It takes both. Why?Because even the best of systems does not make money every day. When you plant a crop, you don't dig it upevery week to see how it's doing. Ditto systems, market letters, gurus etc. It always takes time to make money.Making money is about time. time is about patience. Moral of all this: Forget Freud; Shut down your PrimalScream; Activate your reactive mind if you want. It doesn't matter. just find a reliable approach to trading andstick with it. And, for the record. of the 25 services monitored by Commodity Traders Consumers Reports. weare in the top 5 or so for profits for the year, one of the few that made money in 1991.
218December 1992
Volume 29, Issue 12Beating Them to the Punch
In a matter of days, pundits will be telling you what 1993 has in store. All sorts of claims will be heardand sage, crystal ball, advice given based on these oracles. Will they be any good?Sometimes You Can Judge the Future from the PastListen up here real good ... people (analysts) tell you all the time that you can foretell the future fromstudying past events. That's true, but not as often as you might think. If that was totally true, all we marketsoothsayers would be multimillionaires. Few of the talking heads you see on CNBC, who judge from the past,have more than cab fare to get to the TV station.But ... there are some things you can judge from the past-one of these things is past predictions. I've beenwaiting 12 months to pull out last year's predictions, for this year to prove, that prognosticators' ability to seethe future is no better, and probably worse, than yours.It Means Millions of DollarsSay what you want, the National Enquirer is a multimillion-dollar operation that would just love to takebragging rights to being able to predict the future. Every year they have their psychics tell us what will unfold.If they could be right certainly the NE would shout it out to the world and make more $$. Ditto all marketletters. Guess what? Sneaky me kept the NE's 1992 forecast as well as the market letters that make yearlyforecasts to see how their 1992 expectations came out. Here are the results:The National Enquirer These journalists paid the top 10 psychics for their predictions and printed themlast January. Here's the scorecard; of 41 forecasts for 1992 not a single cotton-picking one of them wascorrect. The closest was that "an AIDS epidemic will devastate prosports." Well, AIDS devastated Magic, butthere was certainly no epidemic. Chicago psychic, Irene Hughes (who charges a pretty penny to forecastmarkets, and I've seen make major misses) saw that Vanna White would be "nearly killed" from a shockwhile turning the Wheel of Fortune ... Angie Dickinson was to appear nude in Playboy at 60 years of age andCybill Shepherd would renounce acting in favor of running a medical clinic for the poor. NONE of thesehotshots predicted Bill Clinton's victory, most all gave the nod to Bush.Moving Right Along Reading the Enquirer's predictions is a stop far removed from reality ... DonaldTrump was to lose it all but become a successful late night talk show host ... Michael jackson was to have lost
219his voice ... and Liz Taylor was to have children ... maybe one would think that market forecasters would havea better grasp on reality.The truth is they don't. Several of the more respected soothsayers were looking for a December 1992(that's now) drop of 1,000 DJIA points. Another said George Bush's New World Order troops would take theU.S. over on December complete with a bank holiday!Some market analysts said we would be in a rip-roaring bull market, others, a devastating bear market.What became of the best-selling author of the 1992 depression book? And, what became of his depression andstock market crash? I hold in my hand an October 19th epistle which proclaims, "Have no doubt about it, aCrash will occur ... there is a fast fortune to be made ... $2,000 will become $20,000 ... THE DECLINE WILLBEGIN NOW." Of course you are given the opportunity to call, with credit cards, for their recent update. Thepoint is no crash came.Like the National Enquirer crystal ball gazers, the markets pundits I kept book on also had a perfectrecord-of not being right. None of their "projected major turning points" were on the money. Several of themcalled for a major high in March with new lows for the year to be seen in October. Instead October was anexcellent time to buy (it usually is).The Moral of All ThisAvoid like the plague attaching any significance to any ones predications of the future. The futurehappens, certain laws come into play. But, the truth is good thinking and reasoning will get you much fartheralong than oracle reading. If you take correct action in your life, trading or investing, you will come out ontop. Chasing guru forecasts is not right action. Prove my point-take 30 minutes right now to make yoursensible notion of what will happen in 1993. Read it one year from now and you will see how accurate youare, compared to the headline mongers. Thinking and taking the correct action will always beat the crystal ballcrowd. Sure, it's work, but it works.In 30 years of this game 1 have tried hundreds of "magic" forecasts and crystal ball crap. I used tobelieve. But reality has taught me an important lesson I hope I can pass on to you-don't let forecasts get in theway of doing what needs to be done. Savvy??It's just Over My HeadMine too ....I've had a flurry of phone calls and letters this past week that I found revealing about folks like you andme and the markets.
220The call or letters generally go like this, "Gee, Larry, this stuff of trading commodities is hard, I don'tunderstand it, it's just over my head. Would you please refund my subscription fee?"We do.But I don't want to ... I want to grab them by the lapels and tell them this is not an easy business, thatwhoever told you this seriously misled you. After almost 30 years of trading most all of the market is still overmy head. As trite as it sounds, I am still cobbling away, learning how very little I know about the market ... itseems to me I will never be able to learn very much and some things I have to relearn. Over and over.Yet despite all this, I've made millions of dollars trading ... something few people can say ... and I neverwould have made those hard-earned $$ had I let the notion of "stuff being over my head" thwart myintentions of making money. That's my first reaction. But upon some reflection what I should say is ..."Where did you ever get the idea that making money is easy-in this or any other business? Is it easy tomake money in your business? If so, stay there. Refrain from trading."Money is made, in any endeavor, by an exchange of one thing of value for another. In this business theexchange a winning trader makes are his dollars at risk and his intelligence. He or she pays for his earningswith hours of study."There is just no way you can blindly follow some market guru and blissfully make money day after day,year after year. At some point you MUST go to work, figure this stuff out yourself, walk on your own. I'llhelp you, but bear in mind this is not an easy business, that to get money from any source requires an outputof energy. There is no bliss or Nirvana in this business."As my daddy used to tell me, and my children's father tells them, "There ain't no free lunches ... we don'tdeserve anything. We earn it."I LOOKED FEAR AND GREED IN THE FACEAnd here's what I found ...It's no secret that a trader's worst enemy is his/her emotions. Some have even gone on to identify that theemotions that kill us are the mutually entwined powers of fear and greed.But's, so what, you ask. Is just knowing this enough to help a trader? The mumbo-jumbo crowd tells usthat on that basis we can deal with the identified problem.No way. I've known of these Gemini like emotional forces for years but it was not until recently that Ifully understood (I think) how to avoid the negative downside of all this.First, let me establish once and for all that Greed is the strongest of these two emotions.Indeed, greed may be the strongest motivator, after sexual drive, that we all possess.
221How do I know this, from watching my trading-and people like you-who hope to recoup losses. We do itin a host of ways. Why do you not use stops? Greed, pure and simple. You want to make money so you hangon too long. Alexander Pope said it best, "Hope springs eternal in the human breast." We all hope to makemoney, hope to get out of margin calls or bad marriages. We want to make money so badly that some of uscheat. steal, lie, even rob the local 7-11. Why, because of our greed to have more.The secret of winning as a trader is simpler than most think. The operating rule is that if you lose, or cancontrol your losses, who will probably become a winner.What causes loss is greed. We get so greedy-crying for profits-that we get either; (1) sloppy in our moneymanagement or (2) fail to cut our losses as our hopes are too high that every trade will turn into a winner atsome point. The desire for profits is the killer. just last week I held onto a long position, refusing to bail outtaking my profit as I wanted to believe the market would move higher. I bucked the system. Why, because Iwanted to make more. It is not my fear that screws me up, it is my greed. When looking these two emotions inthe face I found that it is my greed that causes me to not follow my systems (do the right thing).You can bet from now on I will be on alert when I "want" to make more money. I know my enemy, Ihave stared it in the face, it is not fear . . . it is my greed. And you know what? You are just like me.
October 1993
Volume 30, Issue 70The Show Must Go On
A loss I am not proud of and a reaction I am.just because I've had the audacity to write several books about the market and publish a letter, somesubscribers seem to think I never have the same problems trading they do.That's wrong ... real wrong. I go through the same emotions, and though I may harness them better, theystill tug away at my heart and soul. Daily.About a month ago I screwed up, big time. Oh, not enough to wipe me out, like maybe I would have donein the old days. But, enough to get my attention, my anger and raise those old questions of self-doubt Ithought had been put to rest years ago.Probably the first step to being a winning trader is getting rid of most of the self-doubt. When you "knowthat you know" you are on your way. Mentally, and physically, at that point you have become a professional.Why? Well, I thinks it's because you are no longer the effect of the market ... you are the cause of what youare doing.
222That's an important edge ... my screw up had cut me like some giant pack rat slipped into my office tochew away at the fibers of my being. The self-doubt built as I went through several losing trades, until,naturally, the worst screw up of the year came.I was humiliated by what I had done, felt as stupid as I'd felt in years, and just wanted to stop trading."Forever," that voice in my head screamed. While I don't know much about the market, or trading, I do knowthere are no losers ... only quitters. Professional people all have "off nights." Did that stop Joe Montana? Iremember he had an off season just before elevating himself to the status of the greatest quarterback to everplay the game. Nor did similar poor performances end the careers of other greats.Clearly, I'm not a "great," but I can sure learn from them. That's what I decided.So, the morning after my screw up, there I was, at 5:10 A.M., placing an order to buy the S&P. The showwould go on. Both trades won, not much, but they were my biggest wins of 1993.
October 1997
Volume 34, Issue 10Broken Noses, Cauliflower Ears, and Bad Trades
Like boxing, trading is not only risky it is also a very difficult and dangerous business.AS 1 WRITE THIS ... I'm angry. The last few days I haven't been able to find subscribers a winning tradefor love nor money and my own trading, which was ablaze with glory and domination a few days ago, has lostquite a bit of its luster.I'm angry about the markets. I'm angry with myself and I'm angry about this business where peopleadvertise seemingly unlimited and easy wealth to be made trading commodities. So I reflect on my limiteddays as a boxer; I got beat up and quite a bit, yet still enjoyed the sport. Why? And how does this relate totrading. Why do I always turn to sports to find parallel or analogy to trading?Fights, like the markets are not fixed. Guys really do get hit in the ring. They bleed, their eyes puff up andstay that way for days, and their facial cuts take weeks for the transformation to a scar. The differencesbetween a true champion fighter and the wannabes is the champs climb back, continue fighting and after aloss still work at their craft (yes, it is a craft, no more brutal than trading) they stay in condition, they rethinkstrategy ... but above all they continue. It is anger that propels them. When younger my anger was abated withdrinking until I learned well channeled anger is a powerful force, so I now focus anger, using it to help pushmyself.When I ask fighters how they can continue, I'm told, "This is what I love, this is really all I know, andgetting beat up is just the nature of the game." The ones that cannot accept the bloody noses and cauliflower
223ears never make it to the top. I have yet to see a champion without a marked up face, even Ali, up close,shows plenty of damage.Champions, just like traders get beat up. That's par for the course, the sooner you accept andconstructively channel your anger behind the losses the sooner you will also rise to champion status.
May 1995
Volume 32, Issue 5Learning How To Lose Money
Ha, bet you thought you didn't need help in learning how to drop your hardearned dollars trading. My betis that you have no idea how to lose; hence, you lose.ANYONE CAN WIN ... It takes no great feat to win in commodity trading, all you have to do is get inand out at the right places. Winning is a glorious feeling, hence something you can pretty well control, handle,or take care of in your own fashion. The world loves a winner, and a winner loves the world. Life is easy then... all green lights and blue skies.But losing, man that's another story. Life's a bitch when you're down 30 percent to 40 percent of yourmoney ... even tougher when you are down 80 percent to 90 percent. I know: I've been there, only all toooften. I took some nasty trips in my younger days I hope never to see the likes of again, However, they didteach me a few things I'd like to pass on to you.Profits pretty well take care of themselves, losses don't. This means YOU must take care of the losses.Indeed, this is more a business of damage control than it is price exploitation. Control the losses, and you areprobably going to come out a winner.So, how do you control loss? There is only one correct answer. Are you ready? Do you really want tohear it? And will you follow it? (I doubt if you honestly answer "yes" to all of the above.)The answer is not always use a stop. Always.Before you continue reading, grab a dictionary. Check out what "always" means. It does not mean someof the time. Believe me, those "some of the times" you leave off stops will be the time losses wipe you out.At a younger age I traded with no stops, believed in my fiscal immortality, and ended up going deficit.Several times I had to sign notes to brokerage firms. That's a bitter reality. It's not fun and games beinghounded by brokerage firms' lawyers. (Ah, the 60s ... what a glorious time period.)The only question left is where should one place his or her stops. There are two answers. (1) With yourbroker, not as "desk" stop. And again, that's always. (2) Since the purpose of a stop is damage control, it
224should be based, most often, on limiting risk. The best rule of thumb I have is that stops should be about $800to $1,200 away, except in the S&P where I use stops of $1,750 to $2,500.Sometimes I use what looks like a key market turning point as a stop, or perhaps an opposite signal, oreven the end of the day. The end of the day (a time stop) may be coupled with a dollar stop. But in any event,NEVER FORGET that the closer your stop is the more often you will be stopped out.Only a genuine masochist uses tight stops. NO ONE knows absolute highs, lows and turning points. Wecan only be generally correct, which is why stops must give the market some leeway ... just not too much.Look, I don't like stops any better than you. I hate using them, but I us them. Always.
March 7995
Volume 32, Issue 3
I know what evil I'm about to do, but my irrational self is stronger than my resolution.-MedeaMAYBE IT'S JUST ME AND MEDEA ... but it probably isn't. The first lesson I ever learned inPsychology is that if I have frequent thoughts about something (sex, money, power, catching large rainbowtrout), my peers are probably having the same thoughts and/or dreams.No, don't think I've gone California Kooky on you. But I'll be the first to admit I have a constant dialoguewith my inner selves (there are probably two of them) while trading. Some might say they hear voices ... Iwould not be one of these. But these selves, or voices, exercise a tremendous power over my tradingdecisions. Therefore, I've been spending a lot of time listening to those voices or selves, and thinking aboutthem. This is what I have learned:First is the awesome power these selves seem to have over our judgment. just to make certain I wasn'tgoing batty (yet), I talked with a few other traders I respect. They too mentioned the voices or their inner-selfdialogue ... and how much an impact it has upon their decisions.Like Medea, who uttered her classic statement just before killing her children, I confess I have takentrades I knew would lose, and actually felt helpless to do otherwise. Some compelling drive seems to lurk inthe soul of we mortal traders.
225Greatest Trading Breakthrough of the Century?The breakthrough would be that of getting control of what can be very selfdestructive behavior from thispart of our mind. In a minute, I'll tell you some things you can do if you, like me, are under such an influence.For now, though, lets look at what's going on here.The reason I really got turned on to all this is two weeks ago I did not take a buy signal in the Bondmarket that I sure as heck should of. Why? Real simple. One of those "voices" (me) talked me out of thetrade. The mental chatter went something like, "Hey, Lar, you lost on the last trade, you better be careful here... this is pretty scary stuff ... cool your heels here ... wait for a better looking trade ... at least wait for thesignal then get a pull back or something . . ." Meanwhile, the other voice is saying something like, "Well,you've got to do what you've got do."The striking difference is in the voice trying to protect me. In other words, that part of me that deals withsurvival has tossed up a bushel-basket full of fear. And make no mistake about it, the "voice" argued longerand harder than the second one. Hence, it carried the day and in the process I sidestepped what was a verygood trade.In short, the inner voice based on fear will talk you out of more good trades than bad trades you will evertalk yourself into.I have focused on this problem a great deal the last few weeks. My observation are that you can get intouch with these sides of yourself. You can feel or hear which one is the fear, or survival-based one. That isthe one you need to get to know. Or, if you are not such a touchy-feely person, just realize that the innermessage aimed at talking you out of doing something is the survival "voice," and the one you need to avoid.By paying careful attention to these inner selves, you will be able to key off of them, as opposed to reachingto their negative dribble. Here's your exercise for the month: as you make your next 10 trades, write downwhat you are feeling or hearing on an emotional level. Let all the diatribe out, and really listen up so you canidentify the two voices (I say two based only you my experience. But other traders I have interviewed to dothis article also mention two crosscurrents going on inside their noggins). By doing this, you will be able tonot only confront your emotions, but also catalog and codify them so you can deal with them in the future.
226April 7994
Volume 3 7, Issue 4Hillary, Highs Hopes, and Heartaches
Over the last two weeks, I've carefully reviewed-at the request of the New York Post-all the commoditytrading activity of our First lady. What an entertaining account it is! Since much of Hillary's trading was notcorrectly covered by the media, I thought you might like to know what I unearthed.Hillary (by the way, she used her maiden name, Rodham, and not Clinton, on the account) had a greatintroduction to trading; on her first trades she made right at $10,000. What looks particularly irregular,though, is that the trades required close to $8,000 in margin. Yet she pulled it off on only a $1,000 check,which may not have been placed in the account until after the first profitable trade had been recorded.If there is a trading pattern to the account, it is one of day trades for winners, and holdovers for loser ... as wellas a real gutsy approach. As an example, on 2/12/80 she was long 10 Wheat which she exited on 2121. Themargin back then was about $1,000 per contract. Hillary had $3,911.20 in the account. While newspaperarticles have largely focused on her Cattle trading, the records I was given also show numerous transactions inCopper, Wheat, Lumber, Sugar, and Bonds. She paid $41 for sugar commissions, $50 on everything else. Soshe paid a little high, but then look at what she got! On many occasions she had positions totaling over$45,000 in margin, while she actually had less than $10,000 in the account.Like you and me, she did have margin calls. Unlike you and me, she never had to meet them. In one case,March 13, 1979, she had $53,478 worth of positions-with some $26,000 in the account. There are lots of 1and 2 lot orders that did make money, but the vast majority of the profits come from huge positions on daytrades, or huge positions where margin calls were never met. Here is another confounding sample of Hillary'strading style. In early June 1979, she carried a bewildering 45 cattle ... on a mere $3,765.Also a distinguishing characteristic in Hillary's trading is that the instant she made profits, she cashiered themout of the account. Even her famous first trade of $1,000 down on 10/11/78, with an immediate profit of$6,300 the next day, shows she siphoned $5,000 out of the account before any more trading transpired. Isuppose this is a lesson we can all learn from. The long and short of it appears to me as this: Mrs. Rodham hada broker who did her some big-time favors.
227February 1995
Volume 32, Issue 2Nervous Nellies-Heaven Bound
If money is only made by holding on, we'd better learn how to hold on!There is nothing easier than making money in commodities. It's a piece of cake. All you have to do is catch amove and hold on until price mingles with the angels of speculation some place up in the clouds.You're thinking to yourself, "easier said than done," right? And very easy to do in hindsight. Yet thereare some lessons we can learn-from hindsight-that I would like to write about this month.We currently have pretty nice trades going ... long the Canadian Dollar, short Copper and Cotton. IF THESEARE LONG-TERM PLAYS, our objective will be to hold them until they bottom/top out, or reach an area ofmajor support. That's the game plan. Piece of cake.Not really; following the game plan is very difficult. It's no wonder there are so few winners. So few peoplecan sit tight and hold onto their positions long enough to allow time to maximize winnings.As an aside, but a most important one, never, ever forget that it is time that creates large winnings. Thelonger a system's time frame, the greater the potential for a large profit. It takes time for redwood trees togrow. Seldom do huge profits come overnight. That's why short-term traders are doomed to small profits.They tighten down the hatches of their frame so much that profits are never given the time to "mature" or"grow."The problem really is twofold. It is essential to develop a state of mind that allows you to sit throughcorrections on the way to the ultimate prize zone. The second problem is developing an indicator or systemthat tell us when to bail out, regardless of our mental conditioning. After all, even the tallest trees in the forestnever quite reach heaven."Preframing" OurselvesNow there's a term I wish I would have bumped up against earlier in life. The idea is that if you preframeyour belief system as to what the future will be like, you can better handle the future. It is one of the mostvalid psychological concepts I have ever used.At the start of every trading year, I preframe myself to equity dips by telling myself that at some pointduring the year I will lose money ... and a good amount of it at that. I reframe an equity dip, preframe that itmay last a month or longer, and that to get through it I simply have to get through it.When it comes to holding on to trades, it's the same thing ... which I hope the following charts illustrate.Notice how in each example the ideal strategy was to hold. Also note that there were big pullbacks against the
228trend. These pullbacks took time and money away from you. Usually we mere mortals get shaken out by theflames of eternal damnation, just before the up move resumes.However, if we preframed ourselves to realize that in all large trend moves there will be substantial any trendmoves, I have found it easier to suffer through the brimstone.
March 7991
Volume 28, Issue 3
Secrets of System Developing and TradingOver 20 years ago I uncovered an amazing little secret that I have been trying to disprove ever since ...and so have subscribers.The "secret" is that effective commodity systems do better without a protective stop loss than with one-if theyare not reversal systems.It is strange but true. If you have a system that is always in the market ... and does a decent job of it ... youcannot improve its performance by tinkering around with tighter money management stops!I will reiterate the point. If you have a decent system-forget about "improving" it with a protective dollarrisk stop loss. The reason I have repeated this point is that I find myself, 20 years later, still trying to twist andimprove systems with protection stops. They continue not making much difference, and usually hurt systemperformance.Many subscribers have written, called or canceled their subscriptions because our stops "are so big."About that they are correct. Our stop and reverse points are a good distance away from the market ... but ... itworks better that way.As strange as is seems ... for 20 years I have kept trying to improve good systems by using moneymanagement stops and they have yet to make much difference. What you gain in protection you lose inaccuracy and profit per grade. Typically a $ stop will cut your percentage on winning trades by 10 percent to15 percent and lop your average profit per trade by up to 1/3. What you get for what you lose, is not worth it.Here's the proof: results of a system I have been working on this past week for short-term trading inCoffee (see Table 14.1). Notice that as the stop gets larger, the accuracy-net profits and total dollars won-all
229Table 14.1Coffee Trading System with Different Stops Produces Drastically Different Results
increase!! At the same time drawdown on the $1,000 stop of $12,553 gets bumped up to $14,855 with a$4,500 stop, but you make almost $30,000 more!The Second SecretThis one is even wilder ... you cannot improve, appreciably, a good system by using targets.Go ahead, reread what I just wrote just for you. The knack of a trendfollowing system's ability to make moneyis that it catches some really big trend moves. Those large wins pay off all the little losses.We all know the rule-let your profits run-and it is proven when you try to add targets (cutting yourprofits short) with objectives. This also bothers new traders ... they want to take profits or get out once pricehits some magic number, a Gann line, Cyclical window, support/resistance or the like.For 20 years my studies keep coming back with the same answer ... you dampen the efficiency of a system byusing fixed targets. I am certain that few, if any, subscribers will be able to ride our big winners all the way.The recent basesloaded home run we scored in the currencies is a good case in point.You would think our phones would be ringing off the hook with people talking about their profits. That,Red Ryder, is not the case. People are calling up wanting to know "where to get back in."
230February 1993
Volume 30, Issue 2The Difference between Winners and losers
The results of modeling over 20 winning and 30 losing traders.Most everything we learn to do well in life we have learned by studying those who do it well. I learnedto throw a football by watching a kid named Russ Powers, learned to throw a handball by watching PaulHaber.In hi-tech-talk this is called modeling; find someone good and scrutinize their every action AND beliefsto uncover what makes them good at what they do. You then imprint that winning form into your mind andbody.Tony Robbins is today's leading advocate of this technology and has probably spent as much timemodeling people as anyone I know. Tony defines modeling as the process of discovering the sequence ofinternal representations and behaviors that allows someone to accomplish a task. The components of thestrategy are beliefs, behavior, and language.Belief systems are the bottom line to the difference between winning and losing commodity traders. Firstsome facts: In a recent test, cancer patients were given chemotherapy, over 60 percent of them responded withthe typical symptoms of this "cure"-vomiting, nausea, hair loss, and decreased energy.However, they had all been given an inert placebo.Their belief created their