This was really the beginning of my career.Everything had lead up to this point.In the process I became bulletproof.
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Chapter 3
Technical AnalysisClairvoyance for ProfitWhen a true genius appears in the world you may know him by thissign: that all the dunces are in confederation against him.—Jonathan Swift
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he year was 1992. During my odyssey to discover my success asa commodities trader, I had opened an account with a verywell-known discount brokerage firm in Chicago. If I told youwho it was, you would instantly recognize the name. At the time, theyhad a small room on the ground floor of their offices that was availablefor local customers. The room was full of quote screens, tables, and telephones wired directly to the trading desks of this company.The idea wasthat if you were a customer, you could come into the office and tradeyour own account right there, every day if you wanted to. It was similar29
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to the old-fashioned bucket shops that used to be so popular at the turnof the 20th century, except this one was completely legitimate. Thewhole idea was a really good one for business. After all, if you lived intown and you didn’t want the expense of setting up your own tradingfacility in your home, or you couldn’t afford to trade in the pits, this wasthe next best thing. You had good access to the markets at a reasonablediscount rate. The rest was up to you.Bear in mind, I was still the kind of person who relied heavily oncharts, graphs, statistics, and the like to determine “where the marketwould go.” I still hadn’t had my catharsis in thinking, so I was really justfollowing the herd to trading oblivion.The room was always full of peoplewho were trading. There were the usual fights over who had the screenfirst, people who always felt they owned the phone that you wanted touse, the name calling over who was “nuts for going long (or short)” onwhatever market was being discussed. There were constant practical jokes,things like unplugging a screen when someone was trying to execute atrade, someone urinating in the coffeepot; that kind of thing.What I found interesting was that the conversations and the general interactions between everyone were nearly identical to what goeson all the time in a “real” brokerage office. It was sort of like an adultRomper Room.1 I was constantly amazed at how ridiculously childishpeople would be both in their thinking and their actions. It still blowsmy mind that these people have money or are entrusted with it. WhatI didn’t know was that every one of these psychos knew less than Idid. I actually thought that the guys who traded knew what they weredoing, both in the “playpen” (as I called it), or in a brokerage officewearing a shirt and tie.Once I became accustomed to the whole scene and began trading there every day, I began to feel more comfortable about what I wasdoing. I would let people see my charts with all the lines drawn on them.I would explain what I thought and listen to what they said. After sometime I began to realize these people had no idea what they were reallydoing. In fact, the real shock came when I began working at a brokerage company shortly after losing my stake in the playpen. One of thebrokers in that office was someone I had originally met in the playpen.After blowing out all his own money, this nut-bag went into the businessas a broker. He was doing the exact same thing he had done before, but
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this time with client money. He had absolutely no clue. Believe it ornot, this kind of thing happens regularly. Not only do most people haveno idea what they are doing, they don’t even believe they need to know.The guys in the “playpen” and the guys in the broker’s office arevirtually identical; their constant point of view is that they all believeyou can find some reason for doing a trade by looking at a chart ofthe market with little lines drawn on it or reading an incomprehensibletable of numbers some computer spits out. So does the public. Neithergroup of traders would ever think to ask, “Who programmed the computer?” or “What is this attempt to analyze really based on?” I haveyet to find any broker or trader who could tell me that the Fibonacciretracement study is named after a 13th-century Italian mathematicianwho was looking for two things: 1) order in the universe and 2) thephilosopher’s stone.2 Fibonacci actually believed you could turn leadinto gold. (I’ll show you the irony in a minute.) Would you want thatguy trading your money? Both groups of people look at the same stuffand decide to buy or sell simply by interpreting what they think theysee on it. It reminded me of having your palm read.Another amazing thing I noticed in both places was how many people would stand around watching a screen of some market and constantlytalk. After the market would move to a certain point all the discussionwould go quiet and then someone would break the silence by announcing to everyone that he intends to buy or sell if the market moves to(such and such) price. A spirited discussion would follow, and then likelemmings, everyone, or at least those with enough courage, would alsoexecute a similar trade at or around the same point. Another lively discussion would follow about “what point to take our profits” or “whereto run our stops,” all of this with no prior thought or planning until thatmoment. Then the market would reverse and go the other way, resultingin yet another lively discussion about “how it will come back” or “if ittrades to (whatever price), I’m out,” and any number of things. Some guyswould take a small loss; some guys bigger losses. Some guys just held on.Some guys would wait to execute at that price. Some would add to thelosing position and hope for the best. Then the market would reverseand trade back to where it started. Some guys would get out there to“cut their losses.” Some guys would say: “I’m reversing.” All sorts ofthings. Eventually, the market would close.
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Then both rooms of “children” would have the same results: somewinners, some losers, but always more losers than winners. The loserswould go back to the pictures with lines on them (or the numbers inrows), to “find out what went wrong.” The winners would all point tothe same pictures with lines on them (or the same numbers in rows), andshow them “where they went wrong.” This would set off yet anotherspirited discussion, followed by pontificating by the winners, philosophizing by the losers. Then it was time to hit the bar. This same patternhappened day after day, over and over again. In the end, the group ineither place kept changing as one by one the losers eventually werereplaced by new potential losers. Subsequently, the winners turned intolosers and were replaced by new potential losers. Then all joined theparty of losers in transition and winners in training to become losers.Looking back I wish somebody would have slapped me. I was that guyfor years. What a complete waste of time. I’ll never get those years back.While I was in the phase of lunacy—called studying the markets—anamazing thing happened that started me down the road to true understanding. I share it with you in as much detail as I can remember. I swearto God this actually happened. To the best of my knowledge, the shabbyguy in this story still trades in the playpen. For all I know he was analien making a pit stop on earth and had a little extra time to kill.It was a Monday morning around 10:00 a.m. I remember it wasMonday because the discussions after the weekend in both the playpenand the brokerage office were always the same: Who got laid? Who gottrashed? Who got arrested? Who saw some great movie? and so on. Inthe middle of enduring a conversation about someone who hadn’t gonehome the whole weekend, a man walked in whom I had never seenbefore. The playpen got real quiet. I thought that maybe he was theowner or something. A regular, whom I called the Fly because he wasalways hovering around behind me and looking over my shoulder atwhat I was doing, leaned over, whispered real low, and said, “Stay awayfrom that guy, he’s nuts.” He said it in such a way that made you thinkeveryone else in the room must be an Einstein. “Why?” I whisperedback. “Just watch,” said the Fly. So I did.Now remember; in order to be in that room you had to have atrading account open at the firm. This guy was dressed in a baggy oldwinter coat, worn tennis shoes, and hadn’t shaved for a few days. He almost
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looked like a street person, but there he was. He calmly sat down infront of a screen and everyone gave him a wide berth. He just sat therefor a moment with his eyes closed, collecting his thoughts. He let out along sigh and went to work on the keyboard. He would stop, thinka little, and tap away some more. He must have done this for a whilebecause eventually everyone else went back to what they were doing.I kept watching. He picked up the phone and asked for the back office.He very calmly asked what the balance was in his trading account. Hepulled a pencil and notepad from his pocket and wrote that down, thenput the pencil and notepad back in his pocket. Then he did what atthe time didn’t seem all that strange. He pulled an empty, green glassCoke bottle from his other pocket and put it on the desk next to him.I thought he was just getting rid of his trash. I had no idea that act wasso significant. Meanwhile, the Fly buzzed over and said, “Now watchthis,” and so I did.The shabby guy sat for awhile, and then his eyes got real wide.He grabbed the Coke bottle and put it to his ear exactly the way youwould put a telephone to your ear. He said, “Hello.” Then he jumpedout of his chair, and yelled around the room, “You gotta buy! You gotta!They’re saying it’s time to buy! Hurry before it’s too late!” He thendropped the Coke bottle, grabbed the real phone, and yelled, “Buy ahundred May at the market. Be quick about it. This is account numberXXXXX!” He proceeded to wait a few moments and then startedwriting furiously on his old notepad. “Okay, 30 at even, 30 at a quarter,40 at one-half. Right, got it; new order. Sell my 100 at (whatever theprice was) stop. Thanks.” Then he hung up and sat back down lookingonce again calm as can be.I wasn’t sure what to think. This shabby guy walked in, traded ahundred-lot of something, did it while yelling at everybody in the room,and did it all, by my assessment, because someone called him on the Cokebottle. “See what I mean,” said the Fly. I didn’t know what to think.Twenty minutes or so later the shabby guy did the same thing.His eyes darted to the Coke bottle. Then he grabbed the Coke bottle and said, “Hello.” Again he jumped up and yelled “It’s time to sell!”this time, called the desk to liquidate his position, canceled his stop,and then sat back down. He then proceeded to calculate somethingon the notepad for a moment. Then the shabby guy very calmly got
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up, walked around the room, and said, “It’s been nice trading with youboys today,” and walked out. Everyone basically ignored him and oncehe left the conversation started about what a whacko this guy was.While they are all talking, I walked over to the screen that he was usingto look at the market he was trading.There on the screen is the five-minute May pork belly chart. Askanyone what trading pork bellies is all about, on a five-minute timeframe no less. I saw his entry point and his exit point. I then convertedto the daily chart and saw this guy had captured about 75 percent of theday’s range. I then figured what that meant if you had a hundred-lot on.The Fly told me this guy comes in every now and then with no setpattern. He does the same thing every time; talks to the Coke bottle,trades, and then leaves. When I told the Fly that trade was worth about$32,000, you know what he said? “Look, he’s just some nut. Maybe theguys at the desk feel sorry for him. He probably doesn’t even have anaccount. They probably held his orders. They never placed them. No onetrades like that.” I asked the Fly, “How did he get in here?” “Who knows?”was his answer. I asked the Fly if anyone looked at his other trades. “Ofcourse not, he’s crazy,” he said. And that was the end of the discussion.The Fly was not the first person I met in this business who wouldignore reality when it stared him in the face. What made such animpression on me was this: If it was a real trade (and I believe it was),this guy, crazy or not, had executed both sides of his trade at preciselythe right time, however he chose to do it, and he took the most amountof money in the least amount of time that particular market had to offeron that particular trading day. It was simply amazing to me. All of thepeople in that room were attempting to do the very same thing everyday. All the people in that room had every tool the industry could provideyou to do it with except the magic Coke bottle. As time went on and mylosses eventually put me back on the phone at a brokerage office,my thoughts were constantly on how to improve my trading for myclients and myself. But that whole experience kept coming to the frontof my mind. Was that guy just lucky? Did he have some secret? Thenthe big question: How do I learn to do that?If you stop to look at the real implications of what had happenedand start thinking it through, the conclusions are simply beyond theacceptance of nearly everyone in the business.
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This is important, follow me on this: There exists unlimited marketinformation that can be compiled in an infinite number of ways, which,in turn, can be interpreted in an infinite number of ways. This takes itsform as the huge business of technical analysis. Add to it the additionalinformation such as books, tapes, seminars, and so on, that also is a hugebusiness designed to help you make sense of the voluminous amount ofmarket information. The business of commodity trading grows largerevery year, and the fact still remains that about 80 to 90 percent of thepeople who execute both sides of at least one trade during their lifetime will remain net losers. Every one of these losers has access to the sameinformation as everybody else. It is true that many of these losers don’tknow they need to learn the business of trading. But the people whodo know, and buy this stuff, are still in this losing group. So if the market information is all the same for everybody, then the problem mustbe in how it is used—or it’s something else.What is still striking is that the shabby guy in this story apparentlynever uses any of the technical analysis information. Also consider thatmany of the people who write the books, hold the seminars, sell thecourses, sell the trading programs, and the like, don’t even trade. Oneso-called expert, the guy I mentioned in the introduction, fills his marketing material with scores of testimonials. People just lauding overhow incredibly reliable his technique is, like he’s the only one with theHoly Grail of trading. You can have this amazing secret for only $69!(We’re having a sale this week.)I personally have met one individual who writes a new bookevery two years or so, is highly regarded by the public, has sold lots ofseminars, is highly sought after to lecture at industry functions, and it’srumored that he hasn’t traded for almost 15 years. He is the consummate professional opinion gabber. I’ve met this guy more than once.You would be amazed at the crowds that draw around him. He owns adiscount brokerage house. He even does television commercials. Peoplereally believe this guy has some secret. When I was going through myperiod of delusion, I bought his books too. When I started coming outof the fog, the last time I met this guy, I asked him a question, “Canyou show me your personal trading results by using this information?”It was an honest question. I assumed that he traded. I didn’t mean toput him on the spot. I just assumed if he was selling it, there must be
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some truth to it. Or at least something that would make the price fair,even if it only helped me make one additional winning trade. Youknow what he said? “Well, I’m retired now. I want to help others learnhow to profit.” Read: “I won’t take the risk you are willing to. I’d rathersell you what you want to hear.”You can make a lot of money in commissions helping losers execute their trades. You can make a lot of money selling “loser trainingmanuals.” You can make a lot of money selling dreams. I finally understood what was happening through all this when my girlfriend at thetime asked me: “How much money have you spent over the years onall these books and charts and stuff?” I added it up one day and toldher. “There are thousands of guys like you out there, right?” was thenext question. “Have you made more money?” was the final question.When I answered, “No” (which was the truth at that point), you knowwhat she said? “You should be in the racket around the racket. Theydon’t know any more than you do.” It was a revelation.I finally decided to test this hypothesis by selling my own “technical analysis.” During the summer of 1994 or 1995 (I would have tolook), I started a 900 number line giving out price action opinions infive different markets. In the process, I discovered that the 900 numberline business is even sleazier than this one, but that is another story.Since the provider is gone, the records are gone, and it was a long timeago (by this industry’s standards), I’ll tell you the name of the business.It was the Pro-Traders Hotline. I charged $1.99 a minute and the average message was three minutes long. I even offered a free newsletter ifyou left your name and number. I hoped to make new clients out ofthe ones who left their phone number. I updated the line’s recordedmessage at about 6:00 a.m. every trading day and again around 4:00p.m. I placed a small ad in a trading newspaper and took my chances.I had no idea that anyone was calling until I got my results every week.Within four weeks I was being paid a net profit on this. Within 90 daysit was a few thousand dollars a month. It really was a neat little business. Then the provider of the service disappeared and I never got anymoney. All in all it was an interesting experience. Here’s the kicker:I made the whole thing up.All the daily recommendations I took from the previous day’s highor low. I invented some hyperbole and hype about support or resistanceand said, “Make sure to run your stops.” A few times I just flipped a
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coin and said, “Go long (or short) on the open.” Sometimes I would say,“Stay out until the market defines itself.” What the hell was that supposed to mean? The bottom line is people ate this stuff up. If I reallywanted to be in this just for the money, I could have figured out a way topump that phone line for all it was worth. I really believe that is whatmost of the support industry to commodity trading is really doing.I bet most of them are doing it ignorantly and really believe in the B.S.they sell. I’m sure a few know exactly what they are doing is selling B.S.This whole thing can be summed up in the following wire serviceopening comments. This was actually on the CQG network, seen bythousands of traders every day, all of them using it to help them trade:N.Y. World Sugar Futures Called to Open Unchanged08:36:41 CST 04/03/95 KEYWORDS: FOOD,COMMENTNew York-April 3-FWN—N.Y. World Sugar futures arecalled to open unchanged, based on overseas trading. At theLondon Commodity Exchange, May sugar is currently down10 cents at $374.20 after trading between $375.00 and $373.40.The physical market remains quiet with no news of any sales,several sources said. As a result, traders expect May sugar to continue trading back and forth between 14.00 and 14.50 cents.The only known tender at this time is on April 19, when Egyptwill be in the market for 50,000 tons of raw sugar for deliveryin July. “Technically, the market looks flat and is in a triangleconsolidation due to an ABC correction,” one technical analyst said. “At this point the 40-day moving average has flattenedout,” this source said. “And open interest over the last monthhas done little. As a result, this source said, “THE MARKETCOULD GO EITHER WAY.”The caps are mine.You need some analyst to tell you that?Therein ends our object lesson on the validity of technical analysis.It is important to remember a few things. The real business of technical analysis is an important part of trading. It does have its place to thesuccessful trader. It can be an indispensable part of lasting trade success.The entire key is how it is used and understanding what it is really saying. That’s what I want to talk about for a minute.
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Let’s review what we have learned so far:• The entire world has access to the same information in the formof price action. All the markets have all the traded prices in the sameformat.• There is an entire industry that takes those trade tics and compilesthem into many different formats. They then interpret what thoselittle price changes mean based on some reason.• Some stop there and some add additional interpretation as to whatyou should do in that market.• Some want you to “do it on your own” and provide all sorts ofpersonal opinions on how you should learn to read this stuff.• Some will even do all this for you and sell you a complete set oftrade rules to follow to make your fortune; including “high-tech”software.With all this information the fact is, in an ever-growing business,almost everyone is a net loser. So how can technical analysis or marketeducation be of any value?The value is in the fact that 100 percent of the losers are using it.Suppose you could find out where they are trading and take your position against them? In a small way that is what the pit trader does everyday. That’s why the membership to the “club” is so expensive. If you,as a student of the market, were to stop right now, put this book downand every other book down, and ask yourself, “Where is the loser?” Youwould begin the process of learning what technical analysis is all aboutand why it has its place.The real value of technical analysis is that everyone using someform of it or buying some interpretation of that analysis really believeshe will profit by using it. By knowing where that person is and trading against him, when he liquidates his loser, he must pay the winner.That person should be you. But he thinks it will be him. Because hisbelief is so strong in “what the chart is saying,” he is willing to executea trade, putting his capital at risk for the eventual winner to take. It cannever be any other way. If using the information results in a winningtrade, he will be so convinced that it is accurate that he will never tradeany other way. He won’t ever consider evaluating the market any other
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way because “this way works.” Therefore, he will eventually make morelosers. The reason is because all interpretation of all price action is nothingmore than someone’s point of view. Every technical “system” has itsshare of winning trades. Once it works one time for someone, his pointof view becomes all the time. At the very least he is willing to do a fewmore trades to find out. This is called “testing.”Some true idiots do something called “paper trading.” The idea behindthis form of mental masturbation is this: “If I pretend to trade long enoughI will learn how.” By that reasoning, if you play enough video games, youwould become qualified to fly an F-16 into combat against someone whois trained to kill you, and do it equally as well as Chuck Yeager.3 It’s madness. It really should be, “If I pretend to be a loser, eventually I can becomeone.” Some very sophisticated paper traders will come up with some smallsomething that they believe is a pattern (from their point of view) and “backtest it” through 10 years or more of price action, thereby “confirming” itsviability. They then begin using it with the same results as everyone else—or selling it to you. Remember, none of those hypothetical trades were ever doneby anyone. How easy is it to say, “Well, I would have done such and suchhere because looking back the market would have done such and such anyway”? That’s all these people are really doing. They are saying, “Since themarket was eventually moving lower, I would have found a way to be short”or vice versa.If you doubt my hypothesis, here is some homework. Peruse the “forsale” section of any industry magazine or paper. Count the number of“trading systems” available as the next “for sure” approach. Do this for a fewmonths. Watch how fast these systems come and go. Call up the authorsand listen to them justify what they are doing. Ask them how much moneythey personally have taken from the markets. If you want a real eye-opener,ask these fruitcakes to fax you the latest monthly statement from their brokers showing gains. Listen to all the reasons why they can’t. Then go readthe classified ads section for people selling these same systems after having tried them. Call those people and ask them why they are selling them.Without fail the answers will be along these lines: “Well, it’s just not whatI had wanted. Oh sure, it works (which is a lie), but I’m looking for something more aggressive or that takes less risk (that is, I want to get my moneyback). I’m not satisfied with my results (I’m looking for a new system torecoup my losses).”
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Let me make this really clear: If there were a system you could buythat worked, that’s what people would use. There would only be one ofthem. The rest of the people are trying to find a system or create oneby doing their own research and charting, or God only knows what.The only way to see if it really works is to trade with it. When they do,they lose, and find out it doesn’t work. Then they try something elseuntil they run out of money. This happens every day.Can you see why I wrote this anonymously for the first edition?Someone could become furious. All the people in the business of selling all these different colored crystal balls could be out of a job if themajority of people putting their confidence in all this insanity were towake up and say, “Hey, this is a rip-off.” For some reason everyonebelieves in this hocus-pocus. That will never change; at least for rightnow. But none of these “purveyors of profits” like their “profession” or“science” to be called on the carpet. There’s too much “evidence” thatthis sort of thing works. They will be happy to show it to you. Do youwant the acid test of the evidence? Ask whoever is trying to sellyou whatever it is they are trying to sell you to let you pay for that system, research, tools, opinion, or analysis out of the profits that it generates. It boils down to getting past illusions. The kind you tell yourself,others tell you, or the kind you let yourself believe. I think I’ve learnedhow to do that. I’ve been able to discover what the real secret to usinganalysis is really all about and what analysis is really trying to do.It’s like this: How many people take the “science” of alchemy seriously today? The hypothesis that you can turn lead into gold doesn’tfit anymore with the facts of particle physics and chemistry. We havecome to know the true nature of gold and lead—they are separate elements. Did you know that, at the height of the belief in alchemy, therewas a school in Amsterdam that offered a degree in alchemy? That isan historical fact. You could receive a degree from a center of learningrespected by the known world at the time without anyone ever in history before or since ever being able to transmute any elements into somethingelse. It’s never been done. It is physically impossible. For some reason peoplethought you could do this. Somebody must have said, “Wouldn’t it beneat to turn lead into gold? We would all be rich.” It doesn’t matterwhy they thought that or how much the basis of that idea was rooted inthe known reality of the time, it couldn’t be done then and no one will
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ever succeed at it because the actual unknown reality (the higher realityif you will) won’t allow for it. That didn’t change the fact that peoplebelieved it could be done. This belief existed for almost a thousand years.You could study it until you were an “expert” in it. All of what therewas to know about turning lead into gold—great halls full of hundredsof people all discussing exactly how to do it. If you could convincesomeone you had done it, people would listen to you and value whatyou said very highly. If you claimed you had done it only once, andsimply wanted to share with others your knowledge (for a small honorarium) you could do so. Let me repeat: This is a historical fact.Others would be so convinced that you knew what you weredoing that they would follow in your footsteps. They would buy yourbooks. They would attend your traveling seminars. People would hireyou personally to perform this miracle and teach them how to do it. Ifit didn’t work, there was always some reason. With enough time, “Wecould fix that.” Others would take what you knew and add to it to“improve” it. Others would try to refute your ideas with ideas of theirown. Still others would keep some parts of the whole concept butignore other parts not to their liking. Some would combine parts ofthe entire theory with other parts into incomprehensible combinationsthat only they understood but claimed worked. “I’ve found it, but I’mnot going to tell you, not just yet. I’m going to test it some more.” Thewhole world of alchemy might shower all kinds of awards on themand laud how far they have “advanced” the “science.” Sometimes theywould “teach” those secrets to only 23 people or so. These were allfakes, frauds, charlatans, cheats, liars, and very deluded honest peopleall seeking something that couldn’t possibly be done. Either they weretrying to exploit this belief to steal money or honestly believed they could makemoney. Some people spent their whole lives in this pursuit and diedpenniless still believing it could be done.Does any of this sound familiar?Remember when I said in Chapter 2 that everyone’s reality is different? All of the charting, systems, and analysis are simply someone’spoint of view on what is happening. They then use all this stuff tosomehow convince