mismanage losing trades. After all, if your belief system is that yourcurrent trade will be a winner-and it isn't-the certainty of that belief will have you holding onto losers,something no
203successful trader does. Ever. An outrageously positive belief about your success (on any one to two trades,not your total career as a trader) will have you rushing in where angels themselves fear to trade.My strange belief system is that the current trade I am in will be aloser ... A big loser at that!Sounds negative, but it is most positive. If that is my belief, I will certainly be careful in taking thetrade and for sure will manage the trade "by the books" that means my stops will be in-at all times-I willexit when my methodology says to, not my whims, wife, or broker. Every major loss 1 have had trading(and I've had more than my fair share) has come from believing my current trade would be a big winner, soI did not follow the rules of the game.Adopt my belief system, that this trade will most likely be a loser, and you sure as heck will protectyourself!A Note on Fear and GreedSome years ago I postulated that greed is a greater motivating factor than fear. Recently a student, andpsychologist, questioned that with convincing evidence that most people fail as fear (of failure or loss)keeps them from taking action.My reply was that those of us who have decided to trade are not Most people" we have already brokenthe shackles of fear, evidenced by the fact we are trading. Back to his studies went the PhD and discoveredthis is true in animals as well. Rats when hungry (motivated by "greed") will take risky action to get foodthat they will not take when not hungry. We traders are like the hungry rats ... motivated by greed.
November 1997
Volume 34, Issue 7 7
How to Buy a System/ Newsletter ... They Are All Making Money!That is all the system/software/newsletter seminar types were raking money in at the recent Futures WestSymposium ...
204Opening Up the Hornet's NestLet me first say I've sold as many books, seminars, maybe even systems, as anyone, so it's fair to askis the pot calling the kettle black about this month's comments on "vendors" of commodity information.The recent Futures West Symposium presented a great opportunity for traders to see new products,hear from speakers and mingle with one another. I certainly enjoyed seeing many of you there.What I did not enjoy was the hawking of supposedly infallible systems and techniques by a host ofvendors, many whom, from what I can tell, don't even trade. The claims of profits and "ease" of tradinghave gotten way out of hand. Accordingly, here are my comments on how to spot the good and bad apples.How to Spot a Good Trading System/ProgramAll the vendors have fancy brochures, impressive track records, scads of testimonials,computer printouts and the like, making it very difficult to separate reality from hype. It gets evenworse when you read Investors Business Daily, as you can see from the recent crop of ads.All the computer printouts and fancy brochures are meaningless, so is the price (1 recently monitoredone of those $10,000 types of systems and saw it lose on just about every trade). Frankly, so it is having aNAME behind the system, mine or anyone else's. Yes, it tells about credibility but is still no assurance offuture success.Signs of a Bad System or System SellerAnyone who tells you this is easy, implies little risk, and "almost" assures profits is a definite pass.T'’aint so. Anyone who claims very high rates of return-without confirmation slips and account statementsfrom a broker-is also a hustle in my opinion. The lack of a guarantee or a wishy-washy one is a red flag.Testimonials can be bogus. I know of several systems sellers that have shills professing how great thesystem is. Also, don't trust the limited quantities to be sold" pitch. Most the sellers I know use this but haveyet to turn away a single buyer. Finally, the more complicated and/or technically oriented the system is, theworse it will probably do. There must be a reason or theory to why it should work; check the premise asmuch as you check out claimed results.
205The Sure Sign of a Good SystemThe proof is in the pudding and when it comes to tasting the pudding we're looking for brokerage firmconfirmations. Little else matters. If a system is as great as the seller claims it is, he/she should sure as heckbe trading it. Given most any form of money management, the simplest of valid systems can make far moremoney trading than by being sold ... and without the pressure of dealing with the public.Advisory Services present a little different problem. There is only one that I know of that takes all theirown trades, that's Russell Sands Turtle Talk. Without this, you need an independent measure of the letter'ssuccess. There's only one, Commodity Traders Consumer Reports. If a service is not monitored here it'sprobably because they don't want the warts to be exposed. Being under the microscope is not fun ... justnecessary. Also, I suggest you check several time periods to see if the letter is just currently on a hot or coldstreak. Has their performance been dependable? That's the issue.
April 1998
Volume 35, Issue 4Twitching Worms and Traders
A recent seminar attendee, "Trader Rick” E-mailed the following; it's good reading to understandwhat to look for and reflect on in yourself."Would you like yet another story that proves youshould not be an emotional trader? Well here it goes;you'll find it interesting."Last weekend 1 decided to place a buy stop in May Copper at 77.80, first thing Monday morning. Shortlyafter Copper opened I called my broker (unfortunately my regular broker does not come in until around8A.m.) and asked, "What's Copper called this morning?" He replied, "I don't follow Copper, I really don'tknow, I'd have to look it up . . ." (Oh brother, never mind)"OK," I said, "what's the last price" and was told it was trading at 77.00 down from 77.90, this toldme price had already gone above my stop so 1 thought I'd wait for a pullback.
206Afraid to Buy, Afraid to SellI called back later, price was at 77.30. Again, I did nothing. Why you ask? 1 really don't know, except1 thought I'd "watch the market" to see what it would do. The funny thing is 1 now know if it went higher 1would have waited for a pullback, if it went lower 1 would have been afraid to buy. Up or down wouldscore me out, and that's just what happened! What would 1 have "seen" anyway, handwriting from God?""Later in the day 1 called back, Copper was now at 80.30. "Damn . . . OK, buy one at the market."Now 1 knew that Copper was really hot, and 1 was violating everything you had taught us that weekend.But something, almost a mysterious force, "pushed" me into the trade. 1 bought pretty much at the high ofthe day, because 1 was so upset 1 had not gotten in earlier."The very next day Copper began a pullback, fortunately, it eventually went higher, but the cost wouldbe $500. Dumb, dumb, and dumb. Haven't 1 learned anything yet? Yeah, 1 have, it's simply this, "Plan yourtrades and don't deviate, don't let emotions push you over the cliff at just the wrong time."It's just Like Fishing1t kind of reminded me of fishing, how I'll toss a worm in and wiggle it just a little, no bite, then a littlemore, still no bites, then just a little twitch and ... BLAM! I've hooked a nice fish. The market seems to hookme just like 1 catch fish with those little wiggles until 1 just can't resist and 1 fall for it, hook line andsinker."Trouble is this is not catch and release, it's bite and lose, no more "forced feeding frenzies" for me!"The next time old man greed taps you on the shoulder or you hear its emotional call luring you to the bait ...don't bite!In fact when in "the old days" when 1 did very short-term trading off a quote machine, one of my bestrules was to cancel any entry into a trade if there have been 18 rally bars. It didn't seem to matter if theywere 5-minute bars, 30 minutes or hourly, but on a consistent basis 1 would say that 18 bars, worm twitchesit you will, is about all the human mind can take before it snaps, and is then snapped in the pocketbook.
207May 1998
Volume 35, Issue 5The Worst Dog I Ever Had, Cost the Most
It was the snippiest, most belligerent untrainable mutt you could imagine and it cost the most becauseit had been bred for a couple of hundred years to be the perfect dog. Instead it was a disaster.Commodity trading systems are a lot like that damned dog. The more you tweak and refine them, themore you optimize and try to improve the breed of trades the system kicks out the worse the dog performs.So far this year my personal trading sucks. I've been up as much as 30percent, down the same amount and sit today with about a 10 percent gainfor the year, not much considering the risk and effort for all this.Naturally, I had to ask myself why.The answer came pretty quick. Last year was a great year, the account I traded went from $50,000 toover $1,000,000. And guess what ... that wasn't good enough for me so I kept breeding the system,tweaking it, thinking I was fixing it. Some fix! The peak of perfection in commodity trading is notattainable, yet we strive, and in my case, overstrive for it.What works is to keep it simple, understanding perfection or anything close to it does not exist in thisbusiness. In short, forget the glitzy impossible, the show dogs, find a mongrel and take good care of it.More on What WorksWell, well, Commodity Traders Consumers Reports just came out and gives us an immense insight intohow to make money in trading commodities. Let me explain. This service, started by Bruce Babcock andnow aptly run by Courtney Smith (a for-real guy who actually trades, by the way) monitors 26 of the mostpopular market letters' REAL PERFORMANCE. It is a tedious task, to say the least, in the last 12 monthsthey have had to follow each of the 3,590 trades we services had cranked out!Here's some observations I've made about the services that make money; to begin the services with thegreatest number of trades have been consistent losers. Guess, that old saw about over-trading is correct. Bythe same token, services that don't trade often seem to be consistent winners. But, the most consistentwinnings have been picked up by services have about 200-300 trades in any given 12-month time period.Services with more trades than that perform poorly. Currently the best performing services are FuturesFactors, up $92,761 on 252 trades in the last 12 months, Taurus up $94,307 on 355 trades in the last 12
208months and Commodity Timing, up $119,716 on 290 trades in the last three months. The service with themost trades, 655, was down close to $50,000.We can also break the newsletters into trading approaches. Generally speaking they are Seasonal,Trend following, Chartists and Gann/Elliot/Arcane, and here are the differences.Here the performance figures are immensely more revealing. I went back the last three years and foundthat the poorest performers in 1995, 1996, and 1997 have consistently been the Gann/Elliott/Arcane groupwho, as a group, has averaged a loss of close to 100 percent a year. This from the crowd that claims all can beknown, that you really can buy bottoms and sell exact tops.Here's another interesting point, the most expensive service has lost money on balance the last three years(they charge $5,000 a year) while the cheapest service, $45 a year, is a net winner!The seasonal letters did well a few years ago but in the last 12-18 months have not fared so well. Thelong-term trend followers led by Commodity Research Bureau and Commodity Trend Service have shownconsistent profits. In the last three years no service has been in the top 5 performers each year. But, thefollowing have been in the top performing group 2 of the last three, Commodity Trend Service, CommodityTiming, and Futures Factors. Hope all this helps you place performance, and the performers into some sort ofviable and working understanding of this business.
June 7998
Volume 35, Issue 6"The Most Important Athletic Ability Is the Talent to Comeback from Behind"
-Harmon KillebrewAthletics Are Such a Parallel to TradingMaybe it's just my personal athletic background, but I think not. Over the years I've written aboutthe similarities between winning on the court, track or field and the pits in Chicago. I don't think it'sany fluke the most successful bond trader in the history of the world was also a High School AllAmerican football star, Paul Tudor Jones a pretty darn good boxer, and Frankie Joe an outstandingprofessional baseball player.
209So, when I heard the above quotation from Harmon Killebrew, I was really rocked. Killebrew,Mantle, Jordan, Namath, Ali, were all born with and developed great athletic abilities, but, then so domany other individuals, who never become such superstars.I've always wondered why that is. What are the differences between the SuperStars and theothers? I used to think it was media flash, but then noticed guys like Brian Bosworth, Dion Sanders, oreven Bo jackson never attained superstar status though they had all the trappings of making it.There are many brilliant market lecturers, authors, analysts and traders, but the really great oneshave the same unique quality as Wilt Chamberlain . . . the ability to not blow up when the team startedlosing the ability to turn on scoring power when things looked pretty bleak. That's what makes achampion.Not raw ability, not learned ability and not luck, which clearly wins some games but neverestablishes legendary champions. Luck is too infrequent and too easy to see when it does appear.THE POINT THEN is that as traders we need to devote a great deal of time and energy intofiguring out how we handle "getting behind" and what our response is. Do we give up, do we fold, getangry? Or do we take the emotions of the moment and turn the anger or frustration into not justscoring points, but winning the game?if we are to win at this game, we must develop the ability to score when weare behind; that's the key ingredient to develop in your psyche.
June 1991
Volume 28, Issue 6What Causes Stock and Commodity Market TrendsFreight Train Theory Explained
The first 17 years of my market research revolved around trying to figure out when in the heck a trendwas about to begin, had begun, or was in the process of reversing.I read all the fancy math books, studied all the chart systems from Gann to Z charts, got totally lost inangles and confused by exponential. I had about resolved that the PhD crowd was correct in theirassumption that it is impossible to know the trend of a stock or commodity.
210An Important AnalogyThe problem, they said, is that the market is not a fixed energy vehicle, like, say a rocket. A rocketstarts with a certain thrust and runs into a certain resistance. Hence, we can measure its speed, projectwhere it will go and tell when it is spent.The market, though, is more like a ship at sea ... we see its wake ... the chart book price pattern ... andtry to tell from the wake where the ship is going. That's fine ... if the ship stays on course.Our problem is that the ship does not stay on course very often, as external energy flows-new shipcaptains-are always trying to take over the helm and redirect the ship.So, while we measure the wake, all we can learn is where the ship has been. The new captain, or eventhe old one, can and will change the course at will ... seemingly without warning.From Boats to TrainsMy biggest research breakthrough came in 1983, and then again in 1985, when I discovered what Iloosely call the "FREIGHT TRAIN THEORY." My theory is that once a train gets rolling to a certainspeed it is damn well impossible to bring it to an abrupt halt.Sure, go ahead and pull the emergency brake ... it will still take time for the train's forward force togrind to a halt.Ditto, Pork Bellies and Bonds, S&P's or Soybeans. Once any market really picks up a head of steam, it willkeep rolling, and in the process a trend will be established.Critical MassThe last paragraph above explains it all ...Trend, I always thought (and so does the PhD crowd), was a function of slope, angle, slant, etc. It isnot.Trend is begun by an explosion in price. The resulting new trend stays ineffect until there is a new explosion in the opposite direction.
211What happens between the explosion points is the construction or definition of trend, but not thecreation of trend. Trend is begun with a big reversal and stays in effect until there is a new reversal.This means all we have to worry about is catching the explosions and thenletting the trend that follows take us along for the ride.
August 1997
Volume 28, Issue 8The Farmer, the Gambler, and the Speculator
It's an easy game, this business of making money trading.There are only three or four rules to follow. But ... you and me ... we overdo the game ... and end uppouring money in, good after bad.How come? What can we do about it? At last weekend's seminar in Florida, Jake Bernstein shared avery telling story. It goes like thisSeveral years ago jake was speaking to a brokerage firm gathering of farmers, ranchers and a fewspeculators. After his speech he was asked if he'd like to meet the one customer who made money. Theysaid he wasn't very bright, but made money. Always.The old farmer and jake hit it off pretty well, so the gent asked jake if he'd like to learn his system."Sure," Jake replied. 1'd like to see what you do."With that, the crusty, aged trader opened up his chart of Pork Bellies and brought out a pendulum on astring ... held it over the belly chart and advised jake, 1f it swings up and down on the page, I buy 'em ... ifit swing cross ways, I sell 'em. There it is, jake, now ya seen my system."Jake stepped back, thought for a minute, and then asked, "That's all, there's nothing else to it?""Mmmm," mumbled the market wizard. "There is one other thing, but it don't mean much, I think. If Igot a loss at the end of the day, I get out of them things."I mulled over this wisdom on the delayed flight home (a bomb threat forced us to switch to anotherairline) and, while driving up 1-5 listening to Country Western music at 1:15 A.m., heard-I mean reallyheard-Kenny Rogers' song "The Gambler." It struck me that everyone else has focused on his words,"Know when to hold them, know when to fold them" . . . but the real message I heard was in the refrain,"You gotta know what to throw away, know what to keep."
212That dumb old farmer must have written Kenny's song. A gambler knows what to throw away ... badcards. Traders might want to listen to the farmer's and the gambler's work the next time they want to playspeculator.Proving the PointTo drive this point home I tried an interesting experiment ... my thought was to develop a tradingsystem for bonds that had three simple rules.Rule one was to buy today's close if it was greater than the close 8 days ago. No magic here, just ademand the market is trending higher. The next step was to know when to throw them away ... so I placed astop of $850. Anything beyond that would be bad cards.Finally, all cards ... trades ... would be held until a profit of about three times the stop was tested. Thebest was a profit of $3,500.With just those rules, one could have made $36,500 trading one Bond since they began trading. Theworst drawdown was a little large, but the average profit per trade, after $50 commissions and slippage, wasan attractive $160.This "system" was not based on magic or fancy math. The only strategy was that of moneymanagement. Kenny Rogers was right.
October 7991
Volume 28, Issue 70How to Measure the Public vs. the Pros
There is a big difference in the emotional state of the “public" and the "professionals " that I think onecan measure through watching the entry and exit styles they are most apt to use.I'd like to explain this fascinating technique that will help you spot major divergences in the attitude ofprofessional and amateur traders.
213Let's BeginLet's begin with an understanding of the typical "public" trader. Most likely he/she is short of casheither by having a small bankroll or, if fortunately possessed with a large bankroll, carries too manycontracts, thus landing in the same fix as the small-time trader.It is usually because of this pressure-which we bring on ourselves-that the trader becomes emotionaland easily influenced by his broker, the WSJ, astrology or gracious who knows, maybe even charts thatlook like candies.Think about it: When you are pressed for money. what is your natural reaction? Isn't it to run scared ...to cut your losses very (too) quickly and to play catch-up ... hopping aboard whatever looks like a good wayto make money to balance out your losses?That's the way it was for me, and I suspect pretty much the same for you.What Does This All Mean?What this means is that the "public" trader becomes emotional or irrational in style. In fact, pressuredestroys style, so neither style nor a system are followed. It becomes a willy-nilly game of catch up and thetrader dances to the flow of the most current wind, even if it is a breeze.The key difference is the public (or almost always wrong) trader appears to be unduly influenced byopening prices. In fact, this relationship is so consistent that since 1969 I have advocated the use ofopening prices for all market measures. In recent years, many analysts have finally gotten the message. For22 years, this same powerful relationship has beat through all markets, stocks or commodities.The KeyThe key you need to understand is that the public action can be measured by taking the differencebetween last night's close and this morning's open.Conversely, professional activity, or true underlying price direction. best shows up by taking thedifference between the opening and the close of the same day.
214August 1992
Volume 29, Issue 8Folks, It Just Can't Be Done
Admittedly, our last market letter clearly explained and laid out a projected market high you to"focus on August 14th-1 7th for the high to appear." Beginning on the 17th a bear market attack wasbegun on stock prices, as we now know.If we were like other services, we'd probably go out and buy a big ad in Investor's Daily you howgreat we are (were).But, folks, 27 years of trading has proven to me that forecasting prices, politics and our lives isdifficult if not damned near impossible. Please, let me explain ... because as soon as you get this point youwill become a successful trader.Gracious, What a Messy DrawerI've used the top right-hand drawer of my desk now for the last 18 months as a vault to store predictionsfrom a wide array of market letters (stocks and/or commodities) as well as other prognostications of what wasto happen.Last night I delved into this pile to rummage around with yesterday's news and possibilities. What I foundwas thrilling, enlightening, and most rewarding.This culmination of hard work and multifaceted predictions of the future illustrates quite clearly that-itcan't be done. Let's see, how do I prove it to you? Should I show you the chart from a leading computer typeletter that used a Neuro-Net to scribe out that bonds would stage a big bull rally-in February? Nope, maybe Ishould quote from an Investors Daily interview with Guru Elaine Garzarelli, wherein she expected (as ofMarch this year)that "Stocks should provide 20 percent returns over the next six to twelve months."Garzarelli follows fundamental indicators. Others follow astrology. Frankly, compared to the fancyfundamentalists, they have not done a bad job. What I mean is they are no worse than the better educatedWharton or Harvard forecasts.I could belabon the point by showing you one of this country's major forecasters whose graphic forecastshowed a continued bear market all the way down to a low in December ... in Bonds. But, so what? Wouldthat better prove the point I trust I have already made? If no ... do what I did ... collect all the forecasts thatcross your desk. Store them up for a year and let the point prove itself.
215When I was younger I had this silly notion that my personal future could be divined by some psychicmeans. Hence, I tried them all, palmistry, astrology, Tarot. The method did not matter, the outcome did. Ilearned a lot which all boils down to this, "There are better ways to spend your money."After all, I began as an art major in college, switched to journalism and here I end up using math to tradethe markets. None of those seers of what's to come, came remotely close to forecasting my future.Politics TooHeard "Slick Willie" say the recent DJIA spill-off was Wall Street's reaction to the Bush acceptancespeech. That's almost as bad a statement as to say our call for the August high predicted a bad Bush speechwhich would lead to the tumble. Speaking of politics, where are the spin doctors today who so boldlypredicted that it would be folly to run against Bush as he was unbeatable?OK-Let's Wrap This UpIt all gets down to this; in 27 years of trading I have yet to see anyone who can consistently forecast thefuture of anything. Every few years we have a Granville, Precheter, Inger or Williarns that holds a hot hand,but not for long.That's right-27 years-and not one of us have yet been right for long with prediction. Moral of the Month;"Just Say No" to anyone who claims such ability. God does not grant us that power it appears. But, he didgive us the ability to have a better understanding of things so that we might develop a systematic way ofdriving, flying, living ... even trading commodities.It Gets Down to ThisYou do not need to know the future of the world to make money trading (you'll never have that viewanyway). What you need is a consistent advantage in the game. No more. No less. That's where commoditytrading systems come into play, they, or any consistent approach, can give you and advantage in this game ...and that, folks, is all you need.
216September 1992
Volume 29, Issue 9The Rush of Trading
Dostoyevsky, the Russian poet and gambling addict, said the greatest thrill in life is making money on aspeculative wager.The second greatest thrill was losing money. Perhaps that's what led to the title Notes from theUnderground for his most famous writings. The point is well taken. Making money is a great rush, strangelyenough so is getting out of a loss. Few things feel better than getting out of that much pain and anguish.The DilemmaThis sets up a mental conflict. Negative action, losing, creates a "rush" or feeling of exaltation that ourminds scramble. Just maybe, the lot of men and women like us, is that we just like rush, thrill and excitement... to the point that we'll pay for the experience ... with margin calls.Think I'm kidding? In written interviews with almost 600 traders, when asked to list the three primaryreasons they were trading not a one of them put down (as their first choice) to make money. That's right. Theylisted things like, thrill, challenge, excitement ... but not one put to make money as their first choice.Here's my next point; when people call wanting to learn a system, or subscribe to this letter, they seldomask if we make money ... instead they want to know how many trades we have a week and if we trade XYZcommodity, their current love. Many callers lose interest when they find we don't trade XYZ, because that iswhat they want to trade. Period. Even though they have been losing money doing it!This Leads to Psycho BabbleThere has been a spate of books and seminars in the last few years claiming that all you had to do to makemoney was "get clear" to arrive at some sort of psychological understanding about you and the market.People have paid tens of thousands for this "enlightenment." Now it happens to be I know little bit about this.First, let me give my qualifications about what I'm going to tell you. I have my minor in psychology, I'mas comfortable in front of a Skinner Box as a chart book, understand the subject matter from more than just a"pop" vantage point.More importantly, though, there was a time in my life when I did indeed think it was our minds thatscrewed us up and kept us away from the unlimited wealth the markets seemingly offer. With that beliefsystem operating at full speed, I dabbled in them all. Geez, I could never admit it before now, but turning 50as this written, makes confession of the soul much easier.
217I tried Scientology, rebirthing, ARICA, EST, Rolfing, Reichan, sat for countless hours in a Zenmeditation center by Big Sur ... listened to subliminal tapes for a message I could not hear, chanted, panted,prayed and pranced with the Sufis ail to "get clear" so I could tap the market's till. In short, I went throughmore mental processes than coleslaw does in a Cuisinart.It was fun, I learned a hell of a lot about myself, my body and rest of the people out there-like you. But,you know what? None of that stuff helped one iota in making money trading. Not a twit.My experience had been to make big money-with splash as you all know then give a little back, playsome games and hit it big again. It seemed I was good, but haphazard.The Unvarnished TruthFinally it hit me ... all this time and money had been a waste.My trading success had nothing to do with my mental state. The market did not care if I'd rather drinkvinegar than kiss my mother. My mind-set about her, a Rorschach blot or my first-grade teacher ... no noteven my concept of God ... made any difference.The reason I lost money was not because I wanted to ... or that I was retentive, possessive, etc. Nope, Ilost because I did the wrong thing and losing was what screwed up my mental attitude or approach.It is not the other way around.So, for my money you can forget the psychobabble currently being offered. You don't need 6 hours in aflotation tank, mind-altering drugs, or hypnosis. All you need is ...A Winning System and PatienceFrankly, I don't know which is the most important, the winning system or patience.