CTCN, Vol. 1, No. 1, titled "Gunning Plays Can Claim Victims in the Futures Pits." Note: If you do not have all our knowledge packed back-issues, you can get all 21 back-issues at the special low price of $77.00, plus $3 Shpg within USA/Canada, overseas add $15 for Shpg. Basically, the trick is to buy below the Support and sell short above the Resistance (Just Do It) because "they" always come after the stops to generate commissions. This is a "probability game" and make sure that you know it. The probability of the price to be lower during the harvest time is much higher as the demand for copper for housing is higher in March year after year (construction picks up after winter). However, if the price advance from 1,2,3,4,5,6, up to 7, the probability of going up to 8 or coming down to 6 is 50/50, unless you pay very close attention to the Items 1 through 5, and try to keep the odds in your favor! As stated in my book, the trader should not forget the importance of the Last Trading Day, the First Notice Day, important Government Report days, etc., because on these days or the next day, the price tops or bottoms, or moves in one direction all day long, etc. Make sure that you know that a PC is a dumb animal (it cannot think), and only you can think or judge and you must combine Items I through 5 to make money. To encourage members, I have enclosed my latest monthly statement from the brokerage which showed over 400% return. Editor's Note: Dec 94 Broker Statement was enclosed.

Traits of a Winning Trader - Gary Smith I hope the readers of this forum can read between the lines and grasp what Anonymous Trader is trying to say in his excellent article in the 12/94 issue of CTCN. In the first place, he tells us that he buys strength and sells weakness.

220

The select few winning traders that I've encountered the past 29-years all shared this trading characteristic. Sadly though, the public has been manipulated into erroneously believing that tops and bottoms can somehow be miraculously picked. Gann, Elliott Wave, Astrology, cycles, choose your poison. Everyday your mailbox is inundated with outrageous hypothetical claims from vendors on how to pick tops and bottoms with pinpoint accuracy. Anonymous Trader goes on to say that "good trading is not 100% mechanical." AMEN! Most traders spend a lifetime seeking a totally mechanical system, so they won't have to think. If not using their brains in trading is their goal, then they would probably be better off working as extras in some of those Night of the Living Dead zombie movies. In a July 1990 article in Futures Magazine, Jack Schwager said that of the 17 traders profiled in his book, Market Wizards, only two were system-based. I note that both of those 100% mechanical wizards have had some disastrous trading years since being profiled. You should be aware of estimates that 80% of the commodity fund advisors are 100% mechanical in their trading. Over the past 10years, the commodity funds managed by these advisors have averaged a paltry return between 6% and 7% per annum. Much of that return however wasn't from trading profits, but from interest income from T-bills. This historic under performance by the funds is in itself an indictment against using a totally 100% mechanical approach. Anonymous Trader tells us that he struggled for 8-years before becoming successful. How many beginning traders would be willing to pay such a tuition? Most newcomers are completely oblivious to the fact that successful trading requires a skill and talent just like any other profession. Years of schooling and on-thejob training are required. What really permeates throughout Anonymous Trader's letter however, is just how worthless all the seminars, systems, newsletters and hotlines are. To paraphrase Anonymous Trader, "all this is crap." The public just doesn't get it. Whether they succeed or not has virtually nothing to do with their methodology, but with whom they are. If you forced him or any other winning trader to totally abandon his methodology, within months they could develop another trading style that they would succeed with. Kudos also to Dave Reiter on his insightful comments in the last issue of CTCN. This fellow has my utmost respect, since he is willing to backup his talk with his trading statements for the past three years. Dave was right on in taking to task those who rush out to purchase the hottest new systems and trading products. As Dave relates, these types always will be disappointed in finding the vendor's claims aren't as advertised, and then off they go in search of the next promised Holy Grail. Before concluding, let me address Harold Fowler's article regarding the Precision Day Trading Method. Harold wrote an exemplary letter and should be complimented. The purpose of CTCN is well served when members such as Mr. Fowler come forward with their experiences. Harold is probably kicking himself though for being blinded by greed. He could have saved himself a lot of grief by demanding that either the vendor prove his rhetoric by means of real-time trading statements, or by allowing Futures Truth to independently test his creation.

Excerpt from Perry Kaufman's book "The New Commodity Trading Systems and Methods" & Keltner Channel Definition - submitted by Philip Toh The 10-Day Moving Average Rule - The most basic application of a moving-average system was proposed by Keltner in his 1960 publication, How to Make Money in Commodities (The Keltner Statistical Service). Of three mechanical systems presented by Keltner, his choice of a moving average was based on performance and experience. The system itself is quite simple: a 10-day moving average based on the average of the daily high, low and closing prices, with a band on each side formed from the 10-day moving average of the high-low range. A buy signal occurs on penetration of the upper band and a sell signal when the lower band is broken: positions are always reversed.

221

The 10-day moving-average rule is basic, but it does account for the fundamental volatility principle and serves as an example of the actual use of moving averages. Keltner expresses his preference for this particular technique because of its identification of minor rather than medium or long-term trends, and there are some performance figures that substantiate his conclusion. As an experienced trader, he prefers the speed of the 10-day moving average, which follows the market prices with more reasonable risk than slower methods. A side benefit to the selection is that the usual division required by a moving-average calculation can be substituted by a simple shift of the decimal place; who knows how much impact that convenience had on Keltner's choice? Keltner's Minor-Trend Rule - One of the classic trading systems is the Minor-Trend Rule published by Keltner in his book How to Make Money in Commodities (The Keltner Statistical Service). It is still followed closely by a great part of the agricultural community and should be understood for its potential impact on markets. Keltner defines an upward trend by the failure to make new lows (comparing today's low with the prior day) and a downtrend by the absence of new highs. This notion is consistent with chart interpretation of trendlines by measuring upward moves along the bottom and downward moves along the tops. The Minor-Trend Rule is a plan for using the daily trend as a trading guide. The rule states that the minor trend turns up when the daily trend sells above its most recent high; the minor trend stays up until the daily trend sells below its most recent low, when it is considered to have turned down. In order to trade using the Minor-Trend Rule, buy when the minor trend turns up and sell when the minor trend turns down; always reverse the position. The Minor-Trend Rule is a simple short-term trading tool, buying on new highs and selling on new lows. It is a breakout method in the style of "swing" trading and can be used as a "leading indicator" of the major trend. It requires frequent trading in most markets, with risk varying according to the volatility of the commodity, Keltner's Minor-Trend Rule is the basis for a number of current technical systems that vary the time period over which prior highs and lows are established and consequently increase the interval between trades and the risk of each trade. An advantage of the Keltner approach is that it imposes no arbitrary restrictions on the analysis of prices (e.g., breakouts of 100 points). Editor's Note: Mr. Toh made this contribution as a result of Anonymous Trader use of the Keltner channel method, as referred to on Anonymous Trader's chart on page 2 of last month's CTCN. Philip hopes this will assist the many members (himself included) who are greatly interested in the methodology used by him to trade so successfully.

All Trading Products Should Qualify For Inclusion in CTCN - Ron Gruen This may be a minority view, but I think your newsletter is doing a disservice by not publishing articles concerning experiences Swing Catcher owners have. I don't see this issue as a conflict of interest (nor does Bruce Babcock, publisher of CTCR & sells trading systems). When I receive his newsletter, it's accompanied by literature concerning his systems for sale. Articles (about your own products) published in moderation and without censoring the content because of bias of the editor, may serve a need by current owners of the system for a useful interchange of ideas, comments, problems and solutions. There is no significant conflict of interest when a newsletter is permitted to carry articles, good, bad or indifferent about products, including the publisher's own system. Through the exchange of ideas in an open forum, they may be of benefit to a portion of members. I hope you give your policy some serious thought. I for one, believe it is misconceived.

222

Editor's Note: I have received a number of letters and phone calls about this issue. Almost all the feedback was in favor of Ron's viewpoint on this matter. In fact, much of the feedback echoed what Ron Gruen had to say almost exactly! Especially about SC being referred to by its users only (never the developer),and covered moderately (both positive and possibly negative viewpoints), and in proportion to other miscellaneous trading systems and products that are mentioned in CTCN. Starting with this issue (for example, see Harriet Hodges' article ) you may occasionally (but not often) see articles referring to Swing Catcher. Normally, as part of an article on a more general subject, so nonowners of the software will also find the articles informative or interesting. In addition, you should know that the vast majority of CTCN Members are not SC owners. In fact, only about 15% are owners (which is a comparatively small percentage).

A 20-Minute Time Period Price Difference Resulted in My Losing $2,300 - Bob Meaders We all know that brokers confirm a fill by phone followed by a printed confirmation in two or three days, depending on postal service. Please note the following experience: I sold T-Bonds. The fill was confirmed close to the real-time quotation by phone. 14 days later, I received confirmation at a price sufficiently below the original confirmation to equal $2,300 loss. Unfortunately, I had no reason to carefully check the phone fill price, but I believe it was 20 to 25 minutes after the phone fill, before the price hit that contained in the printed confirmation. I wrote the CEO of Alaron (broker was Alaron) about this matter. He did not acknowledge my letter. I'm not suggesting that one should trade or not trade with Alaron. I'm simply giving my experience.

Trading Insight - Harriet Hodges I've settled down into a fairly comfortable routine with the Swing Catcher System. I made $2,300 last week, and I'm reading a good book on stops (J. R. Maxwell, Commodity Futures Trading with Stops) which may help me keep a bit of that. Its been exciting learning this stuff. I came out even for the months of active trading I did in 1994, which I think was pretty good for a beginner. The mistakes I made were relatively minor, thanks to good advice from you and books. Now I'm looking forward to some long-term profits from my carefully worked out six-year plan. This plan calls for doubling, after taxes, my $15,000 stake by the end of the year. That's an average monthly profit of $1,765. Knowing it's much harder to make money with a small start than a large. I 'm resolved to be cautious and patient until that $30,000 mark. That is, one contract at a time, negative correlations in the markets chosen, a limit of 4-markets at a time, all signals taken (if possible). My Trend Index program works well. It has small peculiarities that I wish a programmer could iron out. I'd wish for a flexible "Report" capacity, but the quality of the information seems excellent. I'd love to see a good editor (and indexer) clean up copy, organize and present the manual better. I won't say too much about that because I should offer to do it ( an ex-editor and indexer), I don't have time. All in all, I think I am very lucky indeed to have stumbled on you and Trend Index. I have avoided the horrible experiences others write about. My computer system (a bottom-of-the line 386 with a math co-processor, black-and white monitor, cheap modem) with Commodity Systems, Inc., data works well. My brokerage firm, Jack White, is excellent--although extremely expensive. Trend Index delivers about the mix of wins and losses it promises. A beginner should start with a reliable system. It should be understandable by an average intelligence without great pain. A mechanical system, I think is an absolute must. Do exactly what it says (harder than

223

you'd think, given the tendency of the mind to second-guess) until you've traded enough to know where you may begin to veer off. Do your homework. Know at all times what each trade stands to lose and what the exact level of your account is. Pick markets of average volatility, good volume, average or modest margin requirements. (Forget for the moment the S&P 500, orange juice & lumber). Start with a brokerage firm that gives no advice, but answers calls within 10 seconds night and day, is scrupulous in calling back with fills, gives good fills. (Don't be unreasonable here) After you read them your order, it should be their standard policy to repeat it in brokerese. They should make certain whether you intend a day order or an open, good-till-cancelled one. They should know and tell you what markets accept a one-cancels-the-other pairing of stop and limit orders. They should question you if you've done something silly, such as placing a sell stop on a short position or a limit order to sell that's below where the market is at the moment. Then plunge right in, reminding yourself that you have to log four losses for that first win. That's the rule. A question: Why is Robert F. Wiest's - You Can't Lose Trading Commodities and scale trading never mentioned by subscribers? It would seem that a systematic buying at preset levels as the price of, say, cotton drops, and a systematic selling when a contract's price rises 10 points would (as Wiest claims) over the months and years give back a steady 20-40 per cent profit. Is there some fatal flaw here? Or is it just that none of us want to settle for steady 20-40% profits? If someone handed you $100,000 and you knew you only needed $35-40,000 a year to live on (we're farmers; that's a lot to me), would scale trading indeed be a safe place to put that money? (I'm assuming the usual daily attention any commodity account requires).

Opinion on Scale Trader Book (You Can't Lose Trading Commodities) - David Stone In my opinion, the Scale Trader method involves incredible risk and very deep pockets. If I remember correctly, it involved only buying long (never selling short) a commodity when you perceived it to be at historical low levels. You would then hold it forever (if necessary) until it went up in price. In other words, say you bought long (an old trade of some years ago) Sugar at say 6 cents because you thought it couldn't go much lower. Little did you realize at the time that it was going to drop below 3 cents. Subsequently, Scale Trading said you had to hold it regardless of how low it went or how long it took, until you had profits. As a result, you may have held that Sugar trade perhaps several years, until it finally reversed and you had profits. In the meantime, you suffered a huge paper loss or drawdown per contract for that entire period. Sitting thru such a large drawdown for such a long time requires nerves of steel and tremendous discipline, not to mention deep pockets! I can show you even more extreme examples where the drawdown was even more (i.e., over $30,000 per contract), and it required staying with the trade for very long time periods before it was profitable. At the same time, you had a large debit balance the entire time (perhaps months or years)! As you can see, Robert Wiest's Scale Trading technique requires nerves of steel and patience of a Saint and very deep pockets. However, it's probably true that (as the book name states) You Can't Lose Trading Commodities. However, using the Scale Trader method to win (eventually) is certainly a hard and difficult road to say the least. Editor's Note: Perhaps this contribution answers Harriet Hodges' question as to why she doesn't read much about the successful use of the method outlined in the heavily advertised book by Robert Wiest. It seems to me that very few traders would (or could) successfully use this methodology.

224

Spreading Basics - The Mechanics of Profitable Spread Trading - Bob McGovern The concept of commodity futures spread trading appears simple. The trader enters a long position on one side of the spread, while simultaneously entering a short position on the other side or "leg" of the spread. The long and short sides can be in the same commodity, or they can be in two or occasionally three different commodities. If the spread consists of commodity futures contracts of different months in the same commodity, it is called an intracommodity spread. An example would be Long December Wheat vs. Short July Wheat. If the long and short legs of a spread are in different commodity futures contracts, the spread is an intercommodity spread. Example: Long March Soybeans vs. Short March Wheat. Everyone does fine up to this point. It is only when the words, "bull spread, bear spread, inter-crop, crush, reverse crush, carrying charge spreads and crack spread" are mentioned, when some confusion arises. Understanding these terms, besides the unique verbal protocol required to place spread orders, has kept many confident open position traders away from spreading. Comprehending the activity on the floor once the spread order is entered is a definite requirement for the trader; for what he might consider a "bad fill " may in reality, have been a very good execution. Consider a Long July Corn/Short July Wheat spread, entered "at the Market." The trader's screen may show a difference of $1.04 per bushel between the two commodities, and he may expect that difference to be his spread differential. However, the trader must understand that the trade has to be executed in two different trading pits, so the physical aspects of the trade execution must be realized. It is possible that the actual spread trade could be made at $1.04, or even greater, but the trader can't assume that. The logistics of the trade are much simpler on intracommodity spreads, as they are made in the same pit. The mechanics of the spread itself should be studied. To establish order in spreading, the "buy" or long position is always mentioned first, then the "sell" or short side of the spread is mentioned last. This protocol should be used when placing orders. Then, if the spread order is a limit order, the trader states the premium on the "buy" or "sell" side. An example: "I wish to place a spread order as follows, buy 3 April Live Hogs and Sell 3 October Live Hogs, plus 300 points (or $3.00) to the sell side." (What I am saying is that I want this spread, but October must be sold at least 300 points over the April, which I am buying). So, let's assume this spread has filled, with the October Live Hogs sold at $42.60 per hundred, and the April Live Hogs bought at $39.60 per hundred. I didn't care what the individual prices were; October could have been sold at $90.00 per hundred, just as long as the differential between that contract and the April contract was $3. If the October were at 90, then the April would have been at 87. Now, what next? My reasoning for making the trade was that I felt the difference between the two contracts was too great, and a seasonal tendency to narrow existed. Therefore, I want to see that difference narrow. I don't have to figure how much my short October is making or losing, or calculate how much the long April contract is making or losing. All I have to check is the difference in price between the two contracts. If it's less than 300 points, I have a profit; if it's more than 300 points, I'm losing. Let's assume the spread has narrowed to 200 points, October over April. I decide to take the profit, which is 100 points ($400) per spread, before commissions. I don't want to enter a market order, so I place the following: "On a spread, Buy 3 October Live Hogs (I am covering my short) and Sell 3 April Live Hogs (I am closing out my long); plus 200 to the Buy side." Say I "luck out" and get a better fill. Would it be a differential less than 200 points, or more?

225

The Long April /Short October Live Hog spread happened to be a "bull spread," which meant that the nearby month was expected to be the stronger price performer than the October. The spread was also an intracommodity spread; both sides of the spread were Live Hogs. The spread was also a "seasonal" spread. I'll cover more on Seasonals, carrying charge spreads, crush spreads, etc., at a later date. Spreads normally have less margin requirements than open positions, and in the Live Hog spread above, current initial margin requirement is $164 per spread. The initial margin requirement for an open position either long or short is presently $540. Another point to consider in spreading, besides lower margin, is the multiplicity of ways a profit can be made in a spread, as opposed to an open position trade. Here are some factors to consider: There is only one way to profit on an open long position; it must go up in price. There is only one way to profit from an open short position; it must go down. ‚ To profit on a spread position, the long side can go up, while the short side stays the same; the short side can go down while the long side stays the same; the long side can go up and the short side can go down (most ideal); the long side can go up more than the short side is going up; the short side can go down more than the long side is going down. Let me reiterate again; I don't care where the individual prices are, I only care about the relationship between the two. Here's another spread situation with a different twist: Buy July Coffee and Sell March Coffee, plus 200 points to the Buy side. Say the order fills with the July Coffee bought at $1.7000 per pound and the March Coffee sold at $1.6800 per pound. Is this a bull spread or a bear spread? Do we want the spread to narrow or widen to make a profit? How would we word an order to close this spread out? Any other reasons for entering spreads? Well, for the most part, there are certain seasonal factors which ultimately have influence over commodities. Most spreads are based on these age-old seasonal influences. Examples include harvest pressure in June-July on Wheat; in Oct-Nov on Soybeans; and Corn harvests in early fall. All these influences set up new-crop/old-crop spread situations; intercommodity spreads such as Wheat/Corn, etc. I'll cover more aspects of spreading in a future letter (no pun intended). To me, they have been a fascinating avenue for trading? (Bob McGovern is the author of "Commodities Futures Spreads" a biweekly newsletter. He is also CEO of R. B. McGovern & Associates, Member NA, NASD, MSRB, SIPC, and is a Registered NA Introducing Broker, CPO, and CTA). Editors Note: I have dealt with Bob and he is extremely knowledgeable, experienced and helpful.

Exit Strategy - A Possible Improvement to Welles Wilder's Parabolic Stop - Adam White I have an idea for an exit strategy. At this point, it is only an idea because I cannot test it on the software I presently have. The exit is a variation on Wilder's parabolic exit. The traditional parabolic exit initiates a stop X percent of price away from the market upon the entry. Then each price bar the stop takes an N percent step towards price. Eventually the stop and price hit, triggering the exit. The thinking is twofold: Trends that are moving in the desired direction are allowed to run, and the longer a trend endures the more sensitive the exit becomes, thereby allowing less equity to be surrendered at the position's end.

226

The variation I have in mind is to make 'N', the step, a function of price volatility. In fast-moving markets the parabolic would move quickly towards price, in slow-moving markets it would progress slowly. In this way, fast-moving moves against a position will trigger exits sooner than they would when N is a constant. Additionally, since slow-moving markets imply less risk, allowing a trend a greater opportunity to develop when the market is slow does less relative damage to the risk/reward outlook. The necessary calculation for the variable 'N' could be quite simple. As usual, start the variable parabolic X percent away from price at the entry (X itself could also be a function of volatility, but that's another story). Then, move the stop towards price an amount equal to the absolute value of the last close to close price move. In fast markets, the absolute value of the last close to close change will generally be great, and in slow markets it will be less. As before, the stop does not make net progress towards price when the market moves in the desired direction. However, since all trends do carry adverse movement, the stop and price will eventually meet. Another interesting upshot of this strategy is that X, the original distance between the stop and the market, is the amount of risk the position can absorb during its duration. Thus, the amount of adverse movement the position represents is always known; what is unknown is the amount of time it will take for the adverse movement to accumulate. Those interested in this line of thinking and possessing the necessary software is encouraged to do some research and share their results with fellow CTCN readers.

Why I Like Lind-Waldock - J.S.M. I am writing to express my approval and appreciation of Lind-Waldock & Co., the Chicago-based discount futures broker. I have traded commodities for 40 years. In the first 30 years, I dealt through various major brokerage firms, all of which handled both stocks and commodities. About 10 years ago, I opened an account with Lind-Waldock. I now do all my futures trading through them. Here are some reasons I like them: They specialize in futures, and thus can do a better job, than a full-service firm that tries to do "everything." Quotes are available around the clock. ‚Orders can be placed 24-hours a day. I like to do my analysis in the evening, usually finishing by midnight. I can then call on their toll-free line and place orders for the next day. This way I don't have to get up super-early (west coast time, you know) and place orders for the opening or whatever. ƒ They are very accurate in carrying out all of their functions. Not only are the fills good, but all of their paperwork is of high quality. In the past 10-years, only a couple of procedural mistakes have occurred (wrong commissions applied to day trades, for example), and these were corrected by them even before I could complain. „ I like dealing with people I don't know. This avoids the emotion, which comes from dealing with a broker you know, who therefore feels (as most of them seem to) that he must comment on everything you do agreeing or disagreeing with your intended position, praising or sympathizing with the outcome, and just generally laying on the TLC. I don't need or want any of that. I try my best to keep emotion out of my trading, and sometimes succeed. … I like trading with a firm that is financially solid. I could get lower commissions elsewhere, but dealing with a well-managed and efficient organization is worth the difference to me. Also, I don't trade a lot. The difference in commission rates would probably mean more to someone who trades frequently. These are good reasons for me. What do you think? I have no connection with Lind-Waldock other than as a customer. My thanks to all Club News contributors. After 40 years of trading, I still have lots to learn.

227

The Adviser's Dilemma - Traders Want Easy Answers - John Piper from England I have very much enjoyed the last few issues of CTCN. I thought it might interest your readers if I set out a dilemma I face in my business always. First let me say who I am. I write and publish the leading technical newsletter in the UK "The Technical Trader" but my main endeavor is as a trader. Last year I made 18.75% on my account, which is acceptable in that I aim to make a consistent return of 20% pa. However, as I'm only trading around BP20,000, it's easy to see that most of my income comes from my newsletter business. It is one of my dilemmas that I realize to reach my full potential as a trader, I will need to distance myself from the newsletter business. However, this is not the dilemma about which I write. This dilemma is far more intractable. The problem is that novice traders do not really know what they want. I use the word novice, but this can be applied for some years into a trader's life. There have been many articles in CTCN agreeing that the key to success lies within ourselves, but the novice often does not want to know this. What he/she wants is an easy answer (don't we all - but as we progress we realize that - it doesn't exist outside of ourselves). When someone appears to offer such an answer, they will jump at it. If instead, I try and did some marketing setting out the true picture, do you think I would get much response? Probably not, especially not in competition with some US marketing I have seen. But the novice really needs help. I set up my service to provide that help. I consider it very important to reach these people, not only for the benefit of my business. I am not a marketing man. I do run a one-man business, so I have to deal with this aspect also. I'm forced to offer something which the novice thinks he wants, whereas he actually needs something different. I then try and give him what he needs in the service I provide. Only my readers can judge whether I succeed. The response I get suggests I do meet with some success. This dilemma then continues when I offer other services, be they seminars, systems, hotlines, etc. My criteria are very simple. I will only offer something to my clients if I find it useful in the first place. I cannot do much more than that. I have no way of knowing the stage of development of all my clients. I cannot judge how useful such things will be to them. They may buy it for all the wrong reasons, even if I warn them against doing so (which I try to do) and then possibly blame me if it doesn't do what they want i.e., make it easy. I suppose ultimately, I see myself as a guide along the way. If I can provide a few signposts and help traders get over some problems they encounter, then I have succeeded. The traders I don't help, I can do little about, but at least I try. The point I am trying to make, is that when an adviser wants to do his best for clients, it's sometimes difficult to do this in practice because few traders actually know what they need. They may think they do, but because of the true skills required, they are often mistaken. As an illustration, I recently designed a trading system which works well on the UK FTSE Futures. I didn't want to sell the system to a large number of traders and decided to release it to just six individuals. The reason for this is that the future development of the system would benefit from having more minds than just mine working on it. I did this openly advising them of the full facts. I now believe that one or two of these traders bought the system thinking it was the Holy Grail (which, of course, it's not) and that they are unlikely to actually make it work for them. This is unfortunate, because I sold this on the basis that I would share their future trading success (although there was a down payment also). The system also works well on the S&P Futures and I am now pondering how I should achieve my aims in the US. Any ideas?

Tidbits on Financial Astrology -Carol Murphy

228

For Gann Lovers - Many years ago, I took a course on technical analysis. One afternoon after the course, we started chatting with the instructor about Gann. He was so intrigued with Gann that he hired someone to do an out-of-body experience, so he could meet Gann. He then told me he met Gann and he answered all his questions. In Jan. 1987, I saw a chart of his projection for the Dow for 1987 - guess what - there was a big drop in October. Now you all know how to find the answers.

Duplicate Charts - Don McCullough At times I get an awful lot of confusing trendlines on my charts. I can delete them, or even some of them, but often refuse to do so for fear I might forget to include some important ones when I redraw them. I do at times delete all of them or some of them, but have discovered another alternative. I make a new directory in my MetaStock program and call it Dupe. Then I copy this chart to this Dupe directory without any trendlines, moving averages or indicators of any kind. This allows me to retain the original, and sometimes very important trendlines, etc. and yet be able to see the duplicated chart from a fresh viewpoint. You'd be surprised how helpful this can be at times. The importance of each of the trendlines changes over time and this helps one to concentrate on the newer, often more important trendlines. A word of caution. Sometimes the old trendlines can be very important. What trendline to keep and what one to delete will be determined by the quantity and quality of your market experience. Here's a "saying" I have on the wall by my computer and think you might enjoy: Persistence - Calvin Coolidge - said "Press on. Nothing in the world can take the place of persistence. Talent will not: nothing is more common than unrewarded talent. Education alone will not: The world is full of educated failures. Persistence alone is omnipotent." Editor's Note: By coincidence, I have a plaque with this 'saying' hanging on my office wall.

Trading Book Recommendations - Robert Miner I'm a recent subscriber and have recently reviewed all the back-issues. Your service is a welcome addition to the reference material available. As all traders are aware, there seems to be an overwhelming number of books released each year for traders and investors. Unfortunately, the quality of the material presented seems to deteriorate each year. Most financial publishers must have cut back on their staff. I find that almost all trading and investing books are desperately in need of an editor and proofreader. I read fewer trading books each year, as I find most have not been worth the time. However, in the past year, I was fortunate to read two books which I consider outstanding and required reading for every trader. A Short History of Financial Euphoria by John Kenneth Galbraith (Whittle Books, 1990). This is a small, inexpensive paperback that is an excellent discourse on crowd behavior in financial markets. It should be available or easy to order from your local bookstore. What I Learned Losing a Million Dollars by Jim Paul (1994, Infrared Press). This book is an easy and entertaining read, yet cuts to the very heart of the primary reasons why traders and investors are usually unsuccessful and includes practical solutions to overcome the most common problems. I would put this book far above any other book on the "psychology" of trading. It should be a best seller, but probably won't be because of the title.

Optimizable Parameters Should Be As Few As Possible - Ashif Jumma

229

Optimization of a trading system is a logic which generates a lot of controversy. Some traders go crazy over optimizing. Some do not want to go anywhere they hear it. A lot of vendors love it, because it can generate eye popping hypothetical profits which has no connection to real-time trading. I prefer a system to work without optimization. But if I have to do it, I would make sure that the optimization is robust in the following manner: Make sure the sample size of data is large enough to represent real-time market conditions - bull, bear and sideways markets. ‚ The look-back period should be as large as possible for the same reasons. ƒ The testing of optimizable parameters should be on out of sample data using walk-forward analysis or another method. „ The Central Limit Theorem says that for a sample to assume the characteristics of the population, the size of sample should be large. The minimum sample size should be around 30. But since an uptrend or downtrend can last for say 50 periods, I would have a minimum sample size of 100 periods making sure that the full market cycle is there (uptrend, downtrend and congestion). … The optimizable parameters should be as few as possible and tested in a wide variety of markets. Curve-fitting is like rolling a fair dice with 1/6 probability of getting any number from 1 to 6, rolling it 5 times, getting #6, 4 out of 5 times (80%) of time. A lot of traders fall in the trap of curve-fitting without being aware of it. So when designing a system, it is important to keep your guard up as far as curve-fitting is concerned.

1995 Trading Contest: Robert Miner Each year, Robbins Trading Company sponsors a year long trading contest for futures traders. This is a real money contest, not one of the silly hypothetical contests that are unrelated to real trading. Anyone can enter. The contest lasts for the calendar year. A minimum account size of $10,000 is required, plus a $1,000 entry fee. All of the entry fees are divided between the top three winners in each division. Last year the three divisions were professional, non-professional and system trading. I believe they are going to have a day-trading division this year. Why am I giving the Robbins trading contest a plug? They haven't requested it. I have no connections to them, other than as a customer. I'm going to enter the contest again this year and would like to see lots of contestants. The more entries, the more prize money in the pot to win. I intend to win again. It's a mystery to me why all of the self proclaimed trading geniuses, who are so prolific with their advice in various trading publications, newsletters and advisory services don't enter the contest. Since this is the only real money, year long trading contest available, you would think it would be easy money for these folks. I entered the contest in 1993 and won first place with a 118% return on account. The prize money was a substantial bonus, as the first place winner receives half of all entry fees in each division, the balance divided 30%/20% to the second and third place. In my opinion, Robbins provides a great service by sponsoring this contest each year. This contest provides a completely unbiased, level playing field for traders who want public recognition of their trading skills or anyone who wants to take a shot at the prize money. Why aren't the names of the top three winners of the Robbins contest each year the same names we see so often in trading publications, as system developers, newsletter advisors, etc. who keep telling us how smart they are? Am I the only one whose business is trading education and advisory, who actually trades?

230

Come on guys and gals. Put up or shut up. Don't tell us how much you know, show us. For those who are interested in the 1995 Robbins Trading Company World Cup Championship of Futures Trading, contact Rita Karpel, 1-800-453-4444. As I mentioned above, I have no business or financial relationship or interest with Robbins Trading Company. There is a risk of loss in futures trading.

Psychology Is More Important Than Mechanics/Technicals - Daniel North I believe these ideas could possibly help traders in their pursuit of more focused and hopefully more successful trading or speculating. The points are in outline form, and they address a very important issue I encounter when I trade, having a good start. I believe the psychological portion of trading is more important than the mechanical or technical side of trading. If you examine your mental and psychological state first, you should find solutions to your trading problems. Following points are for Making the Perfect Start: Know exactly what you want ‚ Enjoy the project/journey ƒ Be confident in your inner forces „ Concentrate on one area at a time … Collect all available information † Dismiss wasteful and negative attitudes ‡ Cease pointless actions ˆ Score a series of small successes/victories ‰Make the most of every opportunity Š Harmonize with the natural laws of success

Opinion on Dial Data & Fact CSI Is Price Competitive & Opinion on Mendelsohn's Neural Net Software - Al Dougherty I use Dial Data for end-of-day data for about two years. I'm satisfied with the quality of the data; it has improved since the purchase of Warner. My only complaint is that S&P futures are based on Globex, so often gaps that exist in day only trading get closed. I've asked them to offer day only service as an alternative and they seem receptive. Note Dial Data used to be the least expensive vendor, now others (CSI seems to be very price competitive as long as you can avoid long distance charges). I purchased Mendelsohn's T-Bond system about two years ago and used it for about 4 to 5 months. I spoke with other users, a few pleased and several who felt ripped off. The hype and sales pressure is intense. Once you're on their list, they try to sell you the moon, cheese and all. I could never see the advantage of the neural net over what I got through conventional analysis, even though I believe John Murphy's intermarket analysis is very sound. Since it's a black box, you can't tinker with it. Since I used it, they have come out with an upgrade, I suspect "reoptimized" version. If the system was disclosed, I might be willing to give it a chance. Also, I'd like to see a real track record, with brokerage receipts, from someone who has successfully traded it. Based on my experience, I'm suspicious of the Mendelsohn systems and could not recommend them to anyone. I'd be interested in hearing from anyone using Vilar Kelly's Daycare system, Chuck Hughes' Deliverance or Gary Smith's system for day-trading the S&P futures. Lets also hear from anyone who has updated the testing on Hughes' system or has modified Smith's system successfully. Editor's Note: We have an excellent and very detailed Special Report available to CTCN Members written by member B. Radke on Neural Nets.

Opinion on Recurrence System - G.M. Sun If Members of CTCN need further information about Recurrence IV Trading System, please call me at 1516-484-9405. I am very glad to answer your questions about this "Wipe-You-Out-System." I just want to alert the public about this so-called "make you a ton of money" system.

231

Why Was Hillary Allowed to Trade Like That? - H. L. Huber I would like to call attention to an article that appeared in the 2-20-95 issue of National Review, p.23. This article is the most detailed, about the inconsistencies in Hillary's cattle trades. The article elaborates on a 10-part checklist used as a guideline to determine the legitimacy of a series of futures trades. Needless to say, the Hillary/REFCO combined didn't measure up to well. Two things really bother me after having read this article. Why was her account allowed to operate to the extent it did, while so far below margin requirements? If she was able to do this, are there others, and is this common practice. Doesn't a policy of this nature give an unfair advantage to these people over the rest of us, who must meet margin requirements? The second thing concerns statements by Kroll and others about small retail trading clients of organizations that they had worked for, never, without fail, being successful. If this is true, then most of us are wasting a lot of time and money.

Member Requests Al Resnick is evaluating various automated systems. Does anyone have working experience and comments on Bond-Pat by Lee Gettess and Platform Software from Omega Research? New Cherry Picker, S&P daytrading system by David Wright: Who has tried this system in real-time or knows of someone who has? Please write c/o CTCN. Daniel wants to buy a used FNN Signal receiver. Call him at 713-466-6090. Dr. Claus Hallmann of Germany is interested in recommendations, comments or evaluations on Ed Kasanjian's Nature's PulseSystem. Also, several requests for info on Bruce Gould's Money Machine & Omega SuperCharts. Editor's Note: We have an excellent and highly detailed Special Report on SuperCharts written by member Tom Dyste. Contact CTCN to get it.

Editor Comments It is very unfortunate Anonymous Trader does not want to disclose his identity or submit additional articles. However, I will again try calling/writing him in an attempt to get him to change his mind. Many of you were very interested in last month's excellent contribution by Dave Reiter. Dave sent his many account statements to me for review. Unfortunately, they are of little value (to me) because none of his trades show, and other pertinent and important information has been obscured or blocked-off. In fact the statements are almost entirely blank except for the net profit for the month, which appears on each statement. Most all information that normally is part of a broker's monthly statement has been deleted from the photocopies. In Dave's cover letter, he said he did that because he thinks someone could figure out his trading method by studying the trades, etc. I do not feel Dave's concern is in fact much of a possibility, but Dave feels otherwise about that. Perhaps Dave will reconsider this matter. Issue 23. How I Have Made Money Trading Commodities - J. B.

232

Thanks to the excellent articles in CTCN over the past several months by traders like The Anonymous Trader and Dave Reiter. I have been inspired to also write about my trading success. It's true, trading success is more related to the trader's physiological makeup, a trading plan and the discipline to follow it religiously, and money-management techniques. The trader's methodology, in my opinion is not as important as these three listed attributes. When I first started trading commodities, I lost plenty of money, like most new traders do. However, I didn't realize it at the time, but it was like college tuition for me. The $40,000 I lost, was in fact the approximate cost of a four-year college degree. The great knowledge gained during those early losing years was well worth the "tuition cost." My trading and bottom line has now greatly improved, thanks mostly to my better psychological makeup, discipline following my plan, and good strict money-management. Once again, I started out a loser (big loser). As mentioned by Anonymous Trader, for years I was far too concerned with data services, type of data (perpetual vs continuous vs regular data), quote machines, charting services, advisory services, standard technical analysis methods, etc. After years of fairly consistent losing, I realized that its all garbage and trash and will not make you any money. Discipline, a well defined but simple trading plan based on sound trading principles, good moneymanagement methods, and the psychology of trading will make you plenty of money. That's only providing you can shed all the heavy baggage of the believed to be valuable trading tools and concentrate on these aspects of trading. This will really make you lots of money. You too can do it.

More Information on How to Obtain the "House Advantage" - Dave Reiter During the past six weeks, I have received phone calls from several CTCN members who were interested in receiving additional information on my various trading methods and techniques. Therefore, I will try to expand on my previous article (1/95 issue). As I mentioned in my previous article, most of my trading is based on repetitive price patterns. My goal is to locate trades which will offer me a slight advantage over the markets. In other words, I want to "tilt the odds" in my favor on each trade that I initiate. During the past four years, I have developed two trading methods based on the principle of repetitive price patterns. One method is based on long-term price patterns and the other method is based on short-term price patterns. Please allow me to briefly explain each method. I've been trading my long-term method every day since 1992. As you know, from reading my previous article, this method generates about 8 -10 trades per month. On average, each trade is held 4 to 5 weeks. The reason this method has produced consistent profits for the past 36-mos is because it's extremely diversified. It trades many markets (currencies, energy, financial, grains, meats, metals and softs). Whenever I'm losing money in one sector, there usually is another sector that will "pick up the slack." About two months out of each year, all of the sectors are making money at the same time. Obviously, that's when I accumulate most of my yearly profits. Unfortunately, I'll also experience a 2-mo period when each sector is losing money simultaneously. It's no "big secret, that a large number of commodities will move in a very predictable pattern during certain times of the year. However, I'm convinced that most traders are not completely aware of these trading patterns. For instance, most traders (particularly novice traders) probably think that grain prices rise during the summer (June thru August). However, this is simply not the case most of the time.

233

If you go back over the past 15 years and examine the price patterns for Corn (for instance), you will find that corn prices will have a definite bias to the downside over 70% of the time throughout the summer months. Therefore, l always look to short the Grains from June thru August because the "odds" are on my side. This is the underlying basis of my entire trading method. This is just one example. I have dozens of other trading patterns that I use each year throughout all of the commodity complexes. The "secret" to success of this trading method is the fact that all of my trades have a greater than 50% chance of making money. Once again, the "odds" are on my side. My short-term trading method is based on the belief that most markets will "gap open" in the direction of the previous day's closing trend. To profit from the gap opening, I must find a simple way to determine the market's current trend and establish a position before the market closes. My goal is to liquidate the trade during the next day's opening range; hopefully with a good profit. Of the two trading methods, I like the short-term method better because the equity curve is much smoother than the long-term method. However, the long-term method has a greater profit potential and is much less time-consuming to trade. In February, I sent Mr. Green a copy of my account statements and 1099 forms to verity that I have made over $150,000 during the past-36 months as a result of using these trading methods. However, I did (as Mr. Green stated in the 2/95 issue) "cover up" the individual trades from my account statements. Editor's Note: I have found out that some members were somewhat suspicious or doubted the profit claims because the specific trades were blocked-off. The fact Mr. Reiter chose to block-off or cover-up the details of his trades on his brokerage statements does not necessarily detract or cast suspicion on his profit claims.

I did that because my trading methods (as you know) are based on repetitive price patterns. Therefore, many of the trades that I took in 1994, I will also take in 1995. In order to "protect" my trading method, I "deleted" all trades from my account statements and simply showed the net profit/loss for each month. I am in the process of writing a trading manual, which will explain all of my various trading methods and techniques. When the manual is completed, I intend to send a copy to Mr. Green for his review. I'm always looking for new trading ideas and methods. As you know, the markets are constantly changing and we need to keep up with those changes. Good luck with your trading.

It is Important to Investigate the Tax Side of your Investing. - Ted Tesser, C.P.A. Investing May Be Hazardous To Your Wealth! by Ted Teaser, C.P.A. In my last article called "Secrets To Success," I mentioned the advantages a Trader has over an Investor for tax purposes. Basically, a Trader is considered, by the IRS, to be running a business, and is given many of the tax advantages afforded such businesses. An Investor, on the other hand, is considered to be passively "investing" his money, instead of actively "trading" it. Therefore, he is subject to many limitations which affect his taxable bottom line. Some major differences are as follow: Investment Versus Trading Expenses: An Investor must subtract 2% of his adjusted gross income from his investment expenses before he can deduct them. This includes computer expense (both hardware and software), data expense, advisory and hotline fees, etc. In addition, if the investor makes over $105,000, he is subject to an additional 3% exclusion from these deductions. A Trader, on the other hand, gets to writeoff his trading expenses dollar for dollar before paying any tax on his income. ‚ Itemized Versus Standard Deductions: An Investor must itemize his deductions (rather than take a standard deduction) to deduct any amount of investment expense. If he has no other itemized deductions, he may not even have enough expenses to take advantage of this, and may in fact, not be able to deduct any investment expenses at all. A Trader, on the other hand, may deduct his Trading expenses even if they are

234

the only deductions he has. He is entitled to take a full standard deduction, which for married joint filers was $6,000 in 1992, and still deduct his trading expenses besides this. ƒ Traders Get To Deduct Expenses "Above The Line": An investor must calculate adjusted gross income (AGI) before he deducts even the limited amount of investment expenses to which he is entitled. This is a disadvantage because the larger the AGI the more limited are his other deductions (such as medical and casualty loss). The Trader, however, gets to deduct his trading expenses from income before calculating AGI. „ Investment Interest Expense Limitation: The Investor is subject to another limitation on the investment interest deduction. He may only deduct investment interest (margin interest) to the extent of his investment income (interest + dividends + capital gains). If an investor has a bad year, and nets a loss, he will deduct no investment interest at all. A Trader, on the other hand, gets to deduct his margin interest dollar for dollar as "business interest" on Schedule C. … Deductibility of Investment Seminars: One of the more obscure aspects of the Tax Reform Act of 1986 was the elimination of the deductibility of investment seminars, plus related expenses. Prior to this Act, an investor was able to deduct, as an investment expense, the tuition, travel, hotel, meals, and miscellaneous expenses for attending such investment seminars as the "Annual Traders World Conference". This has now been taken away from the investor, and currently, no deduction is allowed for such seminars. Traders, however, can take all such expenses if they are related to trading. † Section 179 Depreciation: Another significant provision of the 1986 Tax Act was the decrease in depreciation expense allowed for assets such as computers, faxes, photocopiers, etc. Let's say you bought a computer for $4,000. If the depreciable life was set at 5-years by the IRS, you could only take 1/5 of the cost (or $800) as an expense in any one year. Traders, and other businesses, however, were given the option (called Section 179), of writing the whole item off in the year of purchase (up to $10,000 of write offs, with certain other limitations). This meant, that if you were a Trader, you wouldn't be limited to the $800, but rather could deduct the entire $4,000 in the year of purchase. This will become even more important as the proposed tax changes in Congress raise this amount from $10,000 to $20,000 this year. ‡Home Office Expenses: Although the IRS has cracked down on its indiscriminate use by taxpayers, they have not forbidden the home office. They have clarified the conditions under which the deduction may be taken. In order to deduct a home office, you must meet three conditions: it is your only place of business, ‚ the designated area is used exclusively for business, and ƒ you must have a profit in the business you conduct. You must also now file a separate form to take this expense, Form 8826. But, and get this, you must have a business which again means Trader not Investor. In fact, the existence of an office from which to Trade, even a home office, is one of the requirements for being deemed a Trader by the IRS (we will look at some of the other requirements in a future article). In conclusion, filing your tax return as a Trader gives you many significant advantages over being classified as an investor. Trading is a tough field, and it is vital to use every possible advantage to get ahead. Claiming "Trader Status," is surely one of the most important strategies for turning in a profitable bottom line on an annual basis.

Don't Let Deception Become Your Reality - Bob Pelletier - President of CSI Deceptive marketing techniques for trading systems are not necessarily illegal ploys. An advertisement may report facts honestly, but take advantage of the trader's desire to accept an inference of profitability. Over the years many trading methods have surfaced that have made great advertising copy, but could represent likely deceptions. I recall a system of several years ago which predicted the date of an intermediate market turning point within two trading days. The promoter alleged he could do this several years in advance 51% of the time.

235

This may appear to be an incredible feat until you realize that "intermediate turning points" as the promoter defined them, occur at a frequency of 25 times per year. This is an average of once every 10 trading days. When you factor in the generous "within two days" liberty, you can see that one would expect to be accurate 50% of the time on a chance basis. The promoter did nothing illegal in his prediction promise. He was telling the truth in his claim, even though he may have had a different analysis for coming up with the same result. The effective deception, if any, was in inferring that such a method can turn consistent profits after commission and slippage. Only the long-term track record of such an approach would tell the true story about the turning point system's merit. One last detail of this system that deserves mention: A turning point occurs when the market changes direction from up to down or from down to up, but you are not told which to expect. A deception? Of course! Examining a more recent technologically sophisticated market tool, I do not believe that neural networks are trading deceptions when applied properly. But I have read articles in popular futures industry magazines and other publications which prove that some technicians and writers have taken liberties that create deceptions from them. Labeling a product a "neural network" is not the same as producing a profitable system. Neural networks have been used successfully to solve some very complex engineering problems. However, the developer who uses the term loosely may have easily ignored one or more basic neural network principals in bringing his approach to the public. Demand explicit, real records before you buy. Make sure the system you purchase has been proven to produce profits in the markets. The profit-and loss record will help prove substance over deception. DECEPTIONS THROUGH HINDSIGHT ANALYSIS With the many tool-kit programs available to traders today, the unfortunate tendency of self-deception through curve fitting has been raised beyond acceptable levels. A market trading simulator that takes into account the aggregate of buy and sell prices for simulated trades is likely to project profits that greatly exaggerate the system's real-life capabilities. Why? Because the more control parameters used in creating a trading system, the less likely it is to repeat the simulated past. Failure to consider the high cost of commissions and slippage, particularly on a short-term trading system, can also grossly inflate simulated profits. The trader who ignores these truths is clouding his reality and threatening his bank account. Deciding what method will bear the test of time and produce consistently profitable results is the necessary step every successful trader must take. A major factor in the success of any trader is how well one differentiates between a real profit-producing idea and one that deceives us into thinking it will be profitable.

Comments on Feb 95 Issue - Don McCullough Your February 1995 issue was a dandy. I must say that if CTCN continues with high caliber articles like in the past three issues, the competition is going to have a tough time. I'd like to comment on various statements made in February's issue. What can we say about Anonymous Trader? A giant THANK YOU for starters for all three of his inspiring articles. A. T., I'd be just like you and would want to maintain my privacy. I don't like "speaking for others" and don't really think I have a right to do so, but as for me, you certainly get my sincere thanks. I recently got hooked-up to real-time data. I'm licking my chops as I watch the S&P make its 1000 to 2500.00 daily moves. I won't start trading with these intraday-day charts until I get a little more data to work with. I really believe I have valid or good bet signals, but what concerns me most is will I be able to

236

consistently trade my signals? I knew about this very fundamental and serious psychological problem long before A. T. mentioned it in his last article. However, it's always good to have a successful trader agree with you. I rank this reinforcement of valid truths about the market as badly needed psychological help for the up-and-coming trader. Another valid truth mentioned by Anonymous Trader is, "You learn trading by trading." Real trading in real markets with real money. I couldn't agree more, and yet I'm sure lots can be learned through thousands of hours of studying historical charts. I realize, especially psychologically, there's a hell of a difference and yet I know for sure that a very good type of mental reinforcement (again) comes into play here. With historical charts, you not only have recent markets to test your signals with, but also all kinds of markets be they trending, whipsawing or whatever. In short, I believe psychological reinforcement of valid truths about markets to be absolutely essential in establishing the certainty one must have to trade his signals in a totally consistent manner. Thousands of hours effort, even many years may be needed to achieve the needed level of certainty. I expect this is why most people--including Anonymous Trader's friends--cannot successfully trade even the very best of systems. You may rightly say, "they haven't paid the price!" Gary Smith always writes interesting and informed article. I must disagree with both him and Anonymous Trader about the validity of picking tops and bottoms. Bear in mind, I'm not a successful trader. However, I have lost very little money in the markets. I attribute this to refusing to act (much) until I'm sure I know rather than merely think I know how to go about it. I have been more of a student than a trader over an 8-9 year period. However, that in no way means that what I have to say is therefore automatically false. I am always trying to pick minor and major tops and bottoms. There are certain kinds of breakouts I will trade, but my main concern is markets' turning points. Before you decide I'm either stupid or naive or both, consider that the famous trader Paul Tudor Jones, is also a top and bottom picker. He discusses this in the first Market Wizard book by Jack Schwager. Rather than tell you my reasons for trading the markets this way, I'd prefer you read Jones's reasons in this book. We may or may not use the same signals, but I certainly agree with his reasoning. I think top and bottom picking is, at this point in time and in the minds of most traders, where day trading was a few years ago. That is, most people at this time strongly believe that you can't successfully trade the markets over the long run by picking tops and bottoms. I strongly suspect after reading Jones's interview you'll have a healthier respect for top and bottom picking. Regarding J.S.M.'s article about Lind-Waldock. This is also my brokerage firm and I wholeheartedly agree with everything J.S.M. had to say. They are courteous, competent and commissions are reasonable. What more do you need? I might add that they do offer additional commission discounts if you trade often enough. You'll have to contact them for full details, but they do state on their "commission card" that they go as low as $12 per round turn. The above reminds me that I ought to mention a few other vendors I have a great deal of respect for. One is Equis Intl. who makes MetaStock end-of-day and real-time investment software. They are tops in my book in all respects. Their customer support has no equal. (Let me inject here the fact you can be too cost conscious about the investment software you buy. Hey, you've got to live with it for many (hopefully) years! Get one of the better programs.) Dial Data has supplied me with good end-of-day data for several years and at a very reasonable price. Data Broadcasting Corp., better known as Signal is now supplying me with real-time data and they have been very helpful with their technical support. My main point is: What would we do without these people? A very big thanks to all of them.

O. C. R., Sr. Market Analyst - CBOT

237

First, let me state how pleased I am with my subscription to CTCN. I look forward to and learn from every issue. Now for my contribution: Michel Arimoto commented in the 2/95 issue that every trader should not forget the importance of the last trading day, first notice day and Government reports. While these statistics are no doubt important, sometimes obtaining them is easier said than done. At the Chicago Board of Trade, we have information about the previously mentioned subjects which are available free of charge to both our members and the public. To obtain CBOT Market Information Financial & Agricultural Calendars, call at 312-435-3634. These calendars highlight important economic releases for entire month and are mailed out monthly. To obtain last trading days, first notice days, etc., please call the Floor Operations Department at 312-3413244 and ask for a Monthly Expiration Calendar. One more piece of information which I feel may help market participants is the CBOT Professionals Packet. The Packet contains additional information about CBOT products and services. If you wish to receive a Packet, please call CBOT Literature Services at 312-435-3558 and ask for the Professionals Packet. Thanks for offering such a fine publication.

Market Symmetry - Joe Dinelli Since no one has sent me a copy of the "Holy Grail," I will pass a small technique that may show that tools are somewhat helpful in deciding the intent of the market. The power of the number of "24" and its multiples are very helpful in spotting support, resistance and the termination of trend. Since what interests me the most in reading these articles are the discussions geared to actual technical trading. I will try to share some basics from the past. Cycles with the combination of the number of 24 along with basic divergence can help one's timing whether to enter a trade or exit. The example I am using is the current April Live Cattle contract. From the low of 67.28 on 10-11-94 and I add 240 which gives the following numbers of 69.68, 72.08 and 74.48. The top of this move was 74.90 on 012095. My cycle work was showing a top coming between 02-21-95 and 02-27-95. As the top was developing, we can see the basic RSI divergence in place at the 01-29-95 time level. Lower tops followed until the final sell-off was in progress. The price level could not hold above 74.47. I might add that the corner on the square of nine was 75.70, with the high being 75.25. It could not move above that corner. As we can see, the cash market could not close above 73.10 before it also collapsed with failing stochastic. The cycle work has to be constantly monitored to produce the acceptable end result and adjusted for the cash market to the futures. But once it is in phase, one can see the accuracy as this was produced three months ago. For the stock trader, the same symmetry is in the stock market, such as IBM stock. For the traders looking for a black box, thinking that all of the thought and judgement process can be eliminated, good luck as I'm sure it is beyond reach. Our understanding and gained knowledge is all that will survive.

Book Sources - David J. Slavik

238

I'm a recent subscriber and want you to know how much I enjoy your publication. In February's issue, Joe Ross' contribution was right on line, when he said "don't let CTCN degrade with negativism." The type of articles Anonymous Trader and Dave Reiter have submitted are just great. My primary reason for writing is in response to Robert Miner's trading book recommendations. I tried to purchase the two books he recommended at local bookstores in the Dallas vicinity, but there was no listing for them. I also looked in the 1994 Catalog (most recent edition) from Traders' Library and they also did not list them. I found a good source for these two books. They are both in the 1995 catalog "Books of Wall Street" from Fraser Publishing Company, P.O. Box 494, Burlington, VT 05402. For those members that would like to find them locally, I am listing the ISBN number for each book: A Short History of Financial Euphoria by John Kenneth Galbraith (Whittle Books, 1990) ISBN: 0-670-85028-4 $16.00 - Fraser Publishing; What I Learned Losing a Million Dollars, by Jim Paul & Brendan Moynihan, ISBN: 0-9635794-9-5 $28.95 Fraser Publishing Keep up the good work and my best to you in your further success in publishing CTCN.

Reduce Your Risk Exposure, Increase Your Profit Potential, Trade like the Pros Writing Futures Options Calls & Puts - Jeffrey Notaro Selling options can be a dicey game. Know your exposure beforehand; trade with strict moneymanagement and what is considered by most to be a game for the pros, can be a consistent winner for practically any trader. Past performance is not necessarily indicative of future results. The risk of substantial loss exists in futures trading. The two most common views on the subject of writing premiums are very narrow and extreme. The first is held by the "kamikaze trader." He is willing to risk it all, and then some, to score it big. He likes to sell options close-to-the money and close to their expiration. Compounding the problem, traditional span margining allows for an explosive amount of exposure, with the minimum of cash to back it up. Worst of all, he very possibly could win a few, thus creating a false sense of confidence that will inevitably explode into red ink. At the other extreme, there is his alter-ego; he is a risk-averse, safety-first investor. To him, options are to be bought only; it is simplistic and maximum loss is quantified. What happens all too often is that the anticipated market move develops slower than expected. A long enough time has gone by to sap all the leverage out of the option. Compounding the problem is the choice of a strike price that is too far out-of-the money. He is left with a position withering at a distant strike price with only days left to go. The disappointing conclusion is that he predicts the market almost perfectly, but his long option barely responds. Now everyone does not fall into these two categories exactly; but somewhere in the middle of these two extremes we find the viewpoint held by the majority of traders when it comes to options. I will present five basic rules that will shake you free from the pack. I will not go into complex strategies or theoretical breakdowns of option value; that would require the space of a mid-size novel. But if the following set of simple concepts are understood, practically any trader who decides to dabble in short options will be more successful. 1. DO NOT SELL INTO LOW VOLATILITY To be successful, one has to grasp some concept of volatility. Option values are dramatically influenced by changing levels of volatility. If volatility is low to begin with and the market begins to awaken from a slumber, you will see a small movement in the futures compounded into a disproportionately large move in the options. To get a perspective, historical volatility charts are a good place to start; but keep in mind, much like Seasonals, nothing has to happen exactly the same as it did in the past.

239

Most trading software programs will calculate implied volatility; tracking this over time is probably the most effective way to know if you are selling hefty premiums or selling yourself too short. No matter how you follow volatility, you will eventually get a natural feel for what levels are opportune to sell, and what levels are best left to be bought. 2. DO NOT SELL WITH LESS THAN FOUR WEEKS TILL EXPIRATION Time decay is your friend. As a grantor of option rights you want to collect your fees as quickly as possible. Do not fall into the trap of thinking that the shorter you have to hold the position, the less risk you have. Once an option gets about four weeks till expiration, time decay begins to accelerate faster and faster. The key is to be already safely positioned before this point occurs. During its last weeks, an option will fluctuate very sharply in value with a small movement in the future. You need to have an established position, with a cushion of profit or a tolerance for some wide degree of fluctuations before this time period begins. To get an idea of the rate of change possible for options close to expiration, look down a list of those that are going off-the-board soon and see how much they change in value, by percentage, from strike to strike. The key is to look in that window 30 to 90 days before expiration for the most time effective points of entry. 3. ONLY SELL NAKED WITH THE TREND Simple naked options can be the most effective way of taking money out of a long-term trending market. If done incorrectly, it also can be a quick way to lose many times more than you had hoped to earn on the trade. Whenever you can comfortably identify a solidly trending market, look to write on corrections and dips. But wait for the trend to establish itself. By not trying to pick the top or the bottom, your odds of success increase dramatically. If you are unsure of the market's direction, employ basic trend following techniques such as a moving average and stochastic. These types of analysis are reasonably trustworthy when applied to the long-term. Once you really identify a trend, there will be plenty of time to make money; the key is to be patient. 4. HEDGE WHENEVER POSSIBLE Short options can be explosive. Hedging a trade with a future or a long option that is close-to-the money will greatly lower the risk level of the entire position. If you are especially afraid of the market surging too quickly toward your strike prices, or would just like to capitalize on that move more aggressively, match each set of shorts with a modest hedge. Care must be taken though to avoid exposing yourself to potential losses on the hedge portion of the position that cannot be covered by the profits on the other side. If the whole combination is done properly, it can be one of the most effective short option techniques. 5. ALWAYS SELL THE FARTHEST FEASIBLE STRIKE PRICES All traders know that it is very difficult to predict any market move with precision. Even if you have a hot streak, it invariably will be followed by a cooling off period. One of the most enticing features of writing premiums, is their tendency to become less and less affected by small market changes, as time goes by and as they end up farther out-of-the money. By moving out to the farthest strike price feasible, your ability to stay in a trade during adverse conditions is greatly enhanced. If down the road in a trades life-span, the market suddenly begins moving closer to your strike than expected, that extra cushion of being a little farther out could make all the difference between a winner and being stopped-out. In conclusion, no matter what style of trading you do, the basics have to exist: You must judge the market with a reasonable degree of accuracy and you must use strict money-management and stops. The use of stop-loss orders does not guarantee that your loss will be limited to the intended amount. The point at which to throw in the towel with short options is even more crucial, due to their tendency to increase in value exponentially as the market nears the strike price. If you are patient and conservative, writing calls and puts can be a lucrative and rewarding way to tackle the futures markets.

240

Special Note: Over the years, as Senior Money Manager and Director of Vision's New York Trading Desk, Mr. Notaro has been in the unique position to observe literally thousands of traders trade the futures markets. By observing those that have lost and made money, Mr. Notaro has developed his own common sense approach to options and futures trading. Mr. Notaro can be reached at Vision LP, 90 West Street, Suite 21115, New York, NY 10006, 800-892-9606.

Book Review by Axel Brandt from Germany on Trading 0ptions and Futures by Joe Ross Some time ago, Joe Ross published his fifth book with the unusual name of Trading Optures and Futions which made me curious right from the start being a futures and options trader myself. His work is 517 pages strong and deals with the interaction of using pattern, price action and technical analysis on the one hand and various techniques that can be employed accordingly by playing both futures and options complementing each other. One of his guidelines here is the statistical fact that 80-90% of all option contracts will eventually expire worthless. Thus, he's constantly at good risk-reward ratios trades to put the odds even more in his favor. In this context, Joe says that the odds are strictly against you when buying options, since the investor has to be correct of price and of the time when the direction will change. The eighth of 30 chapters the book is made of, deals with the importance of historical and implied volatility and how they are related. This is really a useful and smart part of the book - like all his previous books, reflecting that the author is a seasoned practitioner with tons of experience in daily trading. However, at times Ross gets carried away with an idea sometimes ending in confusing conclusions and repetitions that certainly don't clarify the good point he's aiming at. Within the book, Ross goes through all familiar options strategies such as ratio (back) spreads, strangles, straddles and vertical spreads by illustrating them on an actual chart pattern with reasonable position and money-management techniques. Furthermore, he never misses describing his follow-up thought once the trade has been put on. This is definitely one of the strengths of this book, over other literature available in the markets. On the other hand, the follow-up action may result in rolling up the short options position with a bigger number of out-of-the-money options. Here we reach the limit for the average size account, because of the commissions and possibly higher margin requirement to carry over a longer period of time. Thus, this cannot be considered a choice for the novice trader involved in futures and options. They should start with Natenberg's or McMillan's book first.

Reduction of Risk & Using Small Stops - Jim Burke I've been trading futures for 8-years, some fantastic and others truly forgettable. Only in the last 6-months have I been able to "put it together" by using precise trading rules. A checklist for entry and exit. I also reduced my risk on daytrades of S&P from 3 to 8 tics. When I make precise entries, 3 tics is more than enough to risk. For currencies I use 8 to 10 tics and T-Bonds 13 tics. Some methods I rely on 2,3,5,8,15 and 30-minute bars for S&P, Yen 1-minute bars, 3-minute on Swiss Franc and daily for all shortterm trades on 30 markets. Even on my long-term trades, I have reduced risk by more than half and very quick to place break-even trades. I have found that a break-even trade is as good as a profitable trade. Also, if a method requires you to take a profit at a certain price, place an "OCO" one cancels the other (two orders, either both buys or both sells).

241

So many traders do not have a trading plan with defined rules for entry, trailing stop, profit objectives and protective stops. If you don't know which ingredients to use, one cannot bake a cake. I believe if one spends more time on cutting risk and less time on making high profits, the profits will come.

Minimum Required Capital - Wayne Griffith A significant reason for failure in futures trading and other business ventures is undercapitalization. Futures Truth calculates hypothetical net gain (loss) based on three times exchange margin. This is currently $33,750 (3*$11,250) for an S&P 500 contract, and certainly does not encourage the novice trader to jump in undercapitalized. However, an experienced trader wanting to know the absolute minimum capital (ignoring any minimum account size requirements) required to trade a system during the last 12-months would calculate minimum required capital as the sum of maximum exchange margin during last 12-months plus maximum drawdown during last 12-months. I did this calculation for my S&P 'Hourly' Overnight system for 1994. Using the Futures Truth $2,200 12month maximum drawdown, I calculated $13,450 as required minimum capital. Using the Futures Truth $17,600 12-month hypothetical net gain, the 12-month percent gain was 131%. (Futures Truth reported 52%, and ranked the system accordingly, using $33,750 minimum capital.) Things look very different using this less conservative approach to calculating minimum required capital. Remember that you should have reserve capital to withstand a possibly larger drawdown in the future. Specifically, heed the wise advice I heard from John Hill at a Futures Truth seminar ("Your largest drawdown is always in front of you"), or you risk failure due to undercapitalization.

Simplicity Is Best - Bill Wermine I primarily trade currencies and live cattle. I use two simple methods for trading. It took more than 10 years to boil my trading down to simplicity and finally profitability. I tried Gann, Elliot Wave, complex technical systems, chaos, volatility breakouts, optimizations, other people's systems, etc. Not to say that these systems are unworkable - just didn't work for me. My conclusion is that you have to find your own way and simplicity is best. Concentrate on the pure beauty of price, the immediate market action and try to internalize trading wisdom from master traders. For example, Jesse Livermore said you should wait for extreme price movement and then place your trade risking a small amount. I have made this wisdom part of my gut and trading plan and I wait for these opportunities. I will describe my methods of trading live cattle and currency. If readers have any suggestions or comments, I would welcome them. I do not trade in isolation and contrary to many others' methodology, I believe two heads are always better than one. Fundamentals work well with live cattle when combined with Seasonals and a technical entry system. I watch the trend of cattle weights, box and load movements and carcass price equivalents. These fundamentals measure supply and demand. My technical entry system is very simple. I go long as the oversold RSI begins to tic up and short as it tics down from overbought. I use a 10-bar RSI. I never short in the winter or go long in the summer. My entry is at the extreme and I risk no more than $1.00. If it fails, I wait some more. That's it. It is a slow but steady moneymaker. With currencies, I'm about a 75% technical trader but use reaction to news as my fundamental filter. Over the years, I have found that what works with currencies are always changing. Sometimes you need to focus on bonds, then gold, then the S&P, now Mexico, European markets, Japan and always the Federal Reserve. I keep a little book with columns listing the fundamentals and what the crowd is focusing on. I note crowd reaction to the news. Along side of that, I record net changes in prices of bonds, all the currencies, CRB index and the S&P. I will not enter unless all indicators point in one direction. If they are all dollar bull, I will short the weakest currency at a time the momentum is really pushing hard. I place my stop over a swing high and will quickly move my stop to break even on the next swing.

242

I have found that the greatest risk of a position is when you first put it on. I have learned from Joe Ross, that the important thing is to reduce risk as soon as possible and try to put your positions on at the time of least risk. This method works for me, as it meets both of these criteria. I would recommend anything written by Richard D. Wyckoff. He earned a fortune by trading the market based on its own action. Fraser Publishing, Box 494, Burlington VT 05402 has a few copies of Magazine of Wall St., published by Wyckoff in the 1920's. Mr. Wyckoff always gave trading hints in each issue. Ask for Eric Hanson, as he is the man in charge of the Wyckoff magazines. They also sell Rollo Tape and some of Wyckoff's stock market books.

Omega TradeStation 3.5 - Good Product but Poor Support - Matthew Chiang I purchased TradeStation 3.5 off-line in January. I opted for the 9-month installment plan. Omega's sales team is pushy and typically phone-order style and tried to sell other options (video tapes) over the phone. Finally, I asked the salesman to fax the sales confirmation (total monthly charge and any other hidden costs of ownership, such as maintenance fees). He never did, despite my repeated requests. I hope I won't get surprise bills later. They shipped version 3.0 in two days and promised to upgrade to 3.5 later. According to their ad, Easy Language is easy. But I found their manual oversimplified and few examples were given. Omega offers a video tape on using Easy Language for $195. I called their technical support line on how to program a few patterns. I called at different times and days, but so far have failed to get through the busy tone! There were a few times I was on hold, but after waiting over 5-minutes I hung up (no toll free #). I then faxed my questions, but no response. I faxed and called the salesman and asked for the upgrade. He promised to take care of my requests. I received the 3.5a upgrade, but still no fax reply on the few commands. The 3.5a upgrade is so buggy that three times out of five, I got a system error. The help feature is not yet implemented, so I refer to the manual. The 3.5 Easy Language manual has been expanded, but still inadequate in examples. There are no examples on identifying chart patterns. I again called the salesman, he quickly routed me to customer service. The lady charged me $35 for sending the 3.5c upgrade, even though I complained about the buggy program. Now one week has passed and I still haven't received the upgrade, perhaps 3.5c is still buggy and they wouldn't ship yet. This time I didn't call, I 'd rather wait for a bug-free version. Since early January, I have tried no less than 15 times calling Technical Support (try it yourself: 305-xxxxxxx). Editor's Note: I took the liberty of deleting Omega's tech support number given by Matthew, as we don't want their phone line to be tied up even worse with test calls, perhaps even from non-clients. I could hardly go beyond the busy tone. The best I could get is music while holding and the salesman considers his job done. I did not order the video tape. I'm not sure if doing so would allow me to do away with their technical support. I was disappointed that Omega Research offers customers such lousy service. They should answer faxes, if not calls. Their salesman should be more responsive beyond closing sales. They should put more examples in their manuals, instead of asking customers to buy more products to learn how to use the product! Their BBS has relatively few examples, and most are indicators, not systems. So not much can be learned from system writing. Meanwhile, I am using TradeStation 3.0 (it expires in 2-weeks), and always second guessing how to properly write my systems. If your'e a TradeStation user and could share your knowledge, please call me (located in Canada) 1-604-540-2568 evenings or fax 1-604-540-2529 and I will call you back.

243

Trading Educators Ltd. Freeport, G.B., Bahamas - Joe Ross In my last letter I promised that if I ever wrote an article I would not use my name. However, I really don't have time to write articles for both CTCN and for my own newsletter. I am currently buried with work. So with great apologies to you and your readers. I am sending this excerpt from the most recent issue of my regular newsletter, Traders Notebook. It is so recent, that I finished it only this morning. My own subscribers will not receive this information until May of this year. Perhaps that will make amends for my being fickle and not keeping my word. Please include the above paragraph with the article, because I do apologize for my actions. I could not resist sending you this article because I'm a man on a mission. I want to help educate as many people as I possibly can while I'm still able to do so. I plan on retiring one of these days and feel a sense of urgency to teach people the truth about markets and trading. My health has been questionable lately. I ask your readers who believe in prayer to pray for healing for me. Editor's Note: The seriousness of Joe's health problem is worse than he indicates, so please remember Joe Ross in your prayers. FIRST NOTICE DAY There was a time during my trading career when I took potshots at trading around First Notice Day (FND). "Around" FND refers to three days in particular. In some markets they are, two days before FND, one day before FND and FND itself. In other markets such as the currencies, the action I will describe takes place the day before FND, FND, or the day after FND. Throughout this issue, unless otherwise noted, when I refer to FND, it is inclusive of the two days prior to FND to one day after FND. Generally, a lot of action takes place around FND. Why? Because that is when most traders roll their futures positions to the next month. In fact, unless you are a hedger, a registered large trader, or expect to take delivery, some brokers will not allow you to hold a futures position much beyond FND. They get panicky if you do, and will usually call you and insist that you get out. I have had brokers who allowed me to trade well past FND, when I got special permission from them. As a rule, you need to be out of the market by FND. For those of you who are brave and would like to learn how to scalp around FND, I will include some illustrations of what to do. You might be tempted to think that a market will go down around FND because everyone is dumping their position in order to move into the next month. However, this is not true because for every long, there is a short. For every position liquidated by selling, there must be a buyer. The people buying are those who were previously short. They must buy back their shorts in order to rollover. Those selling, are liquidating their longs. I have heard it said that over a span of many markets and over a statistically valid period of time, inside bars comprise about 10% of the market. The price bars involved with FND's seem to involve many of these inside bars. When they are not represented by inside bars, FND's often show up as underside bars. This pattern can be upset by virtue of some economic news or change in the fundamentals. But the rule is that FND bars tend to be small. There is plenty of buying and selling, but the intraday range is not great as traders exit their positions. The rub comes when you try to trade off the intraday high or low made by the actual FND bar. The trade has to be made the following day. Many brokers won't let you initiate an entry trade after actual FND. For markets whose rollover is greater than one month, look for this to happen on FND for those months having the greatest Open Interest.

244

Gold offers a good example of this concept. February Gold would have an FND in January. The February contract is a major Gold contract with lots of Open Interest. March Gold is very thinly traded and you would not look at the end of February for a Gold FND and expect much to happen. Even August and October Gold may be unproductive, because after the June Gold goes off the boards, December Gold may contain the most Open Interest. Charts in Print Copy Now let's view the charts above. In these charts I have shown only the bars in and around FND so that you get a better view. I randomly picked these views. You may be thinking to yourself, "Why can't I simply do this every day, why wait for FND?" The answer is you can do this every trading day. In Trading the Minute, I wrote that the breakout of yesterday's high or low was an entry signal. The difference here is that on the days immediately preceding FND, there is apt to be better fills because there is more volume. Because of the increased volume, you can even do this trade in thin markets provided you do it prior to FND. A thin market will generally become even thinner after FND, and therefore unsafe for this trade. Chart in Print Copy Once all but those who have a need to be in the market are gone, i.e., after FND, even the most liquid markets can become quite thin. It's the thinness, the liquidity that makes post FND markets so dangerous. Two days before actual FND, you begin to watch the market for a smaller than usual bar or an inside bar. The trick is totally in the entry and it is how I used to scalp from the daily chart before there was such a thing as daytrading. If the open of the day after the small bar is a gap outside the range of the small bar, then you trade as follows: Gap up, sell one tick below the high of the small bar day. Unless a trade is taken, this signal stays in effect to include the entire day of the day after the actual FND. Gap down, buy one tick above the low of the small bar day. Unless a trade is taken, this signal stays in effect to include the entire day of the day after the actual FND. ‚ If the open of the day after the small bar is within the range of the small bar day, buy 10 points prior to a breakout of the small bar day high, or sell 10 points prior to breakout of the small bar day low. ƒ If the open of the day after the small bar is within the range of the small bar day, and the open is less than 10 points away from the small bar day high or low, wait until prices trade further away from that high or low and then enter when they come within 10 points prior to a breakout. If FND comes and there has been no inside bar or no small bar, then trade the bar after the FND according to 1-3 above. If you or your broker don't like the idea of entering a trade because of the liquidity following FND, then be aware that many signals come on one day prior to FND. These signals can be freely taken as the market will be comparatively liquid due to the need to rollover. The FND trade is a scalp trade. This means you are in for only a day or two. Do not under any circumstances view this as a long-term trade unless you find yourself in a really good situation and are willing to roll into the next month. One management method for the trade could be in accordance with this view: If you are trading a three lot, liquidate one or two contracts when you have sufficient points that a single contract will cover the costs of all three contracts. If you liquidate two contracts, you will have covered costs and bagged a small profit

245

equal to twice your costs. Then, bring the remaining contract(s) to break-even. Once the market moves your way, trail a 50% stop, and as soon as possible switch to the use of natural support or resistance to protect profits. Another management method is a fixed objective for all three contracts. I used a continuous Crude Oil chart for this illustration for two reasons: 1. I normally switch to the month with the most Open Interest prior to FND, so only my continuous charts contain FND. 2. The Crude Oil rollover is every month, so I was able to show you more instances of the FND phenomenon. Another reason this trade is different from what I wrote in Trading by the Minute, is the procedure for taking it. We are looking to sell one tick below the high, and buy one tick above the low. This trading action is different from getting long just ahead of a breakout of the high or short at a breakout of the low. If you want to try this technique as a scalp trade off the daily bar chart, then be sure to choose liquid markets. The objective of the trade is to get you involved in coordination with the appropriate momentum, i.e., on the correct side of the price action. As previously mentioned, before there was such a thing as daytrading, I used to scalp the market from the daily chart using this method. Until, and unless I'm in a winning position, I don't consider staying in the trade overnight. If I do stay overnight, I will hedge my position by spreading off against a back month or a similar contract at another exchange. The hedge locks in whatever profits I have earned and gives me overnight to assess the situation and decide upon any further action for following day. It's always pleasant to sleep on a locked in profit. Example: I would hedge by selling two half-size Md-Am Swiss Franc contracts for every CME full size contract that I was long. I would do this if I were in a winning position and long Swiss Francs near the end of the day. The following day or later, I would drop one or the other sides of the hedge depending upon a strong directional signal about whether the market was moving up or down. I also might drop both sides, thereby taking my locked in profit and look elsewhere for a better opportunity.

System Writing in Supercharts - Shawn Halfpenny I'm a new subscriber, so I thought I'd jump in and contribute my two-cents worth. I use Omega SuperCharts and find it excellent in most respects (for the price, you can't beat it). The big drawback is its so-called "Easy Language" in which you program your own systems. It is really very limited in what you can program and certainly troublesome in expressing what one would think is the most basic of system ideas. However, l have discovered a few tricks to get around some of these limitations (as many of you already are aware of - but I'll explain them anyway). Take the following example of a simple system (it's just some nonsense I made up as an example, don't try to trade it). (1) if 0=0 THEN BEGIN VALUE1=(H[0]+ L[0] + C[0]) / 3; VALUE2=(2 * VALUE1) - H[0]; VALUE3=(2 * VALUE1) - L[0]; IF OPEN OF NEXT BAR >=VALUE3 THEN VALUE4=4 ELSE IF OPEN OF NEXT BAR >=VALUE1 THEN VALUE4=3 ELSE IF OPEN OF NEXT BAR >=VALUE2 THEN VALUE4=2 ELSE VALUE4=1; IF VALUE4=4 OR VALUE4=3 THEN BEGIN (2) BUY NEXT BAR AT MARKET; END; IF VALUE4=2 OR VALUE4=1 THEN BEGIN

246

(3) SELL NEXT BAR AT MARKET; END; (4) END; (5) IF 0=99 then (this "then" is outside the white window) Buy not used Buy next bar on close (6) Buy next bar at market blab blab blab... blab blab blab... My frustrations led to experimentation and I discovered that you can "fool" the system editor by doing the following ... Start by putting an obviously true statement right off the bat. Use the 'if' that is already present at the upper left of that little White window, and type in "0=0 then begin" (zero equals zero). Now you're off and running. You can program in almost anything (that is a legal Easy Language statement, that is) now without the usual structural restrictions. ‚ That's right, you can even explicitly type in the buy/sell orders. This will give even more flexibility in your system-writing. ƒ I found you can mix in a buy order with a sell order and it'll work. It doesn't matter if you're in the "Long Entry" section or the"Short Entry" section. „ Put an "end"; here to close out the starting "if" statement. … Another trick to fool the system editor. Put this obviously false statement here and the five Buy order options at the bottom will never get activated (which is what you want since your entire system - buys and sells included - will be within the programming window). † You still have to put a tick in one of the Buy order selections or your system won't compile right. So there you go friends, a little trickery, which I hope will help some of you. On a completely different note, a few questions for Anonymous Trader regarding his interesting Day Trading methods on the S & P. How do you calculate a Keltner Channel and what do the parameters (close,9,2) mean? Is it like Bollinger Bands? (Philip Toh's article in last month's issue just left me scratching my head, sorry Philip). ‚ What do you mean by 2 pivots back, do you mean 2 bars? ƒ Is your system as effective in other markets, namely T-Bonds and the currencies? „ Do you have a strict definition of a reversal bar? Also to make a few member requests, does anybody have NAVA Patterns? How do you like it? What about the books "Daytrading with Short-term Price Patterns" by Toby Crabel, "Opening Price Statistical Data on the Futures Markets," by R. Earl Hadady, and "Short-term Futures Trading" by Jake Bernstein. Are any of these books good or not? Also, just received in the mail today literature from George Lane (stochastic guy) promoting his seminars in Day-Trading. Promises big bucks. What's up with that? Oh, most importantly, does anybody know of a good reliable method to predict if tomorrow will be an up day or a down day or whether tomorrow's high or low will occur first, please call me. Together, with this knowledge and the research I've done, we can put together a terrific daytrading system.

Joe Ross and Expert Educator - Wayne Roberts

247

When Joe Ross speaks, I listen. He wrote four books and I have them all. The printed word seems passé. Everybody wants to impress me with their audio videos or software. I wish Joe would make frequent contributions using his real name and not a nom de plume.

Seasonal Trade - J.S. from California There is a strong seasonal tendency for T-Bonds to decline for about one week starting on April 15. This has occurred in about 16 of the last 17 years. Will this decline repeat again this year? I don't know, but I'll be looking for sell signals around April 14.

Tidbits on Financial Astrology - Carol Murphy Exact quote from the book forecasting prices. The conjunction of Mars and Uranus is very significant. It produces unexpectedly galloping changes in prices of all commodities, including Bullion within a very short duration. If the fall in prices last 10 to 12 days, rest assured that the reaction toward higher levels will be sudden and rapid. Therefore, you should exercise great judgement in cashing your profit. This conjunction makes sensible operators millionaires within 2-weeks. 1/29/92, 1/13/94, 1/7/96

Member Requests Bill Beattie wants recommendations, comments, reviews on Dollar Trader, ADM and Market Profile. John Jenkins would like to know if anyone has experience or knowledge about any of Bruce Babcock's systems.

Resource Guide & Editor Reviews I have been getting Bruce Babcock's Commodity Traders Consumer Report bi-monthly publication(CTCR) for some time now and find it an excellent value. Not only does Bruce do well-done and straight-forward reviews of various trading products, but he also keeps track of the performance of a number of well-known commodity hotline services. Personally, I have enjoyed Bruce's detailed interviews of many highly regarded and knowledgeable trading experts as the "best" part of CTCR. For example, the last two issues featured insightful and highly educational question and answer session interviews with Jake Bernstein, who is easily one of the most knowledgeable and highly regarded trading experts. Also included was an excellent article on managing risk which featured interviews with well known traders: Walter Bressert, Steve Briese, Phyliss Kahn, Michael Chishom, Jack Schwager and others. Bruce also did a detailed review on John Ehlers and his Mesa program. Bruce can be reached at CTCR, 1731 Howe Ave., Ste 149, Sacramento, CA 95825. Phone 1-916-677-7562. Look into this. I recently had the fortune of viewing Kent Calhoun's well-done and informative video titled "The Five Most Instructive Lessons of Commodity Trading." It covers several aspects of commodity trading, including Kent's well-known Vertical Bar methodology. In my opinion it is easily worth its cost. Kent can be reached at 1-210-238-3084. Robert Miner is the author of "Dynamic Trader Analysis Report," the monthly publication of Dynamic Traders Group, 6336 N Oracle Ste 326, Tucson, AZ 85704. Phone 1-602-7973668. Some members may recognize Dynamic Trader's former name which was Gann Elliott Educators. Robert does an extremely thorough job of detailed market analysis. His March issue analyzed S&P, Bonds,Gold,DMark & Beans. Plus, an excellent 56-page special report on the Grain Markets for 1995. Check it out.

248

There has been good interest lately on options trading. There doesn't seem to be many good sources of information on trading options on futures. However, I have found one titled "Opportunities In Options" by David Caplan, PO Box 2126, Malibu, CA 90265. Phone 1-310-456-9699. David covers eight market groups and gives specific advise, including calls and puts, spreads, ratio spreads. He also recommends which specific strike price to use, and over/under valued options, and trend analysis. Investigate this one. Issue 24. More on How to be a Successful Trader Anonymous Trader by S.A.T. As mentioned in my last letter, I would not be writing any more (never say never I guess). Dave asked me to contribute again, since he has gotten many requests concerning my trading, methods used and observations, and how I could be reached. First off, let me begin by letting readers know, especially those who have written me via CTCN, I cannot respond to individuals personally as I am too busy either trading or spending time with my family. I just don't have the time or energy to deal with people after trading every day. When the day's done, I walk away from the monitor and relax with my family. If I did respond, I would have to charge $3,000 to $5,000, and I would feel guilty. I have lots of losses from previous learning, educational and getting your guts kicked in years to make up. You see, I was just like everyone else, until the last couple of years. The only difference, I was able to find a simple methodology and the key to make it work - inner psychological control of my dysfunctional behavior. (Read Mark Douglas' book, I mentioned specific chapters in my last article - very important). I feel that after all I've written that many people missed the boat about what I was trying to say. Dave Green tells me many CTCN readers wish to know how I trade, where to enter, exit, place stops, how to know whether to go long or short, etc. As I mentioned before, I have shown two friends how I trade. They know it so well, that they call me up and tell me what they thought I did for the day and they're just about right. However, one cannot pull the trigger and he loses on the one or two trades he takes every week. I trade 3-6 times/day. The other friend is an older man who makes great money when he trades, but hates the fast pace and sitting at the monitor all day, so he doesn't trade much. He is fairly well off and doesn't need the money. My point is, it's not the method, it's how you handle your emotions when trading. Knowing yourself and your likes, dislikes, strengths and weaknesses will help you develop a way of trading you'll enjoy. Trust, execute flawlessly as possible and then enable you to pay yourself as much money as you're able to handle in the market, and this in time will grow also. Again, my method is very structured and mechanical. It is not 100% mechanical. Sometimes I pass up trades because my experience and gut feelings about the markets' behavior makes me cautious. Sometimes I'll wait 5 or 10 minutes before acting on a signal. Sometimes I enter immediately without hesitation. Sometimes I get out before my method tells me to. Sometimes I bring my stop to break-even quicker than I normally do. The point is, every day is different. Even though I basically trade exactly the same way each day, the manner in which I execute the trades is a function of my experience, confidence and psychological training. This is the art of trading, and makes the difference between losing and winning. Neither I nor anyone can teach this. This is acquired by oneself through experience, practice, pain, suffering and heartache. We learn the most from our failures, this is so true. This is why I will not work with anyone, because I can't teach this. This is my problem with so many educators. Trading looks easy on back charts.

249

I will try to give some tidbits of advice on where to start looking or what I feel is the best and most simple way of trading. I have included charts at the end of this article. One thing I use on occasion throughout the trading week is the Ross Hook (if unfamiliar, buy the book). The Vanilla Hook is all you need. Trade in strong trends in the beginning of moves or breakouts, risk little, take medium size profits. You can make a living just doing this. See 5-minute chart of examples of a hook. Also I use pullbacks of between 35-62% retracements in a trend swing that gives a reversal bar back in the direction of a trend and that makes a pivot (low, high). I use this the most and it works great. However, it is the art of trading that will make all this very profitable when you master yourself and reading market behavior. Personally, I would take one market and master it. Don't trade 20 markets like a banana-head. I like the S&P500 and I take a couple trades a week in the Swiss Franc. All on 5-minute charts (same method, same everything). My average trade lasts 30-60 minutes, sometimes more, sometimes less. I take my profits quickly and try not to get married to trades. Learn to be imperfect at times and plan for this. This might make some of you feel better. I usually never risk more than $300 on an S&P trade. Well I did two (not one) really stupid trades last week. My ego got involved and I knew or thought I was right on a couple of trades. The first one, I sat thru a $750 drawdown to make $300 which sounds great, but it set me up on the next trade. Chart in Print Copy I did the same thing and lost $1,500 in 30-minutes on the S&P. I reversed my position and started going with the trend. Put my stops back in and ended up making $1,100 for the day. Had I not made these mistakes, I would have made $3,000 plus for the day. On a 1-lot (that's what I trade mostly) I'm fixing to increase to 2-3 lots shortly. So you see, I still make mistakes and continue learning each day. I've included charts (see pg 2) to show examples and give ideas to develop your own methods and personalize them. Sorry - there's no canned 100% system that will make you a great trader! The Keltner Channel is something I use as a visual aid in market direction and strength. I don't know much about it. It helps me visually, so I use it. A friend told me about it. I looked at it and liked it. Enclosed is my TradeStation formula. You can figure it out, if you wish. Again it's a tool, not a Holy Grail. I personally recommend only intraday trading. I hate trading daily charts and overnight trades. Benefits of intraday trading are as follows: More profit - especially if you trade size ‚ Less risk ƒ More control with money-management „ No overnight exposure - you sleep at night and weekends. Remember coffee, lumber, cotton, and currencies, lately. How would you like to wake up with these against you or locked limit for 2-5 days in a row against you? One bad one like this can ruin 6-12 months of hard work. No Thank You! I don't care what anyone says, it's not for me. … Quick reinforcement - you get a winner or two in the morning and you feel great. You don't have to wait 3 to 7 days to book a profit - just 1/2 to 1 hour. † If you lose, you can make it up within a few hours and you are back in the black quicker, making you feel good. I know some people will write and dispute this, and that's OK. It's my opinion formed after doing all the other stuff from experience. Dailys didn't work for me. Too slow, too boring, too much exposure and too many markets to keep an eye on. Again, trade with trend, enter on retracements, use small stops and take profits as best as you can. Better off taking a profit too quick than staying in a trade too long. You'll learn the right feel for this as real-time (not

250

paper) trading experience grows. You will only begin to learn about trading and yourself with real-time, real (actual) trades. You must trade to learn. Set aside some money you expect to lose as tuition. You'll probably graduate with honors and do it quicker. Don't get hung-up on paper trading. I hope this information helps. I wish I could do more. Unfortunately, this is a journey we all have to make alone. For those who succeed, the rewards are truly satisfying. P.S. I enter two ticks above or below the signal bar. Risk $200-300 maximum in S&P 500. Swiss Franc (currencies) 7-10 tics maximum risk. These are only guidelines, you must adapt for yourself. On Keltner Channels - The stronger the angle or slope, the stronger the trend. In a trend, I like for prices to retrace back around the mid-Keltner before I look to enter - on a signal back in the direction of the trend. However, in really strong steeply trending markets, I will not wait for price to hit mid-Keltner Channel, because it will never get there. You'll see this thru experience.

Software and Data Preference Polls: Not Gauge of Quality - Bob Pelletier of CSI It's that time of year again. Stocks & Commodities Magazine ran its annual "Reader's Choice" contest and the winners are trumpeting their accolades all over the investment rags. This brings up the annual controversy over user preference and just what "Reader's Choice Winner" really means. For those of you who don't read S&C, let me explain the competition. The subscribers of S&C were sent ballots listing advertisers and potential advertisers of the magazine. They were asked to select their one choice in a number of categories. Let me be clear on this: They did not compare the competing products or services as good, bad, worst, etc. . . . Nor were they asked to rate individual aspects of the contestants, such as quality, service, etc. The winner in each category was, quite simply, the one with the most votes. The fact is, the so-called "Reader's Choice Award" in each category of software or data has absolutely nothing to do with the quality and performance of the product. Most readers may have known of only one product in each category. Regardless of the superiority of the other products about which nothing was known, the product familiar to the reader got the vote. While this type of balloting shows the product most frequently used by S&C readers, it does not say on what basis (or under whose influence) the choice was made. None of us can know the private list of candidates each reader was familiar with when casting a vote. In this flawed study, a non-vote due to unfamiliarity with a product carried the same weight as a non-vote due to a bad experience. The editors at S&C are the first to point out that quality has no bearing on the outcome, but this message is lost in the media circus created by the winners. MetaStock used their win to promote their software when compared to a competitor. Likewise, another winner showed their multiple awards in a recent magazine promotion. Using S&C's "Reader's Choice Award" as evidence of progress in one's own accomplishments brings to mind George Santayama's quote, "Those who speak most of progress measure it by quantity and not by quality." There are more product longevity and satisfaction in quality than any other attribute of performance. Unfortunately, S&C left quality out of their questionnaire. It is interesting to note how very laudable the study seems to the winners and how very biased it appears to the dozen or more losers in each category. As a "Finalist" in the data service category, we find ourselves in the crowd shouting "foul." When CSI lost out to competing data services, we felt compelled to advise S&C of the flaws in their study. Neither of the two letters we submitted to the editor, making several valid claims of bias, were accepted for printing.

251

Day Trading Insight - George Moldenhauer It seems like there has been an incredible interest in day trading in recent issues. Frankly, I fail to see the attraction. As a full-time trader/advisor, I realize that day trading is time consuming and mentally taxing. I must think that for most of you, you have better things to do with your day. I run into people that are constantly in awe of the fact that I'm living the life they dream about... as an off floor trader. I work out of my home and make a comfortable living. But that doesn't mean that it is easy. People think that trading stock index and bond futures is easy and it "beats working." If you want to be good at what you do, it takes a lot of hard work. I get out of bed before my neighbors do. I start my day before they have their first cup of coffee and often I'm working when they get home from work. But dedicated individuals can make a living trading. And it doesn't necessarily take big money to be successful. In fact, as an experiment, I have (since the first of the year) been trading a very small account. In this account, I have been trading T-Bonds and TNotes and more recently Stock Index Futures. Most of the trades in this account have been day-trades (some have been held in the night session and only recently have I held Eurodollar positions overnight). I have done this to prove a point... that an average person of ordinary means can make it trading futures. In fact, I seem to remember reading that Richard Dennis was down to less than $1,000 before he turned the corner. While I am only 3-months into my little project, I have yet to have a losing month. I'm constantly pulling profits out of the account and the account is profitable. The approach is simple. Each night after the close of Bonds and NYSE, I make a few simple calculations that will give me a directional reading for the next day. These calculations are simple to do and can be done by hand or on an inexpensive hand-held calculator. From that point, I have a good idea about how the markets will close for the next session. With that information, I know my trading approach for the next session. The system works with notes, bonds and stock index futures. The best part about this approach is that you can have a trading plan for tomorrow, today . . . before you hear the news (or as I like to call it noise) from the markets overseas. With this information in-hand, I know exactly how I am going to approach the markets tomorrow. With my game plan in-hand, I can approach the market with a great deal of confidence . . . an important element to your successful trading. I have seen several contributions recently from members that talk about their success. There is one common element that they talk about... discipline. My experience is that discipline comes from confidence. If you're confident, you have a winning approach, then it's easy to be disciplined. But if you don't have a winning approach, all the discipline in the world still won't make you any money, period. It's easy to have discipline when you know that the probability of a positive outcome is on your side. Michael Jordan doesn't hit all of his shots. If he were on my team, and we were down by a point with only seconds on the clock, I would have the discipline to get him the ball . . . wouldn't you? Trading success is like that. Know the odds, trade the odds and over time you will make money.

Not Seeing the Forest for the Trees? - David Hutton from Australia It's interesting as traders that we find ourselves on all mailing lists. We receive promises of riches beyond our wildest dreams that are just around the corner, if we are just prepared to shell out another $199 for the . . . "Greatest Discovery this Century!" Don't get me wrong, I am the first to admit there are some good ideas out there, and you probably do to. I have a library of trading books, and some trading systems. After all, who was it that said, purchasing someone else's brain was the cheapest investment.

252

But by far, the most valuable knowledge that is available to you as a trader is what you learn about yourself over many years of trading. To be successful, these questions need to be answered: Are you a subjective or an objective (system based trader), or do you fall somewhere in between (if you are very careful?) ‚ What time frame are you comfortable trading? It's no good buying or designing a trading methodology that takes trades for periods of two weeks to a month, if you are worried about your profits every day. It's no use saying you are going to day- trade, if sitting in front of a screen all day is going to give you a nervous breakdown. ƒ How do you handle drawdown? What are you doing looking at systems where profits are large, but there are drawdowns of $15-$20,000 in any annual period? If you can't handle drawdowns of this magnitude (and there's nothing wrong with that) then don't go with these methodologies. „ Simplicity - If a methodology is not easily understood and clearly written, you're in trouble. Remember the average human can only take in a maximum of seven pieces of information at any one time. So if your screen is showing two time frame bar charts, two moving averages on each, channels, and a couple of indicators thrown in for good measure... and you are trying to trade, then you are kidding yourself. Your brain has told you to take a hike and just won't make any decisions, how could it? A good test to see if a system is suited to your personality/psychology, is if you have the discipline to stick with it. Even if you've spent months designing what you think is the perfect system, you find yourself looking for excuses not to take trades or picking holes in it, chances are that besides other problems you may have, one of the major ones is the methodology not being suited to you. Take another look, and be on the lookout for this behavior. If you are purchasing systems, make sure it has the ability to backtest and walk forward the methodology to become comfortable with the results. You want to make these systems your own. You need to know what the drawdown patterns are. What the percentage of profitable trades are. How it performs in good and bad periods and how long it stays in trades. Why on earth would anyone buy a black box on a promise? At the first sign of trouble, you will stop using the system because there's nothing to enable you to have confidence in its ongoing performance. Many thanks to Dave Green for an excellent publication. It's great to have such a wide forum for views, ideas and inspiration available to traders. One common theme that I have noticed from the articles being written. I wonder if you have to? Those traders that are doing well have a relatively simple and clear explanation for their trading methodology, while others that seem to be struggling are lacking a clear direction and methodology. From my own experience, I believe that while many traders would like to trade off the screen with some subjectivity, most need strict rules to trade by. This would include in its crudest form, a trade sheet which provides for ticking boxes when trade criteria are met (as some of mine are), with order levels and stops to be placed, to computer generated orders printed out by programs such as SystemWriter (also as some of mine are). My methodologies tend to be relatively short-term (1-3 days), typically have extremely low drawdowns by most system standards, and have a relatively high percentage of profitable trades. Longer term trades stem from short-term low risk entries, and would typically run for 3 to 10 days. Hopefully this has been of some assistance to those of you still struggling to find your trading identity.

How I Make Money by Using Scale Trading Techniques - S. F. From Europe The reason for my writing is that I have become a convert to the idea of Scale Trading. Therefore I write in defense of Robert Wiest and his system, which was slated by one of your (somewhat ill-advised) readers/contributors.

253

I presume Robert Wiest is not a reader of your letter. Editor's Note: He is not a CTCN Member. However, I will send him a copy of this article and perhaps he will join. If he is, tell him he can write his own defense. I feel obliged to write something about his system, if only to put the record straight, and perhaps help one or two of your readers who can use these methods. To state the system "only goes long when the price is perceived to be at historically low levels, and then holds it forever until profitable" is a gross over-simplification, since a decision to start a scale also takes into account much fundamental information. In the example given in the Feb. issue of CTCN, where sugar fell from 6¢ to 3¢. I presume this move was in line with the fundamentals: I.e., there was gross oversupply. Scale trading would not have been started in this case. If the price of a physical commodity (scale traders are advised not to trade currencies or stock index futures) is near its historic lows and the fundamentals of supply and demand are quite bullish. I can assure you and your readers that this form of trading is very low-risk. The law of supply and demand has governed prices for centuries, and will continue to do so as long as humans wish to trade and interact with one another. Your previous contributor gave sugar as an example, and added that more extreme examples were available. I guess there are, but it is not likely he will be able to find anything anywhere near a $30,000 drawdown in a physical commodity from a point where it was ever suitable for scaling. All trading has some risks. If it didn't, everyone would do it. Scale trading seeks to reduce risk. I agree wholeheartedly with Robert Wiest in his assertion that scale trading offers fair profit potential for low risk. Nobody is going to make 100% per year by these methods, and I presume that this is what stops most people trying it. I can also vouch for Mr. Wiest's assertion that one also needs much discipline, and above all, patience to trade this way. A lot of patience, but anyone who sticks rigidly to the scale trading system will, in my view, never fail (or at least very rarely fail) to return a small percentage profit each year. Based on my historical testing, 2040% seems a very reasonable average estimate. Sure, you'll have drawdowns and paper losses. I have had them, and I have them now. They're part of the system. But overall, I'm profitable, and I sleep at night. If you started your system correctly, the drawdowns will never break you. The losses really will turn to profits later, and not usually years later. Take corn as a present example. I'm not a farmer, so have no idea what it really costs to produce a bushel of corn. However, as I understand it, and this is also probably over-simplification, the U.S. Government has to step in to help farmers if the price drops below $1.94 F.O.B. the farm. I therefore presume that this is somewhere near their cost, assuming a good harvest with good weather throughout the season. Now, the low of the last ten years is about $1.45, although it has only been below $2.00 after four successive huge crops. Therefore, given the current stock levels, 1995 corn at anywhere below $2.50 looks very attractive to me for scaling. If you read Robert Wiest's book, you'll see that scales can always be tailored to your own account size and profit goals. I scaled corn late last year and cashed a profit of $200 (less commission) every time the price moved up 4¢, safe in the knowledge that I wouldn't be in trouble until the price dropped to $1.50. At that point, I would have owned about 15 contracts. Sure, the price might have continued to fall from $1,50, which would have been very serious for me, although not catastrophic. But how likely do you think that is? If the price of corn is 30-40 cents below their cost of production, how much corn will farmers plant next year? Not a lot. I would probably have been rolling a lot of contracts over from this year's to next year's crop, but eventually I would have made my $170 on each contract, plus $170 on each oscillation of 4¢ taken on the way back up. Of course, compared to $1,200 a day, $170 every now and then is not much. But they add up,

254

especially when there are not large minus figures appearing on the statement from time to time as well. And I trade other things too, which also give the odd few hundred dollars from time to time, also without large minus sums. At the moment, I am scaling soybean meal, soybeans, oats, and heating oil, whilst carefully watching corn and wheat. There are also opportunities in the meat markets. If the July soymeal price drops to 140.00, I shall have to stop accumulating contracts, but I feel that this is highly unlikely. If it drops to 120.00, I'll have given your subscribers a good laugh, but I'll still be in the game. My scale will not be closed until the price hits 185.00. Every time the price moves up $4.00, I make $400 less my commissions. So far, I've cashed several profits, and I only started this scale in December. My oats scales have given me profits, as have soybeans. So far, only heating oil has given me any serious problems, but I shall not be in trouble unless the price drops to 36.00. I'll be out at 51.50. Which heating oil price do you think is the most likely in the next few months? People might well-read this in twelve months' time when the price is at 20.00, and think "I wonder what became of him?", but I doubt it. And meantime, every time the price moves up a bit, I bring in a few more dollars to cushion the blow of any disaster looming down the road. I have no doubt that you have several readers like this Anonymous Trader character. He is clearly a smart chap, and I offer him my congratulations. Good luck to him. We all know that 90% of traders lose over time. I have no reason to suspect that this percentage is different amongst your readers. So for every Anonymous Trader, there are presumably nine losers. (If you survey your readers, they will probably deny this fact, but I think I'm right. Also, I think I'm right in saying that about 90% of people also consider themselves better than average drivers. As this is statistically impossible, I always prefer to rely on statistics coming from information given by bodies like the trading exchanges rather than from privately conducted surveys). I suspect most of these nine losers-to-be will never try scale trading, because they would much rather be like Anonymous Trader (making his $1,200 per day) than me making 20-40% per year. Most people would, myself included. I've already realized this is an unlikely goal for me, as I lack either the ability or the perseverance (or both) of Anonymous Trader. I shall stick to my own methods. Regrettably, nine out of ten losers will also find out that they lack something, but presumably via the hard way.Incidentally, if he can't teach friends to do it, what makes you or your readers think he can teach them? Finally, as mentioned earlier, all trading has risks. Any one position trading index futures, bonds or currencies are always vulnerable to gap openings, and it might only need one to wipe them out entirely. Did you know that on Black Monday people got margin calls to produce $200,000 cash, per S&P contract, in one hour? Did you know the bid/offer spread at times that day was up to 100 points (not ticks)? I wasn't there, but have read both statistics in two places. Now to me, that is high risk! Just one day in my lifetime would have wiped out any trader who happened to have gone home long that weekend. Am I taking risks with my scales? Sure. But what risks? If corn really goes 20% below cost, to say $1.50. How many readers seriously think it will drop much further? I think it is wholly inconceivable it could drop much further. Currencies can trend one way, more or less indefinitely, in a straight line if they like, but crops can't. Eventually farmers will stop planting, and unless demand simultaneously disappears (which has never happened yet), the price can only then go one way: back up, and probably up with a bang. Dave, you are clearly a nice bloke. I wish you would read Robert Wiest's book before commenting further on the pros and/or cons of scale trading. If you have already read it, then I'll accept that your opinion about few traders being able or willing to use this methodology with success may be correct: hopefully I'm one of the few. Furthermore, since I dislike being made to look silly, I hope I remain one of the profitable few for the indefinite future. I certainly have a confidence trading now, which I never had previously. You will not like what he has to say about trend following systems. I don't agree with a lot of what he says about chart-reading. I feel it's hard to argue with a law as powerful as supply and demand, and if nothing else, you might enjoy the book just for giving you a different perspective.

255

I'm sorry I've waffled so much. Scale trading gives me lots of free time to write page after page! (I've cashed four winners this week, but did go three weeks in January without making one trade). Thanks again for your work.

Shopping for Real-Time Data - Michael Maldonado I've also taken up day-trading the S&P 500 recently. I'm sure most of the CTCN readers realize that the S&P 500 is one of the most liquid and very popular contracts to trade. Considering the daily volume involved and the ease in which real-time data can be obtained, it's no surprise that there are thousands of others trading in this manner. I'd like to share my recent experience on the purchase of real-time data. My choice was easy to make. I hope to save other CTCN members some of the research time and headaches involved. After receiving information from all available vendors; only two companies were really cost effective for small traders working through home computers. I came to the conclusion that Signal and BMI were the only realistic choices available. Both companies are very similar with the features they provide; but use very different sales techniques. Upon comparison, I found BMI to be a better value than Signal for your dollar. BMI is a much smaller company, and is better suited for the commodity trader. A satellite dish is the recommended receiver of the data stream. BMI shipped a satellite dish via UPS directly to my front door. There was no charge for the dish, and I also received an installation video and all tools needed for assembly. Both companies have start-up fees, but BMI offered to supply my second month of data at no charge, which more than covered those fees. They also will supply all commodities in a 20-minute delayed format at no extra charge. Most S&P traders need to view the S&P 500 contract tick by tick, but are still interested in what the other markets are doing. The ability to view the other markets at no extra charge is a definite plus! They also have one of the least expensive real-time charting programs on the market. They offer a service that fills in any gaps you may have in your five minute charts automatically every evening. Signal offers none of these features. The most unbelievable aspect of my purchase was the attitude of the sales people involved. BMI's sale representative was anxious to do business with me. He filled my every request. He used a "no pressure" sales technique, negotiated on their monthly fees, and was a pleasure to deal with. On the other hand; Signal's representative was the opposite. His attitude was that he believed Signal was the only vendor in town! He continually reminded me that his "sale price" was about to expire. The only way he would negotiate their fees is if I faxed him a copy of BMI's best offer, or if I paid for a year's worth of data in advance. Of course, I informed him that I would take my business elsewhere. I'm sure not all of Signal's representatives conduct business in this manner. Otherwise, they wouldn't be the largest vendor in the industry. In the five months that I've been subscribing to BMI's service, I've had no problems with data reception even though we've had an incredible winter this year in California! I'm also using TradeStation to handle my charting needs. I'm very impressed with both products and recommend them to CTCN members. The representative that I dealt with at BMI was Adam Lawlor at 800-255-7374 ext 4421.

"The Making of a Trader"©-Installment #1 Dyslexia - Blessing or Curse - Joe Ross I guess I'll have to bow to popular opinion and write some articles for you under my own name. I want you to know that I caught a little hell from readers of my own teaching letter who resented the fact that I

256

published that last article on "First Notice Day" before they had a chance to read it. They said if I'm going to do things like that, they would drop their subscriptions to Traders Notebook and just read what I have to say in CTCN. So I guess I'll have to write things here that I don't write there. If you and your readers don't mind, I'd like to do something in CTCN that I've never had time to do elsewhere. Here's the background for my request: Thanks to the prayers of family, friends, my students around the world, and those readers of CTCN who also helped. I lived to celebrate my 60th birthday on April 7. The malignancy is gone and I'm on the road to a full recovery. In June of this year, I will have been involved with the markets for 38 years. Thirty-five of them as an active trader and seven years as an author, teacher, tutor, seminar giver and educator. Dave, I'm still learning. Believe me when I say I learn more from my students than you could ever imagine. I've learned a great many lessons in this life and it amazes me that I was able to trade profitably for so many years and not blowout somewhere along the way. Here's my request: With your permission and the permission of your readers, I'd like to tell about those years with particular emphasis on the lessons learned along the way. I cannot promise to include something in every issue, but I will do my best to make the articles instructive. Also consider that this material is copyrighted and much (if not all of it) will appear in a book called "The Making of a Trader"©. If it's okay with you, what follows is the first installment. The final book version will contain a great deal more. You may wonder what it's like to go through life with a severe case of Dyslexia. My earliest encounters with this physical challenge began at school. In those days the term Dyslexia probably hadn't been invented yet. My teachers thought I had an attitude problem. They told my mother I was smart enough to do the work, but I was lazy and careless. The problem was particularly strong with regard to numbers. Because I sporadically reverse them. I could not and still cannot add a column of numbers. Even a calculator does not help, because I reverse some of the numbers as I enter them. In my books, I'm forced to have numerous people edit everything numerical. On the Series-3 Exam, I failed every single problem that involved calculation or numbers. I am unable to pass that test. In Trading Optures and Futions, without exception, every calculation was in error and had to be rewritten. At least I'm consistent. When I write, the problem is controllable. Most of my life, I have been able to read only 25 words a minute. However, after taking a speed reading course, I am now able to "dyslex" at the phenomenal rate of 100 words a minute. I've learned to overcome adversity. Editor's Note: The remainder of Installment One, which deals with Joe's childhood and younger days, along with Joe's other contributions will be printed either in our next issues, or as a Special Report, depending on member feedback.

Misc. Thoughts of a Long Time Experienced Trader - Max Robinson Keep up the good work! The Phasor System cost $3,000 and gave (the editor of a competing newsletter) the incentive to start his newsletter. It was published by Art B. Turman, J. Gresham Northcott and Lyn McIver. The copyright is 1981. Personal computers were brand new then. At that time, most everyone in futures trading business just knew that computers would solve their problems. I agree with people who write that we should keep our articles positive and full of helpful information. If you have a problem with a system, state the problem and move on. Criticizing people seldom helps anyone.

I haven't checked this idea with a computer, but it looks good. The open is important. After the opening in soybeans, watch for 2 to 4¢ move away from the opening, which seems to stop and reverse. Place an order

257

to enter 2¢ on the opposite side of the open, from where the market had been trading earlier in the day. This seems to work better if the market is making a new high or low over yesterday's range. In order for a market to continue to go up, it should be trading near its high when the clock is on the hour. The trend may be signaled by a Friday close that closes over the 13 previous closes. A weak Friday close that closes below the weekly midpoint is something to watch! A Friday close that closes over last week's high is a possible signal of an uptrend. Friday's low closes are usually bought on Monday. Friday's high closes are usually sold on Monday. Monday's high or low will usually be near either the high or low for the week. Markets go up by opening lower. Markets go down by opening higher. Sometimes you need a mechanical method to trade by, because you can't win by wishing/thinking what the market will probably do. The best reason I have ever read on why you should be sure to put your stop in, was Brian Long's article about playing Russian Roulette (1/95 CTCN ). If you don't like stops - buy options.

Should They Be Able to Chew Our Food and Swallow It for Us? - Joe Dinelli I have read a couple of articles about "GET" by Tom Joseph and "Market Optimizer" by Jeff Rickerson. My observations are as follows: I'm amazed that anyone could have any major negative comments on either one of these programs as far as context in helping trading decisions. "Get" is probably one of the best thought out pieces of trading software written for the trading marketplace by far, unless someone is trying to compare it to a "black box" pipe dream. It is a piece of software in its purest form, not a trading machine. Its intent is to help one make intelligent decisions on trading, not eliminate our ability and absolute need to think, learn and make trading decisions. Tom Joseph in my opinion is one of the most honest and knowledgeable people in the software business today and his software package shows this. The backup is tremendous and the tools are outstanding. I own this software and use it regularly to judge positions in the marketplace. On the other hand "Market Optimizer" by Jeff Rickerson is by no means a slick piece of software, but the information it gives is invaluable. Over and over I have seen highs and lows of a marketland within a tic of the projections. The yearly, monthly and weekly projections are invaluable to a trader, and on its own can stand as a trading system let alone combining it with other tools. I agree that the programming could have been much better. Once again, the information is too valuable to criticize. As far as the comment I had read concerning Mr. Rickerson's ability to trade, I find this ridiculous. I am not privy to his track record and frankly it's none of my business. Being a trader and having a good idea for trading the markets are two very different animals. As far as I know, he's not selling his track record, but rather a very accurate trading tool. I find it amazing that when a good trading package is present, so much negative and totally wrong information can be presented about it. Again, it shows that the majority wants easy answers to personal development. It is great to have accurate information concerning trading programs. This information will save us a great deal of money, but to lump all programs as useless is damaging. If we want to air our "program frustration" we can stick to such programs in the "junk class" such as Bob Buran's. I have included two charts (Charts in Print Copy) to show the correlation of these two systems as "Get" called for a market turn on Nov. 7, 1994 with a major divergence present with the oscillator and CCI studies. "GET" showed a 5th wave present at the exact monthly low from "Market Optimizer" and as they say, the rest is history.

258

I will make one last comment on a newsletter and trading course by Robert Miner. I feel this is truly a great value and a very good educational newsletter. Is it easy? No. Is he always correct? No. Is he the greatest trader? I don't really care! But is his material well organized, fairly priced, informative, educational and honest? Yes. Is it for everyone? No. Mr. Miner has developed a trading technique that he tries to teach through his newsletter, while calling trading signals. This is a very good piece of work. However, it will not in any way take the place of our own trading technique development. No one can totally copy someone else's sweat and tears, and I believe that is exactly what 99% want. This newsletter is for the serious trader only. Good trading, as it's the ultimate road to our understanding of our inner being.

Hooking up to Real-Time - Don McCullough Well Dave, have you given any more consideration to the validity of picking tops and bottoms? By the way (I have not made a special search) Linda Bradford Raschke, who's in the 2nd Market Wizards book, is also a top and bottom picker. (Page 309 last paragraph) Expect this approach may be more common than most traders realize. Dave, I like the fact that you don't do much editing of subscribers' submissions. I think you're right to give the writer "free reign" and thus let the personality of the writer come through 100%. Communicating important ideas is the goal, and grammatical mistakes are the concern of rather impotent school teachers. Also I'm sure if you edited too much, you'd alienate some writers and therefore lessen subscriber input. Quite often those who have the most to contribute are also a rather individualistic, do it my way type. Independent thinkers probably make up a high percentage of the successful traders group. They want things done their way. Following trials and tribulations were experienced while getting connected to Signal's real-time data. It wasn't fun, but I view it as one of the many small prices you must pay in order to make it in the markets. Problems, problems. What do I want to subscribe to Signal's real, real-time data or their delayed data? What method of data transmission do I want? What markets do I want to follow? Do I have to make a serial port available in order to connect the receiver to my computer? Will activation of the screen saver program screw up the incoming data? And so on...... The first thing I had to do was free up a serial port for the receiver. I had my mouse connected to the serial port and had to buy a buss mouse and install its card. Then I had to install and configure the mouse software. Same "mouse" each time and I love it. It is the Kensington trackball. Next, I connected the receiver to the serial port and then installed the Signal software. Then my major problem started. At first all seemed O.K. Then it got to where, when starting the signal program, the receiver couldn't find the serial port (i.e., comport). Well, I fiddled at various times with the serial port settings and the autoexec.bat. files, etc. This problem continued for about five-days and many phone calls to the Signal support people. Finally, they decided it was a TSR memory problem but we couldn't find the solution. (Signal support is good. They really work with you.) Since my Afterdark screen saver is a TSR program, I called MetaStock support and their head of support said I had to deactivate the screen saver program. Otherwise, it would conflict with the incoming real-time data. For this reason, along with my knowing it might be causing my memory problem, I deleted the screen saver completed from my hard disk. By the way, the MetaStock support guy said a screen saver really doesn't help save the newer screens anyway. Do any of you readers know differently? Please respond if so, because I have an expensive Nanao 17" monitor and want to protect it as much as possible. The aforementioned problem continued for about five days and finally a Signal support person sent me a replacement receiver. It arrived the very next day after our phone conversation. That solved this major

259

problem. The Signal people said receiver replacement was seldom necessary with their customers. I chose to go with their cable type of receiver and thus have the data transmitted through my cable TV outlet. Next, I enabled and configured the real-time portion of my MetaStock charting program. No major problem here, but I did have to make several phone calls before I got everything as I wanted it with the MetaStock program. This has been a very dependable and satisfactory program. It remains so in real-time. Their support is tops. Editor's Note: Next month we will print Part 2 of Don's article dealing with the data feed, etc.

You May Pay Lower Taxes as an Investor Rather Than A Trader - Glenn Skirvin In the March 1994 issue of CTCN, Ted Tesser talks about how to qualify for Trader status (versus Investor status) for tax purposes. He outlined some major advantages of the Trader status under current tax law. This is great information and I'm sure there are many traders who can take advantage of it and lower their tax bills. However, there is one major disadvantage to the Trader status that should be mentioned. For many of us up and coming traders, it will lead us to want to retain an Investor status. I am speaking, of course, of the dreaded self-employment tax that is reported on Schedule SE of Form 1040. Very often this tax will more than offset any benefits that can be derived from filing under Trader Status. Let me illustrate this with an example. Suppose that Bill Trader is married with no children and files a joint return with his wife Susie. Bill is a fairly successful trader. He's still building his trading capital to the level where he can become an independent, full-time trader, must continue to work his unexciting day job. Bill and his wife's combined salaries are $40,000 per year and they earn $1,000 annually from money market interest income. They own a home, so they can deduct mortgage interest expense of $8,000. In addition, they have $4,000 of deductible taxes which they can also report as itemized deductions on Schedule A of their Form 1040. Now let's talk about Bill's trading results. Last year in the futures markets, Bill achieved profits on trades (net of commissions and exchange fees) of $25,000. Not too bad considering that most other futures traders came out on the losing end. But Bill also had to incur some direct expenses to achieve those profits. Things like purchasing historical and current price data, subscriptions to newsletters and publications, depreciation on his computer and related equipment. Plus the regrettable purchase of an expensive trading system that turned out to be less effective than the methodology he had innovated and tested himself. This added up to $5,000 for the tax year. His "true" trading profit for the year was $20,000. The following table compares Bill and Susie's tax liability under both Trader and Investor status. Notice the major impact of self-employment tax. Table in Print Copy The tax savings from filing as an Investor rather than a trader is $2,056, or 26.4%. Please keep in mind, however, which the illustration above ignores factors such as a home office deductions and deductions for investment seminars which Ted has rightly pointed out can confer a significant benefit on the Trader. When someone claims Trader status, I believe his chances for an IRS audit also increases. He must therefore, be fully prepared to defend his Trader status with the appropriate written documentation. It is important that the benefits to be derived justify this additional audit exposure. I believe there's a threshold a trader crosses in terms of trading income and expenses where it becomes advantageous to claim Trader status rather than Investor status. For many of us small traders who haven't yet hit the big time, the wisest course of action may be to retain the status of Investor.

Response to Requests for Info about Babcock's Systems - George Moldenhauer In the mid 80's, I ran a futures and options brokerage firm that specialized in trading systems for clients. During that time, my firm spent a great deal of money on commercially available systems. We did purchase

260

three systems released by Bruce Babcock. As a result, I have first hand experience with the Slinky system, Advanced Slinky system and the Almost Trade of the Month system. I can't tell you how they are working now. We stopped following these systems years ago .... after losing what I would consider large amounts of money both in real-time trading and paper trading. I did have one member of my organization that spent a great deal of time researching systems. As a firm, we worked hard on reviewing systems for any merit. There were times that we could take an idea or portion of a system and apply it to the market successfully. Our experience at the time, was that the Slinky and Advanced Slinky systems could be traded profitably ... if you would simply fade the system. By fading, I mean buy when a sell signal was generated and sell when a buy signal was generated. If I may offer a bit of advice from someone who has seen just about every system...proceed with caution. There is an old saying in the business; Any system can make money ... if you sell enough copies. While there are some good systems out there, and some reputable promoters, many of these operators are less than reputable. I am not implying that Bruce Babcock falls into this category ... it is a general statement that I am making. You have taken an important first stop by asking for the input of your peers and this publication is a great tool for all of us to share our experiences. Let's all take advantage of this opportunity. If readers have experiences with trading systems, either good or bad, how about sharing?

My Experiences With Various Hotlines & Advisories - Rich Kuyper I've enjoyed CTCN and offer the following thoughts in the 'for-what-it's worth' category: 1994 was my first year trading futures (I have switched mutual funds for a couple of years) and hotlines were one way I spent my "tuition" money. At various times over the past year, I subscribed to services by Ken Roberts, Larry Williams, Jake Bernstein, Nick Van Nice (of Commodity Trend Service), and Colin Alexander (Wellspring Hotline). I also tried several free trials, including a hotline by Tom Bierovic and a daily fax by Linda Bradford Raschke. Here are some of my impressions, keep in mind these are only one person's opinions. Hotline formats and performances can change over time. First, it's important to know what you want from a hotline (or any other service). That is, do you want to be educated, so you can eventually do your own thinking and trading? If so, then a hotline that primarily gives "black box signals" with little or no explanation of why you should buy here and place your stop there is not for you. On the other hand, if all you want are "expert" signals without having to understand "why" (and you intend to take every signal, i.e., follow the system), then a black box hotline may be what you're after. Most of the above named vendors offer a free trial or a money-back guarantee. My advice is: to clarify your right to a refund if you are not satisfied after a trial period; ‚ to record and study (but not make) the trades during the trial period and ƒ then ask yourself if your criteria (from paragraph above) are being met. Although I learned something from all the hotlines mentioned, I learned more from some than others. I'm still listening to Nick Van Nice and Colin Alexander. Nick's company, Commodity Trend Service, puts out a weekly chartbook and Nick guides you through a trade or a lesson each night using the chartbook. I actually quit taking the chartbook when I began subscribing to end-of-day quotes for my PC, but I still subscribe to the hotline. It's very educational and "interactive." Furthermore, among hotlines I've tried, it's an 800 number--once you subscribe, the call is free! (If your hotline is not an 800 number, add $240 or so per year to the subscription cost--figuring a buck a night for twenty trading days a month).

261

Colin Alexander wrote a book (Capturing Full Trend Profits in the Commodity Futures Markets) which I found very useful. You will get more out of his hotline if you have read his book--the trades tend to follow the material in the book, very educational. I have no connection, other than as a subscriber, to anyone named above. I also have nothing in particular against those mentioned, but not discussed--for one reason or another, I just moved on. One final note on something I've found very helpful and enjoyable. I have a phone taping device and I record the hotlines every night. On Saturday morning, I sit down in front of my PC, click up the appropriate charts and replay the week's trading advice, stopping the tape at my leisure to study this or that concept, and to compare my logic, the guru's logic and the outcome, so far, of the advice given. I've learned a lot this way. Hey, maybe I'll start a hotline. For now, I enjoy exchanging useful information and I can be reached at phone or Fax 303-449-1074.

Fine-Tune Future Trades by Reviewing Past Wins & Stops - Jim Burke What I notice most of articles or from conversations with other traders, is they're more concerned with where to get in, how much money does it make and drawdown. Also, when they go back to study their trades, they only mention their losing trades. If I follow my written set of rules, I understand my losses, but I spend three times as much time analyzing profitable trades. I want to fine tune future trades by reviewing what went right on the winning trades. What do I look for on these trades? I look to see how many tics were against me on the past 100 winning trades before they were profitable. Did I follow my written rules? Do I need to revamp my rules to reduce my protective stops and always trying to reduce my risk? I want to have my stop within one tic of being stopped out. One can enter the market with volatility stops, but that doesn't mean you need to exit with them, same goes with pivot points, retracements, channel bands, apex of triangles or darts. I seldom risk more than $275 unless I'm trading coffee or cotton where it's just a little more. The trade is going to go my way or I want out quick and this isn't my intraday trading, it is my long-term trading! I put in my orders in the morning and check my answering machine at night. Trade only trendable markets, Eurodollar, bean oil, copper, cotton, hogs and Canadian $ to maintain low risk trading. Trade every trade as if your life depended on it. If you want action go to Vegas. If you are on a hot streak of winning trades, reduce the number of contracts you are trading. Don't increase it, because when you do have a loss it will be when you are trading the highest number of contracts and possibly lose more than before your streak started. Don't take any trade, discover first in your testing if the risk is worth the reward of the trade.

From $200 to $1,500,00 Due to Leverage - Insider's Profit Matrix - Wayne Roberts I nominate Frank Richards "The Insider's Profit Matrix," (Coldwell Publishing, 12400 Ventura Blvd, Studio City, LA 91604) for the Trader's Hall of Fame Library. If you are the kind of person who collects books on trading, you'll want this one. If you're not the kind, forget it. This little book is basically about trading commodity options, but the terms "Beta" and "Time Value" never make an appearance. No computer is needed and monitoring a quote machine during trading hours is not necessary. Over a five-month stretch in 1979, Silver went from $10 to $40, an increase of $30. Mr. Richards shows how a total investment of $200 could have been turned into $1,500,000 by the time prices reached $17 or a price gain of $7, if you know how to do this. If you are a master of parlay, I guess you don't need the book. This book contains the most awesome display of leverage, also called compounding, parlaying or pyramiding I have ever seen. Not to say that this trade was actually taken, but it could have been.

262

In three trades, he went from a total out-of-pocket investment of $200 to a gross return of $1,500,000. Each of the three silver trades made a gain in price of $1.00, which equates to $5,000. In other words, if you had been long one contract silver on all three of these trades, you would have made $15,000.

Comments by C.J. Casebeer Chester Keltner's Minor Trend system has been a good one for years. Good for Philip Toh! How do we buy Michel Arimoto's book? Editor's Comment: Many other members have also asked about Arimoto's $39 Book. It's the Clermont Ad in Feb. issue (last ad on Pg-14).

ADX Experience - John Bowley Thanks to Adam White and Giampaolo Bulleri for their ADX thoughts, which agree with my experience. The alternative VHF is more sensitive like DX. Either can be smoothed with a moving average of less than the 14 used by Welles Wilder for ADX. They can then be used to show the beginning of a trend when ADX is less than 20. I still like ADX to stay with a trend until ADX starts down, especially from above 40.

Member Requests George Moldenhauer would like input from members that have firsthand experience with the Prime/Line system marketed by Jules Greenstein out of Marina del Rey, CA. Phil Baker likes reading about how others trade and how to make a trading system and use it, etc. He would also like to read about how "if possible" to forecast future turning points. He would also like information on Investment Research Co., Richard Tolkeim and his Pork Belly Trading system and about Bradley F. Cowan and his books. Jim Cook of England wants to know the address of Keltner Statistical Service so he can purchase the book, How to Make Money in Commodities by Keltner. Also, what software has the KeltnerBands in it?

Resource Guide & Editor Reviews There was no room for editor reviews in this issue because of all our great articles. However, next month we are planning reviews of Dave Reiter's Trading Manual, The Foundation for the Study of Cycles Software Program, and other products. A number of members were unable to reach Ted Tesser at the number published in March CTCN. I spoke to Ted and he said members could call him at 1-212-883-1004. Ted also said he is available for hire as a tax CPA to members anywhere in the nation.

Editor Comments Here's the Keltner Channel computer code, as requested by many members. It was submitted by Anonymous Trader and it is believed to be in the Public Domain: INPUTS : PRICE (CLOSE) , LENGTH (9) , CONST (2) ;

263

VARS : CENTER (0) , UPPER (0) , LOWER (0) , AVERANGE (0) ; CENTER=(CENTER * (LENGTH - 1) + PRICE) / LENGTH; AVERANGE=( AVERANGE * (LENGTH - 1 ) + HIGH-LOW) / LENGTH; UPPER=CENTER + AVERANGE * CONST; LOWER=CENTER - AVERANGE * CONST; IF CURRENTBAR > 25 THEN BEGIN PLOT 1 ( UPPER, "TOP" ) ; PLOT 2 ( CENTER, "CENTER"); PLOT3 ( LOWER, "BOTTOM" ); END; Some additional comments relating to Bob Pelletier's fine article on Pg-3: Others, including your Editor, have also talked about how unfair and of little real value the S&C Magazine Reader's Choice Awards are. This is particularly true as a result of all the media hype and heavy advertising the "winners" do as a result of their high ranking. These "awards" are little more than an indication of the highest sales volume products (and also not by coincidence, the heaviest advertised products). Many excellent products (perhaps superior products) who do not advertise (or advertise lightly) in S&C Magazine end up with few (if any) votes. It's very unfortunate many traders buy products, services and systems based to a large degree (or even 100%) on a high third party ranking, without realizing the truth about the ranking process. This is also true involving other concerns, such as the Futures Truth rankings, but for different reasons. An article in an upcoming future issue by a knowledgeable CTCN Member will discuss this subject in detail, with emphasis on the Futures Truth rankings. For more information on the S&C Awards, please refer to the Aug 1994 CTCN Pg-1 and Pg-8-9. An Editor question for S.F. from Europe on Scale Trading, Pg-5: How does one define "historic low levels" and evaluate "bullish fundamentals?" Fortunately, S.F. has agreed to answer these important questions in next month's issue. Also, about the two friends Anonymous Trader has referred to who do not make the money he makes, don't be discouraged! Perhaps the two friends referred to in S.F.'s article on Pg-6 are lacking discipline, patience or other attributes. Of course, many CTCN Members do not have those negatives, so they're more likely to be successful. I don't know much about tax laws, but no doubt Glenn Skirvin's interesting article on Pg-10 raises some complex tax issues. However, you should know I have received letters and phone calls from CTCN Members who reported they saved considerable money thanks to Ted Tesser's article in the March issue. One trader in particular said he saved $3,000 by showing the article to his accountant as his 1995 income tax return was being prepared. About George Moldenhauer's comments on Pg-11, Bruce Babcock is one of the most knowledgeable experts in the commodity business. He contributes a lot to the business. He has authored one of the finest books ever written on commodities titled The Dow-Jones Irwin Guide to Trading Systems. In addition, most of the systems he sells are priced low and many buyers find them beneficial by virtue of getting ideas from them, even if they prove to be unprofitable or not suitable for their trading. Issue 25. More Details on How I Successfully Daytrade the S&P 500 - S.A.T. The Anonymous Trader I understand many traders continue to have questions on my "methodology" of trading. One big question that keeps coming up is why can't your trading be 100% mechanical? I have already answered this question

264

in April's issue, but I'll try to expand a bit more in this issue. (Order the April issue from Commodity Traders Club News, if you don't already have it)...(also see Gary Smith's article in 2/95 CTCN). Trading is not a science, it's a discipline. Just like any discipline, i.e., (martial arts, sports, art) there is a certain amount of basic fundamental or mechanical expertise that needs to be achieved. However, to be successful or above the masses, there has to be more than just basics. A person needs to become totally committed to being the best. One must be automatic in action. One must develop a so-called sixth sense or intuitiveness (I call it lots of experience) for their discipline. Take a sport like basketball. Most guys can dribble, pass and shoot basketballs. So why aren't they all pros. Why aren't all pros like Michael Jordan? It is the application and the experience of dealing with the basics that sets one apart from the crowd. If you want to be a trader, that's exactly what you'll have to do, is work hard to be good. Being a trader requires your responsibility for your results. People who want a 100% mechanical system, really want an excuse to shift the responsibility for winning or losing to their system. If it was that easy, everyone would have a 100% mechanical system and be sitting on the beach retired. The fact is, you get paid for your expertise as a trader. The better a trader you are, the more money you make. All successful traders use their experience and feel for market action - even if they are mostly mechanical. My entry is mechanical, my stop is mechanical and my stop movement is mechanical. What is not totally mechanical are my exits. I leave some degree of experience to do this. Trade selection is up to me. For example, I might have a buy signal, but the way the market is acting, I might not take it. If it doesn't feel right or look just right - sometimes I miss a good trade. I don't take every trade that comes down the pike. If I do decide to take it, I'm mechanical about entering, placing stops, moving stops and exiting to a degree (this is not 100% mechanical). The market is not mechanical - 100%. However, it is fairly predictable 60-80% of the time. This is what you as a trader gets paid for. How well you can predict, anticipate and recognize market moves with a methodology that puts the risk reward odds on your side. Only experience can improve this, and no mechanical system can sense these things. That's why! Also, some readers asked what a pivot is (how I define it). A pivot is a bar that has one bar on each side, lower or higher than the middle bar - very simple. Chart in Print Copy CTCN readers have asked about my commissions. As I've stated before, I pay $20 per round-turn, all fees included. I use Refco as my clearing firm and I do not have direct floor access. I use a trading desk and they give me my fills while I hold most times. It is not necessary to have direct floor access. I understand some say, it is impossible to trade without direct floor access. I say it is a hindrance. The guys at my trade desk know me and how I trade. They watch out for me and handle any problems and even correct me sometimes when I say the wrong thing. Like buy instead of sell. It happens sometimes when your thinking quick. The guys on the floor are very rough and intimidating sometimes, so my trade desk shields me from that. Readers are asking questions about bar spacing, colors of charts, Keltner formulas, floor brokers, data feeds, etc. Don't waste so much time fretting over these things? This stuff is all a bunch of secondary crap. It won't make you any money. People need to concentrate on learning a methodology. Practice and gain experience, then work on executing properly. These things are important.

The Inner Dimension of Trading - John Brown

265

Certainly, much has been written about the mind being the key to success in trading futures markets. However, I find it remarkable that so little has been presented in terms of specific techniques traders can utilize to improve clarity of mind, focus, discipline, confidence, positivity and optimism, energy levels, etc. These are the qualities necessary to actualize the full potential of our trading abilities. Probably most would agree that the degree to which these qualities are developed will have a major impact on the trader's performance in the markets. As a day trader, I feel that the need for optimum mental and physical skills is greatly accentuated. The intraday venue demands faster reaction time, sharper acuity of the decision making process, precise execution of trading rules in a narrow window of opportunity. The ability to quickly recover from a loss, take the next signal, pull the trigger, take all signals, deal with rapid fluctuations in the markets and equity, maintain the discipline to exit a losing trade without hesitation, never "freeze up," etc. In working with traders during my trading seminars over the years, I have found that it is almost a universal experience that we all have to deal with these same issues. It does not appear there is any easy way out -the skills don't come just by recognizing the need for having the skills. I believe it is necessary to work on the skills of personal development directly as opposed to merely focusing on developing trading strategies. It would be useful for CTCN readers who have developed the internal skills for successful trading to share their knowledge and experience, as to the techniques they have employed to refine the real tools behind the trading process, the mind body integration of the trader. I have practiced Transcendental Meditation for the past twenty years. This is a very simple mental technique practiced twice daily for twenty minutes. During the practice, the mind settles down to a state of great clarity and alertness, while the body gains a very deep level of rest. Following the practice, the mind is more clear, with the body full of energy and less restricted by stress. I feel this is the ideal state of mind and body from which one would want to enter into the markets. Personally, I cannot imagine exposing myself to some of the crazy things that can happen intraday in the S&P, Bonds and Swiss Franc, without this preparation. I would highly recommend the practice to anyone looking for an edge over the vast majority of traders who respond in the typical panicky, stressful manner -which some feel is actually the main driving force behind the chaotic nature of market movements. I have also participated in the martial arts of Kung Fu and Tai Chi for the past 25 years. I find them very useful for developing the discipline, persistence, positive energy and resilience which are so valuable for the daytrading environment. The "warrior spirit," the unshakable resolve to stick with your system or trading plan, can make all the difference in the world when volatility picks up intraday. Of course, there is a whole area of influence from what we take into the mind and body which might drastically affect trading performance as well. It is recognized that the negative effects of drugs, alcohol, wrong foods and environmental pollution, all severely impair our mental and physical capacity to deal with stress and function effectively. Someone who really wants to go all the way with their trading, should probably consider diet, exercise, routine, etc. Perhaps the environmental influence is one of the least obvious and least recognized areas which we can enhance for better trading performance. Most daytraders and many short-term or position traders spend much time in front of computers. There has been an abundance of evidence on the negative effects of electromagnetic radiation from computers, monitors, backup power supplies, fax machines, etc . All these electronic devices usually surround active traders. Have you ever noticed how sometimes you feel dull and drowsy, or hyped up, impatient or irritable, terribly bored and depressed with a stiff neck and creaky joints, headache and eye strain, or any other emotional or physical states which come up after some time sitting in front of the screen? I've noticed a variety of these traits myself and among many traders, who might attrib "bad moods" or negative attitudes to some recent trading losses. It might be worthwhile to consider the alternatives that these negative inner experiences may be a significant factor contributing to the losing trades.

266

Recently, I learned of a couple of products which are reputed to alter the field effect of electromagnetic radiation coming from computers and electronic devices, to create a more "coherent" energy field. I had setup a new much more powerful computer with a much bigger screen, feeling "wiped out" and "zapped" by all this hardware. I read about some convincing scientific research on these devices done by the American Institute of Aeronautics and Astronautics Research, the Moscow Brain Research Institute, and other research centers. I learned that the offices of the International Monetary Fund had the devices installed in all of their computers and reported positive effects from their employees. The devices are quite simple to install -- a floppy disk installed on the hard drive and a power strip in which to plug in electronic components. I began using the "Quantum Byte" two weeks ago and have been quite happy with the results. My computer screen no longer crackles with static electricity when touched. I no longer feel the draining, agitating and irritating effects from my new electronic monster. The company that developed these devices operates in my hometown. I asked about the possibility of getting a discount for quantity, as this might be of interest to many traders.

Methods I Use to Help Me Become a Successful Trader - John Moore After trading futures for nearly 20 years, it seems to me a discretionary trader that has years of experience trading and that can control his/her emotions can do far better trading than any mechanical system. Granted, very few people have the experience, focus and emotional control to watch a number of markets every day, identify trading opportunities and act without emotion. Some things that helped me move toward becoming a successful discretionary trader are: concentrating on no more than 4 or 5 markets; looking at monthly, weekly and daily charts each week while being aware of the developing fundamentals and psychology in the markets I'm following. I write down what price levels and time period I feel offer a trading opportunity and review these each night. This helps with the problem of failing to put on trades due to fear, not paying attention, etc. It helps to keep an open mind and not waste time trying to predict exactly where and how far a market will move. Focus on possible opportunities and keeping losing trades small. Try to take money out of the market constantly. Don't try to make a killing on one move. Focus on opportunities and when you sense a trend, go with it. Trade to win, don't be a perfectionist. Try to stay somewhat detached from a trade after you put it on. This helps keep emotions in check. All discretionary traders are unique and must spend the time and effort necessary to develop their unique trading style to make consistent profits. CTCN has many interesting articles by fellow traders. I find it full of positive and useful information.

More on Scale Trading - You Can't Lose Trading Commodities - SF from Europe I feel more like a professional book-reviewer now than a trader/investor. The idea of my earlier letter was to simply defend Robert Wiest's book titled "You Can't Lose Trading Commodities". If book is used correctly, the method is far from high-risk, and to suggest that you as editor of CTCN should read the book before commenting upon it's contents. I forgot to mention that the system can be used to play the short side, but it does then become very high risk. Robert Wiest strongly advises you don't try it, I agree. While there are levels below which many commodities cannot realistically go (i.e., their cost), they can go up for years if demand continues to exceed supply, and would exhaust the equity of any trader. Soybeans at $5 would be very attractive to scale from the long side, because they simply can't drop very far. If anyone wants to be hyperconservative and

267

construct a 100% risk-free scale, the price can't drop more than $5, can it? Set your scale for this if it makes you feel better. Most of your account equity will sit in T-bills forever, but you'll never go broke. On the other hand, beans at $10 might look attractive from the short side, but why can't they go to $20? They could go to $40. At this moment, copper looks vaguely attractive for scaling from the short side (it's historically high, all the bad production and high consumption news seems to be in the price, and it has bounced off its record high levels many times lately), but this would be extremely dangerous. If anyone wants to bet it won't go to 160, or even 180, he's a brave man. It probably won't, but it might. It could go higher still. Scaling from the short side is possible, but suicidal in my view. There have been some very valid points raised. Clearly, many people trying this method run into trouble, or by now word would have got around that this was idiot-proof, and everyone would be doing it. It's not foolproof. Will not generate huge profits, and is often boring! Though it works, it can be very frustrating. I suspect that most of the people who fail, do so because they run out of patience. It is easily possible to spend a month with open positions in five commodities, all of which show paper losses, without opening or closing one trade, it does lack action. If you just want action, Las Vegas is much cheaper for the average trader than the futures markets. If one succumbs to the temptation to play in too many markets at once, the margin calls will start coming one day, and the unfortunate trader will have to liquidate all (or most) of his positions, probably in each case near to the bottom(s). Incidentally, I do find it hard to resist overtrading the system occasionally, and now try instead to get my "action" by betting just a few dollars a week on soccer. By the way, is gambling still illegal in some states in the USA? Regarding working out whether something is cheap by historical standards, this is quite simple. The fundamentals are much harder to follow. The easiest solution I have come across to the first problem is in the book. (Sorry if I'm starting to sound like an advert. I stand to gain or lose nothing if you or ten thousand other people do or don't buy this book). Robert Wiest takes the high and low of the last ten years (or so), splits it into thirds, and only commences scales within the bottom third. This is highly over-simplified, but readers get the idea. If you want to know all the details, you know where to look. Getting hold of, and more importantly interpreting, fundamental information, is much harder. I do most of my trading through a discount broker in the U.S.A. (blatantly ignoring Robert Wiest's advice). I put enough business through a full service brokerage in London to get the regular reports, numbers, storage details and so on. This info can help me decide the likely future direction of something based on supply and demand fundamentals. I try hard to do this interpretation myself, for two reasons. Both important. First, if you listen to the advice of someone and just blindly take it. You not only learn no lessons if it goes wrong (you don't even learn anything if it goes right), but you are subjected to any bias in his opinion. For instance, if an analyst is very long crude oil, he will likely scrutinize a report for any piece of bullish information, while finding reasons to exclude, override or flatly deny anything bearish. Secondly, if you learn to do something like this method, you will have a skill that will make you money in the future, regardless of whether your latest guru dies, gets locked up, or simply starts misreading everything. Such ability, to me, is just priceless. So, working out whether something is historically cheap is quite easy. The rest isn't so simple. I can't give you a mechanical way to do this analysis. I don't even know if there is one. Although far from elementary, fundamentals on crops are not so difficult to fathom out as currencies, since sentiment will override everything in these worldwide financial markets (didn't everyone say the yen was fundamentally overvalued at 97/98? I wonder what they thought when it hit 88 this week). For crops, you look at the current carry-over levels, estimates for the next crop, probable export and/or import levels, and so on. Don't rely on the weather in Iowa in June. That's guesswork, but of course you must remember it's a crucial factor. If stocks are enormous, the price will probably stay down whatever happens to the weather this year. There might be no rain, there might be three feet. If stocks are low and planting levels are low, the price will probably go up enough for a scale trader, even if the weather's perfect. If it isn't perfect, the price will soar up. On the other hand, if stocks are high, the next year's crop estimate is high and the price is at the top

268

of its bottom third, go and find something else, because the likely direction is down, unless the weather is awful. Unfortunately, it's not usually quite this simple. Again, if it were, everyone would do it. Read the book, you'll see that you don't need the price to go up a mile and stay up. You just need it to hop out of its bottom third for a brief period (probably a few minutes will suffice), and you're out of your scales, with profits, and can look for something else to buy (maybe the same thing, if the price drops back again). For people who are willing to simply take the advice of Robert Wiest, he publishes a newsletter every couple of weeks or so which might help. I get this newsletter (along with many others) to help broaden my information base (and I like reading newsletters). I do not take any of his recommendations as gospel. I like to form my own opinions, and create my own scales. At the end of the day, the only person I trust is me. I don't trust some chap on the other side of the world to whom I have never spoken, despite how nice a man he seems to be (from the tone of the letters), and regardless of how grateful I am to him for writing his book. Incidentally, his newsletter includes a guarantee account, which as I understand it promises a return of 25%. At some point in any one year period, or you get your money back. I don't follow this account, so I don't know how he's doing. I think I read somewhere, presumably in his letter or book, which he's always offered this guarantee, and has had to make refunds only once in many years of publication. I know he was hurt last year by some bad information on live hog slaughters, and has been forced to stack up umpteen contracts with big paper losses, but he seems to cash in plenty of winners elsewhere. We all know that the price of hogs will go up again eventually, don't we? Even if it perhaps drops a bit first, it will go up soon. No farmer in his right mind is currently increasing the number of pigs he has, while the low price of pork and bacon is presumably starting to move the consumption figures higher. Furthermore, I bet he's cashed several oscillation profits on the recent price moves up. I have stated before, my reasons for wanting to trade off my own bat and can repeat them here. I know Robert Wiest is much older than I am (he was flying in the war), and I intend to scale trade long after he stops writing his newsletter. I can recommend that anyone with patience, read this book. I think it will provide entertaining reading. Even if they later reject the ideas as too cumbersome, boring, frustrating or whatever. I doubt if Anonymous Trader will be terribly impressed by it, nor should he be. But I think many people would benefit from it, and I heartily recommend it. If they want to subscribe to his newsletter, that's up to them. I'm afraid I forget how much it costs, but it wasn't a huge sum. It will probably help beginners, and certainly helped me to get started. I also maintain that the goal for most people should be to trade profitably and independently. I'll never attain the dizzy heights of $1,200 per day, but as a trader, I am a one in ten!

For the Most Part Vendor Prices are Fair & An Incredible Bargain! - Bob Aughey There's always lots of discussion on the subject of vendor prices, particularly trading system software. While it's certainly true there's some overpriced garbage out there, I think for the most part, pricing is fair and often an incredible bargain. I have heard the argument that most trading system software programs are less complex to develop and program than the average word processing program, so therefore, it should cost the same or less. I think that there is an important difference, not the least of which is that software designed by large corporations for mass distribution is just that, mass distributed. Volume sales will always allow for smaller gross profit per unit. What I feel is the more important issue to support higher prices for trading software is the disclosing of valuable secrets... trade secrets. Why people sell their secrets is another subject for discussion, but personally, I think that plain old pride of authorship is the main reason. But back to the subject here. An incredible amount of work goes into

269

creating a quality system that can be marketed to the trading public. That is the trading public, not the general public. After hundreds or even thousands of hours of development and testing, is it realistic to think that someone should be able to buy the product for next to nothing? Trading system vendors sell their products to a very tiny slice of the software end-user pie. You have to wonder why anyone would devote so much time, money and expertise to market a product to such a small audience. We are fortunate that some do. The next time you power up your PC and call up your favorite trading system, analysis or toolbox program, and at the end of the session you are armed with trading signals in which you have confidence and that have resulted in making you money in the toughest financial arena in the world, take a moment to reflect on the fact that system vendors have to make a living, just like traders and everybody else. Lastly, when you consider the purchase of any software product, do us all a favor: Do your homework! Ask the tough questions. When you are satisfied, pay the money. You will remember the quality of the product and the support long after you have forgotten the price. Remember that knowledgeable consumers are always the best defense against Holy Grail merchants. They also make the best customers. Editor's Note: After hearing about Bob's article (which appeared in another publication), I contacted him about it. I found what he had to say very valuable and true...and something rarely publicly stated before. Bob authorized running it in CTCN.

Opinion on Vision Ltd Broker - David Sligar I'm writing to convey my appreciation to the staff on my Vision trade desk. I've been an active customer for several months, and have been very happy with their handling of my account as well as with their courtesy and pleasantness. I'm a relatively new trader. I have a separate career in another profession as well. At times, either because of my inexperience or my level of distraction, I have placed orders awkwardly or mistakenly. For example, I have given incorrect order prices. The trade desk people have always stopped such orders, waiting for clarification, saving me large amounts of money in the process. In those instances, they have gone beyond the call of duty, and I appreciate it. Thanks to all of them.

Opinion on Prime/Line - Mireille Staub Editor's Note: This is in response to George Moldenhaur's request in April's issue for information on Jules Greenstein's Prime/Line System. I purchased the Prime/Line system from Jules Greenstein. I learned it and used it for a while. It does offer an interesting approach to Fibonacci levels, definitely has something to it. I am not using it at the moment for various reasons. The two main reasons are: (1) it's DOS based and reads only ASCII files; (2) I use other things, including my own, that fits my trading style better. Therefore, I am willing to lend the whole thing to George, so that he can make a firsthand opinion. The software has a restrictive license and a lock. I would need to get authorization to assign the license (I know how to work the lock) if George is interested. Let me know, and where to send it.

Review of Nature’s Pulse, Part 2 - Glenn Skirvin Editor's Note: Glen's complete review was too long to place in this issue. Therefore, we have published Part 2 as this is the part most members would find of greater value. His complete review (along with some

270

other info on Prime/Line) has been made into a Special Report, which is now available to all members upon request. In Part 1 of this article, I discussed the features and capabilities of Nature's Pulse (NP), the methodology employed, the program documentation and the technical support that is available from Kasanjian Research. In this second part I will first offer a few critical comments about the features and capabilities of NP. Then I will discuss my experience with the program in actual trading situations and will delve into the question of whether it can really call market turning points with enough consistency to make it a reliable trading tool. 3. Suggested Improvements to the Program First, while I feel that NP is an excellent tool for discovering and documenting cyclical relationships in markets, I also believe the program could use a few enhancements that would make it even more useful to traders. The program currently does not allow a user to save accordions that are set up for a particular market. Even if you save key dates in a date file, you can only access them for studies, not for use with accordions. I have ended up saving my dates in an Excel spreadsheet so that I can go back and re-create my accordion displays when I need to. How much more convenient it would be if the accordions themselves could be saved by NP and then recalled when needed by the user. The program would be more useful to traders if it included some screen drawing capabilities. By this I mean the ability to draw trendlines, vertical lines, horizontal lines for support and resistance, and text on the chart, to name a few. A further recommended enhancement would be the inclusion of some technical indicators that could be calculated and displayed on the chart, particularly the kind that Messrs. Kasanjian and Kwong use themselves to make trading decisions at energy points. If both of the above enhancements were implemented, the user could almost "do it all" within the NP program instead of having to switch to another technical analysis program to do part of the work. The ability to write notes on a chart would alone be a great feature addition to the program as far as I am concerned. Hopefully many of these suggestions will be implemented in the upcoming Windows version of Nature's Pulse. 4. Practical Application to Trading Situations Now let’s talk about the practical use of the program in trading. Please keep in mind that what I am about to say here reflects only my own experience with NP. I will be the first to admit that I am a novice user of the program and have a long ways to go before I will be anything close to an expert. Others who are more capable and experienced traders than I may be able to share a completely different perspective of NP. First of all, let me say that anyone who expects NP to magically pop out accurate change-in-trend dates for a particular market is in for a rude awakening. This program is a tool that takes time and practice to master. When I was still deciding whether or not to purchase the program, I asked Ed Kasanjian what percentage of NP forecasts turn out to be accurate. The response I got was 65%-70%. Ed’s definition of an accurate forecast is a date that falls within one day of an actual energy point. I don’t dispute Ed’s accuracy percentage, especially given the fact that he has a pretty good track record with forecasts in the Pulse Rate newsletter, but I am reminded of CSI President Bob Pelletier’s statement (Jan 95 issue of CTCN) that, depending on how one defines "turning points," anyone can predict the next turning point for a market within three days about 70% of the time just based on pure chance. Ed’s success criterion is much tighter than this, though (within one day instead of three). Moreover, he has successfully called some major trend changes for certain markets in a manner that appears to exceed what could be expected through pure chance. In my experience with NP, I have encountered several difficulties in applying it to chosen markets. These revolve around the fact that the choice of pivot points and multiplier or static cycle files for a particular data series can be quite subjective. You'll find through exploration and experimentation that numerous cyclical relationships exist in any given market, and these can be combined in a multitude of ways to yield a variety

271

of "answers" about when the next "energy point" (EP) should be expected. I’ve also noticed that NP cycle projections don’t always form nice neat little clusters to indicate certain dates as the "obvious" choices for a trend change. For example, when I did my personal analysis of the S&P 500 using about 12-yrs worth of weekly and daily data, the results I came up with produced future EP dates that were different from those published by Kasanjian and Kwong in Pulse Rate. Based on their experience and expertise with this methodology, I tended to defer to their analysis rather than my own although I felt that the pivot points and multiplier files I utilized were no less intelligently selected than theirs. This phenomenon has created somewhat of a confidence crisis for me when using Nature's Pulse. How do I know when I’ve done the analysis properly and come up with the "right answer?" The thought has occurred to me that maybe I am having difficulty because I am focusing purely on the time element in the markets rather than combining time and price the way Robert Miner and others do. NP gives you the ability to analyze price separately from time, but they cannot be combined per se. I also understand that Mr. Miner has developed his own program, Dynamic Trader, that enables a trader to analyze markets in a manner similar to the way NP does. I don’t know much about this program but perhaps another club member or Mr. Miner himself would want to comment about it. In conclusion, Nature's Pulse is a well-designed, well-supported and easy-to-use program that will definitely facilitate ones understanding of the various cycles at work in a given market. There are many satisfied users of NP that can testify of its contribution to their trading profitability. As for me, I still have more practicing and experimentation to do with the program before I will feel confident enough to base real-time trading decisions on its prognostications.

Response for Info about Bruce Gould's "Money Machine" System - Stephen Sayre It's my understanding that several readers have requested information on the "Money Machine." After purchasing Bruce Gould's "Money Machine," I have found that it has lived up to its expectations, having more than paid for itself in net profits. It is a simple, but effective system. This is not a method conducive to daytrading, but rather for the patient position trader, as it takes a certain amount of time to setup. Dr. Gould responded quickly and completely by fax or letter to any questions that arose when trading. However, I did find it awkward not to be able to speak with him by telephone, since no number was ever proffered before or after purchase. Many traders may be reluctant to buy a system without speaking with the vendor. I purchased based on the strength of his writings and reputation. I highly recommend any of the books written by Bruce Gould. They all contain great nuggets of insight and information regarding the markets from his many years of involvement.

CSI is an Excellent Data Service, but they to have some problems - Terry Davis It is interesting to read Bob Pelletier's comments bemoaning the fact that contests are not fair. Grow up life isn't fair. You are selling a good product at a fair(?) price. I have dealt with CSI in the past and have found their data service to be excellent. However, if I had to check a box for customer service or help they give over the phone it would look like this: ¨Rude ¨ Ruder ¨ Don't call us, we'll call you. For billing problems it would be: ¨ I'll get back to you soon! ¨ You didn't talk to me two weeks ago ¨ Why are you complaining that we double charged your credit card, again. CSI is a good and reliable company, but like so many others who are industry leaders, they have internal problems just like the rest of us.

272

President of CSI Responds - Bob Pelletier Thank you for giving me the opportunity to respond to Terry Davis' letter at the time it is printed. I appreciate Mr. Davis' kind words about the quality and reliability of our service and I wish him luck with whatever data service he is now using. I think we agree that the public forum is no place to air private gripes and billing disputes. I have urged you to print his letter, because it touches a chord that is important to me and to many of your readers. Mr. Davis' letter strikes at a very vulnerable part of our organization. Our customer service and billing staffs are required to field hundreds of call per day; ranging the gamut from cheerful orders to aggravated tirades. My mail often includes darts and laurels for both departments, sometimes with dissenting views on the same staff member. Despite some evidence to the contrary, the CSI customer service and billing staffs strive to resolve every problem and satisfy every caller. As Mr. Davis' letter so poignantly reveals, they do not always succeed. When I read Mr. Davis' unhappy letter, our service manager called him to see what we could do to help and to apologize. I will not offer a list of boxes to check describing his response, but I now find it easier to understand how, on a personal level, our staff may have been less than eager to help. Nevertheless, I will not tolerate rudeness nor impatience from our staff. I often take complaint calls myself in helping to solve problems and disputes. I am sorry I did not have the opportunity to speak with Mr. Davis personally about his problems. Some troubles mentioned were caused by the recent strong demand for our services. Because our prices are among the lowest in the industry and our data products rank among the best, we have more than doubled our customer base in only the last three months. The explosive demand has temporarily overtaxed our customer service resources. We have since increased our staff to better accommodate our growing customer base. We have also made some staffing changes in customer service and bookkeeping, which we hope will result in greater communications and better relations with all our customers. Unlike our competition, we offer two-shift customer service with Saturday help. We will continue to add additional assistance in these areas as necessary to keep up with demand. It is our goal to keep our fees low so that data users will come to us for good reliable service. Hopefully, as the public becomes more aware, the natural tendency will be to come to CSI for a superior product, a fair price and ever-improving service. Thank you again for the opportunity to answer Mr. Davis' concerns and thanks to him for bringing these past problems to light. We consider it a challenge to prove you wrong! If any CTCN readers would like to receive a free subscription to the CSI Technical Journal, please call our Marketing Department at 1-800274-4727 or 1-407-392-8663. I guarantee they will be treated courteously and with great respect.

Don McCullough on Real-time Data-Part 2 At the start, I subscribed to Signal's delayed data and futures markets only. This cost me $60 a month and the Chicago markets arrived on my screen about 10-minutes delayed and the New York markets about 40minutes delayed. Now that's delayed! A few days ago, I changed to bonafied real-time and only the two Chicago futures exchanges. This is much more expensive than delayed time and now I pay $355 a month plus $31 a month for my cable TV service. I got the cable TV hookup mainly for the markets and receiver to connect to. That's a total of $386 per month for my real-time data. This means I'm serious about the markets or I sure as hell better be! That delayed data was a real pain. I was constantly having to guess what the bond market was doing 10min ahead of what I was seeing on my screen. I had a little help from Signal's free Dow Jones Industrial

273

data that was real-time. When the DJI looked like it was strong and going to get stronger, I would sometimes buy. I also would call my broker's quote service for the latest price before making a trade. The New York markets being 40-minutes ahead of what I was looking at on my screen were totally out of the question! I'll start trading seriously using real-time charts in a few weeks. I have to get more money to my broker, so I can afford one or two S&P contracts. It's a struggle finding out what markets you want to trade. To me, the S&P charts the best and offers the most potential, so my choice is easy. I have spent years going over charts of all the major markets as far back as the 60's, so my selection of the S&P market is for good reasons. By the way, and I won't tell you why, I think the best chartists are in the S&P market. I nearly forgot to include an important problem I had. I don't think it's very serious now, but when it occurred, I was not happy. Seems about once or twice a year the cable TV companies do what they call a "cable sweep." That is, they check out the reception in various portions of their total area. One morning about 5:45 a.m., my MetaStock program told me my reception was poor. I immediately turned on my TV and had no reception on any channel. I then called the cable company and was told there was a "sweep" going on in my area. I lost about 14-minutes of bond market data because of that sweep. There have been a couple of other 1-minute or so lapses in reception and some rather lengthy ones during non-market hours. I don't think this is reason for anyone to not use the cable TV hookup. I would prefer satellite reception and may eventually change over to it. Even then the Signal people tell me in cloudy, snowy and rainy areas satellite reception can fail at times. Here in California, I expect satellite would be the most dependable. Editor's Note: Data stream interruptions are a major problem with real-time tick data. It seems to occur from time-to-time with all services, cable, FM, or satellite. The data flow interruption results in data gaps, which then negatively effects technical analysis, such as cycles, trend-lines, etc. Hope this article will be of some help to you soon to be real-time enthusiasts. If I'm in error about anything, let me know. It'll be my gain. I'm trying to find a book either titled or about Drummond Geometry. I read about it in one of my better market books and think it may be helpful with the markets. Can subscribers help me locate it?

Opinion on Richard Tokheim's Pork Belly Trading System - Stephen Sayre Rich Tokheim has a nice, effective system geared to the short side of the pork belly market. If you're a belly trader, this may be one you will want to add to your arsenal . . . not conducive to daytrading. Rich will take time to visit with you on the phone and explain his philosophy. Since he offers an array of trading systems, you may want to give him a call at 1-402-572-0377.

My Observations & Views - C.J. Casebeer I would like to make some observations on the April 95 issue, which was a good one. Thank Anonymous Trader for giving methods of daytrading. This is the way to make money for those who don't mind sitting in front of a screen 6-hours a day. I have never tried it, nor think I want to be tied down and under that kind of pressure daily. I wonder if George Moldenhauer would give us his "few simple calculations that will give a directional reading for the next day." He is right on about having a winning approach along with discipline.

274

Dave Hutton of Australia sure gave good info on our minds handling no more than seven pieces of info at one time. Mine is much less! He certainly keeps his trades short - 1 to 3 days and 3 to 10 days. His question of $15-20,000 drawdowns, no matter how large the profits, is exactly what Robert Wiest (You Can't Lose Trading Commodities book) and his adherents such as SF of Europe want to have us do. Personally, that's not the way to trade. As for SF of Europe, he states Wiest rules "of waiting for historic low levels" which in itself makes action very limited. He implies a lot of activity such as bean meal, beans, oats, heating oil, corn, wheat, etc. But how many of those have made anywhere near historic lows? So he is not using Wiest's basic rule. He is trying to pick bottoms and doing it in reverse of the sensible way - going long on the breakout or waiting for a Bruce Gould 1-2-3 bottom pattern. Why even subject yourself to disastrous drawdowns. These kind of trades must have an unlimited margin account, as do the fundamentalists to stay alive in this game. Max Robinson has good tips. As for stops, I prefer mental ones. I won't setup as clay pigeons for the pit gunners. Options are another ball game I prefer to leave alone. This leads me to remark on Wayne Roberts and Frank Richards "The Insiders Profit Matrix." I wonder just how old this is? After buying, Richards answered my letters, but really never answered my questions. The problem is I can't find any $200 puts or calls at market tops and bottoms, and I asked him about it with no answer. In fact, it is hard to find any 3-mos or longer $200 options. So this destroys the $1,500 profit rollover. The system is worthless nowadays. I appreciate the articles on taxes. We need all the help we can get on this subject. The IRS is not fair on the way they deal with traders and investors. I certainly would not have known of Joe Ross' physical problems until he revealed all to us. I must say he is one remarkable man to have done all he has with the curse of dyslexia. Re: Rich Kuyser and the tippers or Hotlines, etc. Why do all the geniuses have to sell tips just as the horserace hawkers at the gates of the racetracks and elsewhere do? He says he learns from them. Very expensive tuition! Nick has good charts and info for technicians, but I do my own and do subscribe to Pocket Charts, only $50 per year. I certainly appreciate all your efforts with CTCN. P.S. - Jim Burke's tips are right on!

Opinion on Essex Futures Pro - Heinz Kellerman As an owner of the system program, here are my views. "Futures Pro" is a break-out system program by the Essex Trading Company and combines their former programs - *Eurotrader, Tradex 21 and Ace System"; Long, medium and short-term respectively. What you are basically buying is a core system. You then have to add the markets you are interested in, i.e., Currencies, Grains, etc., long, medium or short-term are all extra. Usually about $200, sometimes on sale for $100, or some package deals. In other words, for the $200 you get all the currencies for long-term only, or medium-term only, or short-term only. Or $600 for all terms. I would strongly recommend, if interested, to call and ask them for their special deals at 1-800-726-2140 - since my information may be dated. The positive points about the system are: The company has been in business for a long time. ‚ The people are efficient, courteous and will answer your questions in a professional manner. ƒ The software works under "Windows" and is a joy to manipulate, with orders as you would read them directly to your broker. „ The manual is executed in a professional manner and the best in line with "Omega" manuals,

275

The negative points about the system are: The data bank is their own system including rollovers, which are automatic. As a result, in my case I cannot use my 35-commodity CSI data bank from Dave Green's Swing Catcher to feed Futures Pro. Of course, you may get data from CSI and other vendors. Also, you can update it manually, which is a real joy. ‚ My biggest concern is the parameters with built-in filters. The company provides updated disks every three or more months for an extra charge. The parameters seem to be tested on 10-years or so of data. Over the long haul, I am sure it is a money maker, but the drawdowns meanwhile are tremendous and suitable for huge bankrolls, which leaves me out. Therefore, I have stopped using it except for confirmation. In all fairness, I have not tried to calculate parameters myself for shorter periods of testing time. The company believes in 5-years minimum testing time. That should about cover it. Again, these are my opinions only, and I hope that you get more input on this matter from other users.

Opinion on Rickerson's Market Optimizer - C. C. Collee - The Netherlands I would like to reply on the article by Joe Dinelli, about Jeff Rickerson's Market Optimizer. Mr. Rickerson sells his Market Optimizer system with a "proven accurate and profitable track record," which can be independently verified by the user. As you know, one of the most important aspects of trading is confidence in the system you're trading. There is no system with entry rules and exit rules, so the track record he advertises, does not exist. When someone writes such lies in a brochure, you do not have any confidence in the trading tools in the program. As far as Dinelli knows, he is not selling his track record, but if Mr. Dinelli wants to have a copy of his brochure in which he tries to sell his system(?) (It generates buy and sell orders on every swing high and swing low) I would gladly send it to him by fax.

Trading for a Living - Don McCullough December 30, 1994, l quit my regular job. I decided I knew enough to make a living trading the speculative markets. Since then I have been busy getting hooked-up to real-time data and psychologically reinforcing the validity of my signals via this data. Also, I have had a few months to see how the various futures markets chart in real-time using my signals. This last resulted in my deleting over half the markets and I think it's possible I may delete all markets except the S&P and the currencies. Not only did I delete most of the futures markets, I also deleted about 400 stock charts. At one time, I was working many 10-hour days at my regular job and coming home and going through around 700 charts each night. Stocks and futures combined. I would sometimes fall asleep around 4:30 a.m. while trying to get through all of those charts. How very grateful I am to be done with so many charts! I expect many people who are new to the markets have the ego problem I had and attempt to successfully trade every damn thing under the sun. Anonymous Trader is right, and so are some of the better authors who suggest that you trade only a few markets. Regarding markets. I place the S&P market way above any of the other markets for daytrading purposes. I would rank the currencies next, especially the Swiss Franc and the German Mark. The highly rated T-Bond market is one of the poorest charting markets I've ever had the displeasure to look at. Time and again, I see the bond market making a paltry $200 move while the S&P makes a $500-1,000 move. Soybeans, Live Cattle and Pork Bellies are (in my opinion at this point in time) about the only other halfway worthy daytrading markets.

276

I suppose that personal freedom and the potential for great wealth are the main reasons people like me quit their regular jobs and attempt to trade successfully. Those are my reasons and the personal freedom may come before the money. Of course, the money makes the freedom possible. Also, we like the challenge, although I'm about fed-up with this part of it. Too many hours and years of studying the markets, when I could have taken that same time and had more fun. Or could I? About personal freedom, I don't think most people even know what it is in a complete sense. After 12-16 years of schoolteacher domination, they then work as a subordinate for another 20-40 years. Just about everybody has somebody they are subordinate to for most of their life. Life is so short and look how most people think they must live it! Such a dominated lifestyle is hard to avoid, no doubt about it. The markets, especially the futures markets, offer a way out of this life long subordinate dominant bullcrap. Hey, maybe I have the right mind-set. The great trader Marty Schwartz once said he couldn't stand most established institutions. Independent thinking? You bet. How are most people going to be able to think independently enough to find the right answers to the markets after a lifetime of domination? Good question. They are just the kind of people the book writers and seminar promoters are looking for! I am determined to succeed at this trading business. A few years ago, I decided that I was going to make it in the markets and would do whatever it takes to get there. That decision to "do whatever it takes," is, I believe, a crucial one. Talk is cheap for sure. However, at my present stage of trading ability, I know all I have to do is consistently trade my signals-winners and losers!

Opinions on Gary Smith, George Angel, Ensign - Jim Moore Congratulations on continued good work on your CTCN. As I continue to read these articles, I think I could answer some requests for comments. I have traded commodities off and on for 15-years. I have tried a lot of the same things the others have, so here I will give you some of my comments, mostly pertaining to S&P daytrading. One request was comments on Gary Smith's daytrading system. I have found his Break-out System very effective, if you pay attention. Gary is very nice to work with. A reasonably new system by George Angel and Dr. John Wang is the Spyglass am & pm for S&P daytrading. This has provided a high percent return for me so far. Dr. John is unbelievably cooperative. I have to agree with the party that said TradeStation is a fantastic system, but their customer service is lousy. I have had to use my Technical Support friends to help me through problems. It cost me a fortune to wait on the phone for technical service to answer. If you want good service, an 800# technical service, and a simple but effective software, try Ensign. It is a trader's dream. The only problem, no one programs their systems for the Ensign software. Let's hope this changes. June 94 issue of Stocks & Commodities had an excellent, on the nose, article by John Sweeney on the Ensign 5 product. I'm ashamed to say that I lived within ten miles of Joe Ross in Leander, Texas and never knew about him. What a shame. Think how many dollars I could have saved or made! Now I have to take a vacation to see him. Enough said for now. Thanks again Dave for the good work.

Use of Sporadically Incorrect Data for Historical Simulations - Buzz Ross I'd like to share some thoughts about concern over data vendors whose data contain errors. I do not know how bad some data is, but in general, I believe the following principles apply.

277

For historical testing, although using perfectly correct data might be ideal for perfect optimization, I do not believe historical data needs to be this good to develop a dependable and profitable trading system for realworld use. Assuming the errors in data are relatively infrequent and not obviously absurd, there should be little concern in using this kind of data for system development and testing. Since markets tend to look "continuous" on charts with occasional "common-sense" appearing discontinuities, you can generally spot data that is grossly in error, and estimated corrections to this kind of error can be made. Errors of a few ticks on either highs or lows of a daily range (or other sampling period) may be considered "noise." Errors in opens or closes within high-low ranges may or may not be "commonsense" detectable, so this data "noise" may be of most concern. However, although market behaviors do tend to repeat, rarely, if ever, do patterns of behavior duplicate themselves tick-for-tick. Therefore, to assume that a trading-decision strategy must be based on high precision tick-range patterns or indicators is asking for trouble -- this would be indicative of over-optimization. Shallow-sensitivity "robust" optimization, in my opinion, is quite desirable, but steep-sensitivity optimization is likely to be disastrous. (Here, "sensitivity" refers to the change in simulation results as the characteristics of a market change over time, and shallow/steep refer to abruptness of the change.) My presumption also takes into account the total number of trades that a strategy may generate over its useful lifetime. Fewer trades imply longer trending durations and, therefore, the "noise" relative to the magnitudes of the moves will be relatively small and insignificant. As the number of trades increases for a given lifetime, the trend durations shorten, moves generally become much less, and relative "noise" becomes more significant. However, assuming that a sufficient number of trades are generated both in historical simulation and in real-trading so that, statistically, no single trade dominates the overall results, a robust strategy that produces consistent "small advantages" (like the casino examples in recent CTCN issues) will by design, be inherently "noise immune." Bottom line: So what if the historical data is somewhat in error -- the future is likely to produce data that differs somewhat from the past anyway, so a profitable trading strategy for any given market should be tolerant of some reasonable variation in data, whether that data be historical or yet-to-occur as the future develops. A "good" trading system should be reasonably "noise" immune, and data that is somewhat "noisy" can be quite adequate for trading strategy development purposes. Having said all this, would I, or could I, trust using potentially flaky recent data to create real-time trading orders, for either day-trades or position trades? If I did not want to take time to look over data for obvious gross errors before mechanically (blindly) generating trading orders, using unreliable data for this purpose could likely result in some very expensive losing trades. (There could also be some serendipitous profitable trades, but I wouldn't hold my breath!) So, in this context, having reliably accurate data is imperative and I would definitely want to use a vendor whose data I could trust. Understanding the strengths, weaknesses, and underlying design of one's trading strategy coupled with the emotional considerations of trust, confidence, and belief in that trading model would dictate the comfort level of using data that could have sporadic errors in certain ways. Even if I were willing to take time to carefully examine all data for "common-sense" correctness, I might not be too comfortable using data that would require my constant vigilance, even though my "noise immune" trading strategy would probably produce reliably profitable results over the longer term. Bottom line: In real-time trading, for peace-ofmind, get the most reliable data available.

Opinion on Trend Dynamics - Joe Dinelli I would like to make everyone aware of what I feel is the best educational newsletter available today. It is called "Trend Dynamics" and is written by Joseph Hart, a long-time active trader. This is purely an

278

educational course and is sent out monthly. Mr. Hart holds nothing back and indeed provides a vehicle of learning that is straight forward and invaluable. This course work has been going on for about 18 months. All back issues would have to be purchased to be on par with current subscribers. The cost is $59.00 per month, but is restricted to 250 subscribers. A network of subscribers has been provided with FAX and phone numbers of fellow subscribers to fill in the void of backup, along with an " Internet discussion group" in the planning stages. I believe this will help in providing a communication network for sharing of information. All questions are answered by FAX and if found pertinent, published in the newsletter. It is obvious, Mr. Hart has been influenced by many traders in his quest for trading perfection, but his obvious dedication to research and teaching shows through every issue. This is a true "jewel" of a newsletter and is a must for the "Higher" education of the trader. The phone number for "Trend Dynamics" is 1-805-481-4358 and the FAX is 1-805-481-9692. Their address is 897 Oak Park Blvd, Ste 261, Pismo Beach, CA 93449. They offer a sample issue and "start-up" package for $15.00.

S&P Traders Can Save With Delayed Quotes - Tom Cruckshank Do you meet the following criteria? For day trading you trade only the S&P. ‚ You obtain your data from Signal. ƒYou use the TradeStation Software. „ Your place of trading is served by a cable network. If these things apply to you or you can make them apply, you can save a bundle by signing up for Signal's delayed quote service that costs only $60 per month. You say WHOA, I need my data now, not on delay. Well here's the trick: Signal gives you all the indices real time and end of day data for all the issues for this $60. If you are familiar with Gary Smith's work, you know that the cash combined with the premium equals the nearest futures price or is close enough as not to argue. Now you receive this real-time with the delayed quote package. TradeStation, and perhaps other software, allows one to write programs that combine these prices. For TS write the following study to plot the bars in any time frame from one tick on up: INPUTS:DATAX(l),DATAY(2); VALUE1O=C OF DATA(DATAX); VALUE11=C OF DATA(DATAY) /100; VALUE12=VALUE10 + VALUE11; PLOT1(VALUE6,"S&P-H"); PLOT2(VALUE9,"S&P-L"); PLOT3(VALUE3,"S&P-O"); PLOT4(VALUEl2,"S&P-C"); I omitted values 1 through 9 for brevity, but they are for creating the high, low, and open. Set the properties to bar high for PLOT1, bar low for PLOT2, and either a cross or a point for the open and close. Plot them in the above order and the open and close will show if given a different color from the high/Low. When you set up your chart window, be sure that the $SPX is data 1 and $PREM is data 2. Do not change inputs in the study unless you change this data order. What about applying studies or systems? No problem! Create this user function: INPUTS:DATAX(NUMERICSIMPLE),DATAY(NUMERICSIMPLE); VALUE1=C OF DATA(DATAX); VALUE2=C OF DATA(DATAY)/100; CSP=VALUE1 + VALUE2;

279

This is for the close. If you wanted the other data points, just create them using this as a model. The name of this function is CSP. To apply this to a moving average for instance, put CSP(1,2), 10 in the input value area for a 10-bar average of the close. Please note that I have never tried this ploy except on old data that I had from when I stopped receiving Signal in late 1993; also, I am using the antiquated version 2.4 of TradeStation. However, it seems to work beautifully. It wouldn't work for me anyway as I live outside the reach of a cable service. I don't know if Signal still offers the $60 deal. This may work with other delayed data vendors, I don't know. I visually inspected these bars alongside the then current contract and they were very close; certainly close enough for all but the most demanding trading. The differences appear to be magnified at price extremes where the premium or cash gets a little out of balance. It would be good if someone reading this who has the proper setup would test this and report their assessment of the idea to the readers.

The Greatest Trader in the World? - Making $300,000-$500,000 Per Month Daytrading the S&P? Don McCullough Marty Schwartz has got to be one of the best traders in the world. He's interviewed in Jack Schwager's first "Market Wizard" book. Marty is so good that in nine out of ten trading contests he entered, he made more money than all of the other contestants combined! This is truly outstanding. I recently received an ad which told of the importance of having a market mentor to learn successful trading from. They listed several of the people in the "Market Wizard" book and how important a mentor was to each of them. Marty was one of the people mentioned and they went on to tell how he makes from $300-500,000 a month daytrading the S&P market. That's right, per month! No doubt many readers are going to have a hard time believing a trader can be this good. Personally, I don't doubt it at all. When you consider that an individual trader can hold as many as 5000 S&P contracts, and considering the average daily range of $1,000 or more per contract, you can then imagine even greater profits being made. Not easily perhaps, but possible! About 5-years ago, I read about Marty Schwartz in the first "Market Wizard" book. I decided then that he was my pick for the best trader in the book. Now, after reading about how much he is making in the S&P market, my wild guess would be that he's in the top 5 percent of all traders of all time. Like the Top Gun navy pilots, he's one of the "best of the best." Do you suppose, it would be possible to get Marty Schwartz to contribute an article or two to this newsletter? Now wouldn't that be interesting? Editor's Note: His address isn't in our data base. I will contact him if a member knows his address.

Favorite Book List - Don McCullough Over my 8-9 years of market study, I've purchased, read and sometimes studied around 120 books about the speculative markets. That's around $3,000 worth and, for the most part, a whole lot of time wasted. Following are my favorites--and boy did I ever have to wade through a lot of baloney to come up with this list! Market Wizards, by Jack Schwager The New Market Wizards, by Jack Schwager Trading for A Living, by Dr. Alexander Elder The Inner Game of Trading, by Koppel & Abell The Outer Game of Trading, by Koppel & Abell Market Masters, by Jake Bernstein The Big Hitters, by Kevin Koy

280

The New Gatsbys, by Bob Tamarkin Winning Futures Strategy, by Larry Williams. Note that most of these books feature genuinely successful traders and not book writers, system sellers or seminar promoters posing as successful traders! I have a recently published book in which the author confesses, in the last chapter, which he's never been able to make a success of his trading. My response is: "Put that statement on the book's cover and then see how many books you sell!" Recently noticed, he's one of the speakers at a seminar. Are you getting the message?

Having Trouble Finding Book Sources - Ms. Pamela Chan from Singapore I have been reading your CTCN newsletter. Referring to the Feb 1995 issue, there are a few trading book recommendations which I am very interested in. They are as follows: 1. Trading is a Business - Joe Ross 2. Trading for a Living - Dr. Elder 3. Wall Street Psychologist for Trading Improvement - Ruth Roosevelt. 4. What I Learned Losing a Million Dollars - Jim Paul (1994, Infrared Press) 5. A Short History of Financial Euphoria - John Kenneth Galbraith (Whittle books, 1990) 6. How to Make Profits in Commodities by Keltner & Profits in Soybeans (both out of print). Unfortunately, the above books are not available at local bookstores. I would appreciate very much if you could tell me how I can get those books. Editors Note: CTCN is looking for an advertiser who has (in-stock) most of the trading books mentioned in this issue, plus our past & future issues. A few months ago Ed Dobson of Traders Press had a paid advertisement in CTCN, but Ed said he received no orders or inquiries from his ad so he cancelled it. That seems very odd in view of the fact CTCN is mailed to many traders each month (in all 50-States and 34foreign countries), many of whom are newer traders who are very interested in acquiring helpful books.

Member Requests Dave Helminen and several other members request opinions on Randy Stuckey's Catscan from owners of it. In particular, they are asking for details on the size of drawdowns. Scott Caldwell is a new member who would like to hear from members who have had experience with any of the following option related info services: Don Fishback's "ODDS" video, Bernard Schaeffer's newsletter entitled "The Option Advisor," or Jon Najarian's "Super Trader's Options Trading Course for Off-Floor Traders." Day - 1-318-323-9686, Evening 1-318-396-5310 Ron Zahodny wants information on Bill Williams and his Profit-atunity method. Greg Wika wants information on Mr. VanTharp's Peak Performance Trading & Investing Course. Frank McCord would like to be in contact with other traders in the Sarasota-Bradenton, Florida area. Call him at 813-355-7057. Can anyone share some insight on a trading system called "Impulse" (or Impulse-80?) that appeared during the early 1980's? Call Buzz at 1-303-443-7131 (or send contact info via CTCN)

Editor Quick-Scans & Resource Guide

281

Dave Reiter (1-817-665-8836) sent me his Trading Manual for review. It consists of 44-pages (spiralbound) of interesting and detailed information covering several trading methods Dave has used successfully in his own trading, and has developed over the last several years. Earlier, Dave sent me a large number of account statements which indicate he has had considerable trading success for some time. Dave says the methods are disclosed in his Manual. Some of the subjects covered include Diversification & Portfolio Selection, Trading Capital required, Importance of Discipline to follow a system, Belief in Contrarion viewpoint, Time Cycles, Natural Cycles, Importance of Trading the underlying trend. I found Dave's work on both Time Cycles & "Natural" Cycles well-done. Some people may be inclined to call Dave's "Natural Cycles" - Seasonals. Several very interesting trading systems are disclosed, both long-term & short-term. I can not vouch for their profitability. However, Dave's Trading Manual is well-done and unique and warrants close study by interested traders. The Foundation For The Study of Cycles, (900 W. Valley Rd., Ste 502, Wayne, PA 19087, phone 1-610995-2120) submitted their Cycle Analysis software. For many years they contributed great cycle research. It's an impressive and sophisticated program with many capabilities to find and display all major and minor time cycles for any commodity. The graphics are good and the programming seems well done. However, my main criticism is that the manual that comes with it is somewhat small and doesn't seem to go into sufficient detail on many subjects. Most importantly, I didn't know how to actually use for trading purposes the vast number of cycle waves being displayed on my computer screen. In addition, there is the basic underlying question of whether you can actually make money using time cycles. There's little question that time cycles exist. But they have a tendency to come early, or late or even skip a beat entirely, making it difficult to make money with them. However, CTCN Members who are cycle devotees should consider this program. Issue 26. I Knew the Market, Not - J.L. Although I had read several accounts of futures traders who said that one of the most important factors in trading was the preservation of capital. I guess I didn't fully appreciate what they were saying. I do now. At the end of January 95, I had $97,000 in my account. I had made a gross profit in 1994 of approximately $95,000, netting nearly $82,500. This was made trading primarily the S&P500, making two to three trades daily, although close to $31,000 was made in two coffee trades. On January 30, I felt strongly that the S&P500 was due for a major correction to the down-side. I sold two March contracts and then a couple days later sold an additional two contracts. When the correction didn't happen, I still felt it would at any time, so I held on though the market continued to rise. I rolled the March contracts into the June contracts on March 14, and watched the market continue to rise. I had a margin call and liquidated two contracts and shortly after that liquidated another contract. Finally on May 19, I liquidated my final contract for a total loss since January 30 in the S&P of $56,500. I felt like a person who had held onto a rope of a hot air balloon who didn't let go while he could and then couldn't because he rose too high. I was in agony for several months. You would have thought I had learned a lesson. Again being sure the bond market was due for a correction downward, I shorted bonds eventually taking a loss of $7,093. I had a system for trading the S&P market that I had usually followed that was profitable. I strayed from it, though it had been profitable over a long period and followed a hunch that the S&P was sure to have a nice

282

correction downward. I was sure of my hunch, but I was wrong. I have been nearly always wrong when I follow a hunch, thinking I know what the market is going to do. I was wrong to the tune of about $25,000 on lumber in 1993 and wrong another time the S&P in the amount of $16,000 in 1994. I have now stopped trading until the middle of July, while I evaluate things. I have lost confidence in my trading due to the scenario above. Now I am not even confident of the things that proved to work prior to my very stupid trades. Yes, I have called myself stupid among many other things in these past five months. I hope I have learned a lesson, a very costly lesson. I have now decided I will always put a protective order at the time of my original order to get myself out of the market whenever it goes against me, in the event I follow a hunch rather than a system. Preservation of capital will be utmost in my mind. I do have several systems I follow, one of my own for the S&P 500 market and the Gary Smith S&P system. Also I plan to use another system I purchased from Lee Gettes for the bonds, S&P, coffee, cotton and silver. I have been monitoring Gettes system for several months and I think it has merit. My motto from now on will be: Don't rake the leaves against the wind. Don't stray from what works and if I can't resist then always place protective stops that I am comfortable with at the time of the order. I find it extremely difficult to place a stop after the order, unless I am following a system that calls for one. It is far better to take a loss a little early than to take a large loss later. I now realize I don't know how high is high or how low is low. I have become very humble. If what I have said turns out to be of help to anyone, then I am glad I shared this terribly distasteful but very real experience.

A Data Vendor Wish-List - David Sligar Continuing the recent comments by and about data vendors, I would like to submit the following "wish list:" Accuracy and reliability. Almost goes without saying, though I certainly agree with Buzz Ross in May's CTC News that perfect accuracy is not essential, even if it were possible. Much more important is the percentage up-time of the quote system, which one must hope is close to 100. Redundancy, anyone? ‚ Accessibility. Local phone access or in real-time data, cable or satellite feeds, should be inexpensive and easy to set up. The data should be available in a format readily usable by all major charting/analysis programs, and should provide conversion software accordingly. ƒ Flexibility. A trader may need quotes on one (or a few) issues at a particular time. Data on issues previously uncollected should be easily available, and beginning and ending dates should be easy to specify. „ Cost. A low monthly fixed charge for some base amount of information is good. If historical data is required, a reasonable and well-defined surcharge for data collected is acceptable. (The adjectives are important!) … Completeness. Includes stock, mutual fund, commodities, futures and options quotes. More? † Telephone support. Most information highway vendors I've dealt with came up short in this department. Somehow, there are always excuses, e.g., "hundreds of calls per day," "explosive demand," "overtaxed," etc. I would suggest that an essential component of any product is its usefulness. If that's true, then it is the seller's responsibility to provide to the buyer whatever will make the product usable, including, if necessary, adequate technical support. Is this basic? When it comes to computer information and software, I would prefer that systems be carefully designed, and manuals well written, that only a bare minimum of telephone support would ever be needed. This can be done, though most often it's not. An example is MetaStock. In almost two years of using their charting software, I have called them only once, and without much difficulty.

283

That's enough, from my perspective. If I've left something important out, I hope someone will help me complete the list. Now, to be more specific. CTCN has run several comments in recent issues by Bob Pelletier of CSI, including in the May issue a response to a letter pointing out some problems with CSI's technical support. I recently stopped my subscription to CSI. My reasons may be of interest. The difficulties I had were with the software. CSI data is no doubt quite good, but collecting it was extremely time consuming, and the collection process was hard (for me) to set up. I had to create a new portfolio whenever I wanted to collect data on only one security, or when I wanted to collect any subset of my normal portfolio. The time required to set up the data collection process in this way was not acceptable to me. It may be that I was simply not well enough schooled in how to get around in the program. I was not able to discover better operating methodologies during the limited time I had to learn the system. I did telephone for technical support on many occasions, and the response was that this is how the system is, no one else is unhappy with it, and so forth. That may be. But my interest is in trading, and I prefer to spend a minimum amount of time learning to use my mechanical tools, and almost no time at all actually using them. The market and my psychological responses to it are where I want to spend my time. Thanks, Dave, for providing this forum. I thoroughly enjoy every issue of the News.

Emotions are The Key - Mike James from New Zealand Thanks to John Brown for his contribution in the last issue. I have been meaning to write a letter covering some of the same ground. I don't intend to repeat specifically the areas covered by John, I suggest for the sake of your health and trading profits, reread his contribution in Vol 3 No5. It contains some sound advice. Personally, I believe that your emotional state is the key element in determining your bottom line profit. Trading success is a product of internal control. Without a healthy mind and body this control is far more difficult, if not impossible to maintain. There are many aspects to this. One example is an exercise program. Anyone who has committed to any sort of aerobic exercise program will probably have experienced a more relaxed state, and found that they can think more clearly. If you are worried or stressed your brain doesn't function as well. Think back to the last time you sat a formal exam. For most people examinations are stressful. Many people find that in the heat of an exam they "forget" many pieces of information that they would usually be able to recall immediately. As soon as they leave the examination room, the information they tried to recall in the exam room pops back into their head! This is one simple example. You may have had something similar happen to you in a trading situation. As well as regular exercise, make sure you get some mental relaxation. Trading can be a very intense business. So mental relaxation is important. Another important aspect is your diet. I'm fortunate that my wife is a natural health practitioner, so I have some guidance from her in this regard. Personally I only eat organic unprocessed food where possible. You may think that this is going a bit far. Don't you make sure that you car has the correct grade of fuel? From a nutritional point of view, processed foods and chemical additives de-nature foods and make them less than ideal as a fuel for our body. I want to operate at my peak, make money out of the markets consistently and be relaxed. Processed foods just add one extra stressor that my body has to deal with, that I for one want to try and avoid. I also take one or two herbal and vitamin supplements every day. Seek qualified advice. To help with my mental concentration, I take a vitamin B complex and the herbs Siberian Ginseng and Gotu Kola. These herbs are available from Natures Way Products, which is based in Utah, and probably on the shelf at your local health food retailer. Briefly, Siberian Ginseng helps the entire body adapt to stress. Because it helps our cells to use oxygen more efficiently, it also increases stamina and endurance. Gotu Kola is termed a

284

"Brain food" as it increases blood circulation to the brain. It also has a relaxing effect on the nervous system. Among herbalists, it is renowned for its ability to promote memory and reduce mental fatigue.

Babcock's Systems Opinion - P. R. Rettino I received Bruce Babcock's CTCR for 2-3 years. I purchased about 20 of his systems. After converted many of these to SystemWriter, I discovered only losers or marginal systems. It appeared that they may have been over optimized. I succumbed to some very slick advertising and purchased his S&P Day Trading system. It was very expensive. I lost a lot of money and all faith in CTCR. Bruce Babcock Responds Thank you for the chance to comment on Robert Rettino's letter. It raises some important issues for cons