HOW TO MAKE MONEY IN THE FUTURES MARKET
...AND LOTS OF IT by Charles Drummond Ted Hearne and Associates, Inc. 5520 North Magnolia Chicago, IL 60640 USA
How to Make Money in the Futures and... - Drummond, Charles
How to Make Money in the Futures and Lots of It By: Drummond, Charles
http://www.traderslibrary.com/moreinfo.asp?item=2453...D%26sort%3D%26lc%3DQuickSearch%26submit%3Dyes%23245330/01/2004 13.48.29
This item is currently unavailable from the publisher. Item #: 2453 Pages: 583 Type: Book - Hard Cover Publish Date: 1/1/1979
FIRST EDITION
Copyright © 1979 by Charles Drummond
All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems without permission in writing from the author, except by a reviewer who may quote brief passages in a review.
PUBLISHED BY CHARLES DRUMMOND; WRITER PUBLISHER For information contact: Ted Hearne Ted Hearne and Associates, Inc. 5520 North Magnolia Chicago, IL 60640 Phone: 773-728-6996 Fax:773-728-6886
[email protected] Or visit the P&L Dot website at www.pldot.com
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This publication is designed to provide the Author's opinion in regard to the subject matter covered. It is sold with the undertaking that the Author is not engaged in rendering legal, accounting or other professional service. The Author specifically disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any advice or information presented herein.
The formula on page 573 is copyrighted and permission is granted only to the individual purchaser of this book for use in personal trading activity only. Use of this formula in any commercial venture for profit is prohibited.
acknowledgements
Needle~s
to sa¥, I ain't the first one, to give thoughts towards commodities. There's plenty before me. Thousands. Everything that is herein is plagarism, one way or another. All the thoughts of hundreds of writers have somehow gotten to these pages from my years of reading and involvement with commodity markets. Pure plagarism. Except no more than the musical composer, painter, architect, scientist, whose works express the past with an inherent individual creativity, all their own. So it is with mine. Bearing this in mind, I give special recognition to Tewells, Harlow, Stone who wrote ' Commodity Futures Game, Who Wins, Who Loses, Why! ' and Robert Vichas, in ' Getting Rich in commodities, Currencies, or Coins, before or During the Next Depression', all of whom gave me a special expanded knowledge of human nature and market psychology, which display the realities of the market place phenomenon. I appreciate and respect the book selection of the 'bibliography' , too numerous to mention here, but without which the trader would never create a responsible library. These works, added to that of my own, would give the reader all the information he or she needed to consistently make lots of money, in this the most fascinating of all free-market activities. I also wish to thank my ten doing the typing myself,,, Tobacco Company of Holland, Troost Special, Van Rossems
little pinkies, because I insisted on and my 'behind', ,,, and the Royal for pounds and pounds of their odourless pipe tobacco.
Being a private person, I am embarrassed not to mention the unfailing support of a few personal friends, who knowing my obsession with privacy, would be offended if I acknowledge our association in public, because we view our relationship as something special. Without these people, my knowledge would have gone to the grave with me, and if this book should make any contribution to the knowledge of market movements and a trader's successful handling thereof, then i~ is to these friends that we should all be grateful. To friends, I wish to say thank you, for what has turned out to be quite an experience.
I
BIBLIOGRAPHY A
Commodity Futures Game Who Wins, Who Loses, Why ! I974 Richard J. Tewels, Charles Harlow, Herbert L. Stone McGraw Hill
B
Commodity Trading Manual I973 Chicago Board of Trade
C
Charting Commodity Market Price Behaviour 1969 L.D. Belveal Commodities Press Wilmette. Illinois 60091
D
Economics of Futures Trading for Commercial and Personal Profit I97I Thomas Hieronymus Commodity Research Bureau Inc. 140 Broadway N.Y.N.Y. IOOOS
E
Forecasting Commodity Prices - How the Experts Analyze the Market 1975 ( 14 authors ) Commodity Research Bureau
F
Dow-Jones Irwin Guide to Commodity Trading 1973 Bruce Gould
G
Getting Rich in Commodities, Currencies or Coins, before or During the Next Depression I975 Robert Vichas Arlington House Publishers I65 Huguenot St. New Rochelle N.Y. IOBOI
H
How I Made One Million Dollars Last Year Trading Commodities I973 Larry R. Williams Conceptual Management Carmel Valley Ca.
I
Making Money in Commodities I976 Eugene Epstein Braeger Publ. Inc. 200 Park Ave. N.Y. N.Y. IOOI7
J
Modern Commodity Futures Trading I975 Gerald Gold Commodity Research Bureau I Liberty Plaza N.Y. !0006
K
Sensible Speculating in Commodities or How to Profit in the Bellies, Bushels & Bales Market I972 Stanley Angrist Symond & Schuster Rockefeller Centre 630 5th. Ave. N.Y. N.Y. I0020
1 L
Speculation, Hedging & Commodity Price Forecasts 1970 Walter c. Labys , L.C.W.J. Granger Heath Lexington Books, Lexington Massetucists
M
Successful Commodity Futures Trading or How You Can Make Money in the Commodity Markets 1974 T. Watling J. Morley Redwood Burn Ltd. IIO Fleet St. London EC4A 2JL
N
The Commodity Futures Market Guide I973 Stanley Kroll, Irwin Shishko Harper & Row Publ. IO East 53rd St. N.Y N.Y. I0022
0
The Fastest Game in Town I973 Anthony M. Reinach Random House
p
Trading in Commodities An Investor's Chronicle Guide IS74 c.w. Grainger Woodhead - Faulkner Publ. Ltd. 7 Rose Cres. Cambridge England CB2 3LL
Trading Commodity Futures
DEDICATION
to self-aware people & all commodity traders & the holy grail
& to all those who I have met, and will meet, who have anything to do with commodity futures trading & to the ultimate art,
commodity trading.
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introduction Anyone can make millions of dollars in the futures market, if they know the rules of the game, the game itself that is being played, and why the rules of the game are as they are. The rules of the game are simplistic and factual, and ~t is up to the reader to learn the rules of the game and to play by those rules. The futures business is one of the toughest in the world, both for the trader and his broker, as well as the people that handle all the machinations of an executed contract order. Be that as it may, if we are serious about the matter, the concept of futures trading can be one of the most stimulating of all experiences, and to some, more so than sex. The fact of the matter is, is that it is as it is and that accordingly U must ask U'reself some questions and determine if it is all worthwhile. Do U enjoy success, and money. And, can U handle it. Do U want to make millions of dollars, maybe twelve million in eight years, or achieve my goal of IOO. The opportunity is there, and nothing will stop the trader from achieving that goal, except his or her capability in appreciating the facts of life as they relate to the market place, and being aware of these capabilities, why they are as they are, and what to do about them, and then what shud be done in relation to executing a market decision, with which this book will be of some assistance. Take some time, maybe one year, if U are not that much of a seasoned trader, to becum a student and a pro of what we call the 'basics' of commodity trading. ( Maybe U will becurn a seasoned trader in that period, as opposed to our other fellow, the 'blown out of the box' trader who will most likely read a few pages and quickly go to the market, excited with his new found wisdom,- the flippant pro that he is. ) Then,U can also, and add it to the above, possibly becum a student and a pro of ~&L (Point and Line) Charting, of which this writer is the author. U cannot becum a pro of P&L unless U have passed the 'basics' course. Why ? Because I said so. ( The book will explain. ) ( something about forests and trees. ) U cannot be a pro in P&L trading without qualifying as a knowledgeable graduate in acceptable basic training. So there. With this in mind, we have geared our approach to the 'just after beginner' trader, who maybe has been bombed out of the market with a few dozen trades and wants something to grapple the problem with. Also, it's for the trader who has a little stature with experience, yet who needs rounding out. But, please note that this author does not wish to mess around with the mind of someone who has a winning technique, but only to instruct him/her to stick with it, maybe with some practical guidance from this book and to broaden his/her knowledge base, all to support that winning technique. As for the real pro, might I say, have a good laugh with this book. Who needs it. Right ? Right. U've already achieved 'consistent winner' status, (altho' U're probably curious about anything to do with commodities.) There is nothing in this book to explain what a futures contract is, or what a 'fill' is and so forth. The beginning trader can obtain that information from any large brokerage firm or any commodity exchange, and after doing so, he or she mite study a book like this, maybe ·for a few months, - I suggest six months to a year, - before trading; all to the avail of encouraging u to the principles which, someday, maybe in eight years, wud entitle U, if I may be so provocative, to have that twelve million.
1
I have tried not to be academic with writing style. Who needs it ? The only thing we wish to be academic about is knowledge and ability. The prose is informal and friendly, perhaps too friendly and uses the modern dictum, when opportune, - such as 'U' for 'you', 'shud' for 'should', 'becum' for 'become' and so forth. And why not ! It makes for more st~ulative reading. Also, we tend to repeat certain sentences, phrases and ideas, so that the trader mite unconciously becum aware of their imput, and since I place certain relevance on them, the reader will, consequently, incorporate them automatically into their thinking processes when he/she evolves and employs a trading plan. Some sections will be too ponderous, (like this introduction) some too flippant, -maybe haranguing, maybe too presumptive, possibly parading propinquity, but at all times prodding, and for a purpose. ( Sorry to be so eloquent. ) The sections on philosophy, technical analysis, and psychology all are woven one to the other, because U cannot have one without the other, if U are to respect this book. I am serious about that. ( I want U to have that I2 million. ) Accordingly, the section on philosophy is·meant to be instructive and didactic; psychology throngs into the pedantic and the areas of basic technical format, including P&L Charting involve actuality, and are meant to be realistic. If the reader wishes to becum an involved student of P&L, I have provided plenty of material and comments in the section on_P&L (Point and Line) Charting. Hopefully, he/she will experiment and delve deeper into its concepts. For U cheaters out there who do not wish to put in the effort, I'm sure U're target of interest will be in chapter I3, where we parlay .an investment of $3,400 into $220,050 in fifteen weeks. For the serious student, however, the rewards will be an awareness that P&L can be phenomenal in its application to market analysis, and accordingly its concomitant financial success, and also that it is not applicable when not tied into the 'basics' of technical and fundamental analysis, which will be presented in this book. P&L can be an earthquake of an experience. It can change U're life, possibly much too fast, since U may have an over-assumption of U're ability to master the project. It's a big world out there, and it's the nature of the market to reward U're sudden success with the opposing debilitation of unexpected, adverse, returning of monies to the market place. Be careful of assuming that U are a pro of P&L Charting, especially after a succession of positive market applications. If U sit and take it easy and quietly trade \-'i th a plan at hand, -.·a well formulated plan, explained in this book, the trader will find that there's no end to the enjoyment of what success in the futures market has to offer, and what it can do for the trader and his circle of influence. U are going to get U' re money' s worth out of this book.• So, don't be in such a hurry that U blow U'reself out of the box. One more thing. P&L cannot be computerized. So U are at the distinct advantage of n~t being succombed by the computer markets that exist to-day. u will be acting long before they do. It's rather a smug feeling to have nothing but the parameters of your brain with which to operate. Man will survive Now, make money in the futures market ..•.. and lots of i t ! ( Sorry to be so corny, but I'm serious. ) One hope •...•• the lord above, preserve the futures market, for us all, the trader, the hedger, the market place.
contents
PART
A
THIS IS THE FUN PART
CHAPTER 1
C
TECHNICAL )
JUMPING INTO THE FORAY .......
pq.I
the who's, where's, why's & a few how's introduction;charting;chartists; fundamentals vs. charting
CHAPTER
2
METHODS OF FORECASTING PRICES ... pg.I4 discussion;moving averages;weighted moving averages;oscillators;volume oscillators; balanced volume;resistance index;index numbers;structural theories;understanding general econo~cs;correlation analysis; market theories;fundamental analysis;trend analysis;congestion analysis;volume;open interest;cash;basis;odds;SO% retracement; chart formations;period of time price reversal;support and resistance;contrarian ~~J opinion;committment of traders report;news; /-1 point and figure;~the.matical trend analysisf f_({( ~ J pre~ums;registered warehouse receipts. H
CHAPTER
f\JO
3
I WANT U TO MEET THE MARKET PLACE
. . . pg. 3 8
the commodity market-opportunity knocks; why invest in commodities;stocks vs. commodities;what the market place is like; \7 speculative activity;conspiracy theory; /-(dishonesty of floor brokers;brokerage / a business people;the mish-mash of traders; market emotions;what does the future hold for co.mmodities;further information •
...
CHAPTER
q
VOLUME
pg.54
secret of the pros critique;classification;volume in congestion analysis;volume in congestion breakout analysis; volume in trend anal sis·volume in reversal analysis;~·n,t~r~a~-~d=a~~-===-=~~~~
summary.
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INTRODUCTION In the reao~ng of any chart formation, it is important that the underlying explanation of what is happening is held in mind. Random Walk - Trending - Discounting - Congestions - possible Reverse Formations - Fundamentals - "floors" and "ceilings" -/ for each commodity all help in the interpretation of charts and help prevent some of the more spurious reasoning that can cum from technical studies. My advice is not to lean too heavily on mechanical approaches to market analysis, for example, relying solely on when moving average lines criss-cross or any other of those "silly" little lines. This removes the trader from the human elements, which make up so much of the correct analysis of price movements. If the mechanical approaches really performed all that well, profits wud disappear, because everyone wud apply sirnliar analytic procedures.
T 2
':HE FORAY
Technical analysis is for the short term. While technical indicators do not meet the test for medium or long term price projections, they are priceless when used in combination as consistent warning signs to alert U against short-term hazards. The entire objective of technical analysis is to anable U to position U'reself in the market under favourable terms. Technical analysis must be short-term enough to enable U to exit the market when the trend to which U have committed U'reself develops an increasing potential for reversal. To buy/sell based on price level analysis, as opposed to price movement analysis takes no account of the short-term movements of prices. To buy a certain commodity just because a price is $2.00 or looks like a convenient place on the chart, is not taking into account price momentum - price movement. In order to ascertain price movement - momentum, one must apply technical analysis, and this technical analysis must be short term oriented. That is why I am delighted with the application of Point & Line Charting expressed further on in this book. There are myriads of approaches available to the trader. In the following section I will be listing but a few. The trader must accept those to which he is obliged to commit hinself, based on his/her acceptence of them. His/her acceptence must flow from knowledge, experience and awareness. The fewer technjques
u
employ, the happier U will be.
u will find however, Point & Line ( P&L ~ Charting flows very well with any or all of these methods, because P&L charting is the penultimate in short-term day to day and intra-day analysis. I know of no system wherein that particular system analyzes market momentum, by taking into account the high/low/close of the specific day U wish to execute prices. However, the general medium to long term approaches, which includes fundamental analysis, enable the trader to be aware of price movements and identifying the broad picture. It is very impor~ant to be able to identify the " picture " in chart formation analysis.
CHARTING Ph.Ltol>ophy A study of market action is an investigation of people interreacting with the market. Since we cannot insert people into test-tubes ( at least not yet ) to research their psychological
THE FORAY
make-up, we can only use proxies prices , which provide a means to measure the results of people's reactions. Whatever one believes is being measured, the entire approach is being based on the assumption that certain repetitive patterns of price and action will re-occur, either before, during or after a significant price movement. To my mind, u shud have charts which clearly tell U the tale of the market and which wud be the most helpful to u in U're forecasting ability. U're chart is meant to be a road-map on the path to fortune. If it is too detailed, or pretends to do this, U mite as well frame it and hang it on the wall. Most charting systems contain the basic selling/buying pressure studies.
App!t.oa.c.h The chartist is always concerned with his ability to recognize the commencement of either a congestion area, a trend, or a trend reversal. So long as the trend line remains valid the market continues to parade in a succession of highs and lows. And, the prevailing trend is assumed to be intact. The penetration of a trendline cud raise the possibility of a reversal. The downside penetration of an uptrendline cud carry a bearish implication. In the reading of any chart formation, it is important that the underlying explanation of what is happening is held in mind. The "::loor","ceiling","random walk","trending","discounting", all help in the interpretation of charts. The speculator need not be a statistician to trade in commodities successfully. In fact, more than one statistician has failed miserably in these markets when he attempted to apply his favo~rite model. The most expensive model in the world will not improve the actual, correct interpretation of the market. No system is that finite. The best systems always involve the writing down of the reasons why that system is applied, at a given time. The written statement must answer the statement " Do U want to buy or sell this commodity", reducing U're reasoning to a simple statement or two, encompassing maybe the fundamental, technical and outside opinions, containing the outside opinion last in waying them least. Essentially however, market fundamentals underpin trend direction, while charts, volume waves, wiggle-waggles portray the market activity.
3
4
THE FORAY
There are two categories of analysis. I ) academic research
- whether the markets are non - random or random etc.
2 ) practical market analysis. To be perfectly candid, there is very little objective, explicit evidence available to support the commonly accepted rules of chart analysis, yet the rules are widely accepted as valid and in many instances seem to produce worthwhile results. Chart signals are given by patterns built on many days' price activity, which are often extremely difficult to define mathematically. This means that the chartist is essentially performing a highly complicated and subjective multiple correlation analysis in his mind as he examines his chart. When technicians attempt to focus attention on short-term fluctuations they leave themselves open to criticism. However, nearly all market analysis is based on short-term analysis, as an attempt·is made to find the appropriate moment to execute prices. The use of medium to long term price analysis will not take into account a random walk of a market on a medium to long term basis and the unpredictability of prices. Price is a result of a cause/effect relationship and occur at the wiggle of fingers in a trading pit. To assume an execution of a trading position based on medium to long term chart analysis does not take into account the effective impact of the character of the market as it relates to news events, trader's committments (who's buying/selling), market psychology and other short term, small time-span factors. Fundamental analysis is the only justifyable approach to long term price analysis. As an introduction to some of the more commonly accepted approaches in identification as an approach to technical analysis, look at the following. identification. a) identify both the major and minor price trends. b) identify the major and minor support and resistance levels. c) identify the "trend channel" if there is one. e) identify both the short and long term price objectives based on,
.I
TP.E FORAY I) support and resistance levels. 2) pattern count o~ other ~hart projection 3) 40 - 50 % retracement and other chart patterns. 4) long term continuation chart analysis.
This above all is true: any approach must be regarded as unprofitable until it has been proved otherwise.
We.a.lz.ne6.6 o 6 c.ha.Jt.ting
It must be pointed out that as more and more market participants attempt to predicate every action on chart rules, the accummulative effect of those similiar actions self-creates price fluctuations which might destroy much of the validity of all chart techniques. As a chartist , U have lots of company. There are literally thousands of people charting exactly the same movements as U are. Thus when a major move is signaled, U are liable to have a lot of the same orders as yours hitting the trading pits. In particular, the placing of stop-loss orders at identical points by hun~eds of chartists, may create false penetrations of trend lines and other formations.Charting is inevitably to some extent an inexact science. It is a matte~ of choice what scale the chart is on and whether the mid-price or closing price is used. To plot price movements, both can be distorted. The latter is the most often used, bu~as it cums at the end of the day it is associated with a lot of profit-taking etc. Moreover, dynamic and unforeseeable events may play havoc with charts. Charting is to some extent a lazy approach. The neat clinical look of a sheet of paper appeals to the many weaker bretr~en .. who have no time or inclination to delve deeper. Most people like to think it is more productive to look at all the wiggle-waggles. As technical analysis spreads, it will commence to defeat its own purpose,
5
l 6
THE FORAY
particularily in a " thin " market. It is important to realize that if enough traders are using the usual chart interpretations to trade a given commodity, it will influence the price of that commodity in the direction chartists expect prices to move. Chart followers can prove their own theories right. While a pure chartist does not wish to know a thing about fundamentals, a wise trader will try to combine futures trading from both stategies. No chart formation is completely reliable. One must seek confirmation from other indicators, such as changes in production from year to year, variation in business cycles, and deviation in commodity prices or any other quantifiable sum, reduced to a single summary figure to register all diverse activities. ( Commodities Index ? ) Often the commodity goes completely contrary to fundamental considerations due to technical and other factors. To succeed the chartist must be ready for thorough study and hard work and develop experience. It is an art because of its skill and the finesse and experience of the technician. These are without doubt the essential ingredients of profitable trading. The technician must constantly check and re-check~ Another weakness from charting stems from the belief that altho' all the facts of a commodity situation are known to the speculator these facts are also known by large trading houses and other professionals. In reality, however, certain events can occur unexpectedly and affect all traders. Prices may not have completely discounted these occurences, in which case the chartist may be caught offguard and there is very little left that can be done to protect a position in such a situation except to be alert to recognize sudden change in the market trend and to be quick to act. ( How about a hurricane carrying all the oranges into the Atlantic. Technicians are famous for making spectacular profits one week and enormous losses the next. It is a fact of life that prices wi~l not fluctuate according to what their past performance dictates, altho' U do get some idea on a day to day basis with P&L charting. The advisability of most systems is indictable because of the absence of a track record. Any approach must be regarded as unprofitable until it has proved otherwise. To be perfectly candid, there is very little objective explicit evidence available to support the commonly accepted rules of chart analysis. Many chartists
THE FORAY
tend to anticipate trends. This is a fallacy. One cannot asume or ~ecognize a trend that does not exist. In attempting to utilize a trend following method, one must wait until the trend has demonstrated itself. Even then, the chartist's motto with regards to a trend is that a trend continues until it stops. Once again, he attempts to anticipate the direction of a trend reversal as it evolves. This is impossible. One can only be aware of the new trend evolving as it occurs. Most technical systems cannot anticipate an trend or trend reversal. It can anticipate the likelihood of a trend developing, but only until the trend has evolved does one exist. ( Am I rite or wrong - think about it ! If unexpected moves happen, many technicians have to start all over again. After a series of discouraging losses, many traders have abandoned their technical studies because they just don't work. As it is a fairly common phenomenon, is further proof that there are no short cuts to trading success and no substitutes for experience, knowledge and hard work. All we know for sure is that. prices will fluctuate, but not how much. Only in congestion areas are U protected because the congestion area defines U're projection of losses. Prices fluctuate in congestions. Any technical approach that attempts to analyze congestion areas, and evolves a trading method therein, will provide the trader ( and his broker th+u lots of commissions glorious profits, as commodity prices are in congestion, one form or another 85 % of the time. The universal problem known to the professional and novice alike is when to get in and out of the market. On this basis, technical analysis must encompass to a considerable degree the short term price fluctuations ( Another plug for P&L charting ) .
S:ttte.ngt.h o -6 c.h.a..Jt.:tO BROADWAY, NEW YQRI(., N.Y. 10038
33
34
METHODS The ?&F chartist makes two assumptions that the bar chartists does not. I) he views the volume of trading as unimportant - a mere side effect of price action with no predictive significance. 2) he dismisses the importance of how much time has elapsed as the price moves from one level to the other. Only one thing matters and that is the direction of price change. Since the topic is rather complicated author respectfully suggests that the talk to his broker for an explanation the books, which are available on the
and quite an art, this reader, if he is interested or search out ( the library? topic.
I have a couple of comments: - for some strange reason, I do not know of any P&F chartists ( where are U ? ) who consistently make money from the market. It's like a religion- all involving. And I tend to feel that these chartists cannot see the forest but for the trees. At one point in my trading, I found that my "point and line" charting ( ?&L not P&F) had the same effect on me. That I was so engrossed with the evolution of the P&L charting that I forgot the basics of volume, O.I. patterns, trend lines, hard news data, basis odds, cash, trend-congestion characteristics etc. - all of which are absolutely essential in appreciating price movements. As a further aside comment, my major concern with P&L charting (the topic of which will be explained later) is that it will evolve like P&F (point and figure) and that the trader will becum bogged down in too many wiggle-waggles and by seeing too much with P&L (point and line). In fact, I am considering NOT publishing this book for that reason. Who needs the fuss ? Do U get my point ?
One last comment: I prefer Point and Figure charting for long term trades based on settlement prices only.
2
METHODS
(~_
"'''"'
MATHEMATICAL TREND
"~--~
......,,
35
-·----~
ANALYS-~
... , ........... __________ ~-------------~---------------------------···
Well gang, this is where I cum in. At least where I carne in. Such was the birth of Point and Line Charting. I'm delighted to =eel that I am not really breaking that much new territory and that point and line charting has some historical support. Poin:: and line charting is based on "mathematical trend analysis" and mathematical trend analysis goes something like this. ( See chapt. 7 for a further explanation how P&L evolved. Our description of a trend and the interpretation of its characteristics can be made more precise with the help of some simple mathematical .\tools. We can "fit" a tendline to the price data using the least s~data, described in ~ny introductory stat~st~cs text. \ Unlike the usual trendline, the mathematically fitted line will not pass through either the highs or lows of the observed price movement, but will move up or down the middle lane.
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The first conclusion here is simply that a trendline and parallel channel lines can be drawn using certain mathematical rules, thus giving us a method that can be repeated objectively in the same way at any time. The onl differ nee ha cha tin makes with the above P ·L uses !) is that an analysis the mathematica re and ~~::~~~~~~~~~-;~~~~~~~~~~~~~~.This
gone over
36
~THODS
A computer can be programmed to carry out this operation every day, every week, or whenever we deem it appropriate. The mathematical =ormula that creates P&L is easy to do and takes about one minute by the time U have shuffled pieces of paper around and lifted the pencil. age 573. With conventional mathematical trend analysis, a second observation has to do with measuring the kind of price formation which has evolved or expect to evolve as in P&L. This formation is completely described by two characteristics of the mathematically fitted trendline and its parallel channel lines.
~~~ \
I) the slope of the line 2) the scatter around the trendline as measured by vertical distance
some thoughts: in general, with mathematical trend analysis, a trend sca~ter low. When a breakout occurs from a mathematically defined trend channel, this breakout augurs a trend-reversal or deceleration of the existing trend or a sideways movement.
is more likely to endure if its slope is high and its
Enough of this ! U will see it in chapters nine and thirteen. u v.•ill very likely be astounded with P&L.
PREf'ld UMS Premiums exist whenever forward contracts trade at substantial premiums over nearbys (backwardation}. Then such premiums may appear to offer an extra incentive to sell.Whenever, forward contracts are at a sizeable discount to nearbys, then such discounts may appear to constitute an extra incentive to buy.
2
METHODS
REGISTERED WAREHOUSE RECEIPTS
*
( available each morning from wire services The receipts show how much is available for delivery at a given time. I= the producers of e.g. lumber have registered hundreds of contracts for delivery it means no one wants the cash product. If no one wants the cash product, why buy the futures contract ?
other methods of forecasting prices and their sources .•.•• Make a list and_search them out on your own. U must have some favourites somewhere. There are thousands of them, u know.
37
38
MARKET PLACE
CHAPTER THREE
I WANT U TO MEET THE MJ\RKET PLACE
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.the. mi.oh-ma.oh o-6 :tlta.de.M maJtlz.e;t e.mo.tio JU
wlw...t doeo .the. t)u.:tu.Jte ho.td £otr. c.ommocii;tieo ?
THE COMMODITY MARKET
OPPORTUNITY KNOCKS
Year after year there is an opportunity in one or more of the commodities, as a minimum, for returns of hundreds of percentages in invested capital. These opportunities are not really that all exceptional and they continue to occur and re-occur year after year. ( What is exceptional is to have the patience to wait for them and when they do occur to have the patience to stay with it.).
3
MARKET PLACE The value of the commodities traded in 1973, in contract value reached 500 b-i...t.t-i'low that Jones bo"'g"t trom 1,1r St~nle-t
Later. Jones. real,z,ng a orof1t on a pr,ce 1ncrease. m'gl'lt de:,de to llou,date oy se111ng I"J~c< me owme numoer of wl'leat futt.:res conrr.1:ts ..:ones wou'o !;tve an oroer to tha' effe:t to h1s orok:er Jones· contracts were ofiered on :he mar~et ana oougtll ov a man named Lar$on. Suooose that Larson w1sned to uou1daie h•s obugaczon two oavs later be
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83
84
No~,
look at the following live cattle and rye contracts,
~he=ein O.I. rose substantially between the two arrows, YET, WP~~ HAPPENED ? The price declined significantly after ~~e
second arrow,
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5
O.I.
O,I. IN MARKET TOP ANALYSIS 0. I. ordinarily climbs during bull markets and falls during bear markets. If during a bull market there is an inordinate increase in open interest, the end of that bull market may well be at hand. Speculators most often trade on the long side of a commodity market. This infers that once O.I. builds up significantly, that the number of speculative longs in the market is generally high to a degree which technically weakens the market, increasing the market's vulnerability to sharp reactions. As long as speculators continue to buy, the potential for market reversal cud be obscured. But once the new speculative buying falters, weakness can develop suddenly, with prices declining often to a degree beyond any apparent fundamental justification. When O.I. stands at a particularily high level, the penetration of an established trend line, especially on high volume, shud be regarded as a possible warning of an impending price reversal. This warning is not infallible, but as experience suggests, it is significant and in some prohablistic sense. Moreover, a large O.I. may be particularily vulnerable if it's concentrated in a soon to expire contract. If the O.I. continues to climb and price level starts levelling off, a top shud be suspected, as this indicates that longs are liquidating profits, and new shorts ( commercials and astute· professionals ) are entering the market. The domination of the bulls is being effectively challenged by new sellers. Following a period of massive build-up in O.I. , in great price strength, a down trend occuring from a market top may well feed on long liquidation and an O.I. increase on the downturn is needed to validate a bearish signal. The astute speculator watches the O.I. as market prices rise. He takes action only when it has built up to three times its average size for the same date for the last five years. When this happens as i~ usually does near the top in a bull market, he executes well-margined short sales. This is where the hard-boiled speculator gets interested. Any time O.I. is three to three and one half/times the normal, it shows large and usually foolish participation bullish talk is everywhere, Everyone is buying, but, are they ? The fact that O.I. is still rising shows a lot of new contracts are being sold, but by hard-hatted men. Sooner or later, the inevitable happens - the market collapses. So, keep a weather eye on O.I. sharp build-ups, or sharp drops, which mean that inportant money is getting in or out of the market. It behooves U to go to the side that has the money.
85
86
Also ~o be ~aken in~o consideration in a~alyzing a top formation is ~hat , with p~ices up and O.I. down, means that the price rise is ~ot being supported by new buying, but by short covering. This adds to the technical weakness of a market. In this circumstance, the ~arket is only rising because, sooner or later, shorts admit thei~ errors and o=fset thei~ positions by buying, which strengthens the swing. In this instance, we do not have new buying entering the market - we have short covering, which lowers the open interest. The falling O.I. with prices rising, also exposes the profit taking longs who offset their positions. Once this buying activity and sho~t covering dries up, the market will decline. Even precipitously. Are U beginning to see how involved the study of O.I. becums ? Once understood, it provides an excellent key for U're market attack. )
O.I, IN MARKET BOTTOM ANALYSIS Bear markets end in dullness. The daily price range becums small - 0.!. declines - volume is at a low level. The O.I. at the end of a bear move and at the beginning of the bull move is normally considered to be in strong hands and of high quality. After a price decli~e and a congestion area has been entered, a bottom shud be suspected, if the O.I. continues to be liquidated while the prices are levelling off. Therefore, if during a bear market there is an inordinate decrease in o.r. the end of that bear market might well be at hand. Bow does the O.I. data unravel in a downtrend towards the bottoming formation ? The answer lies in that lower prices and higher O.I. at the commencement of the downtrend expose the shorts who flex ~~eir financial muscle and aggressively crowd the trend. How ~o we know that ? For what other technical reason are prices declining ? The longs are obviously losing money. Eventually they must cover their long positions by selling. Offsetting of these long positions adds to the selling pressure, further depressing prices and reducing O.I. When new sellers are no longer interested in entering the market from the short side and old sellers take profits, o.I. is further reduced, thereby signaling the bottom of the market, at which point ~~e market becums technically strong. At the commencement of the bear crack, remember, the downtrend feeds on long liquidation and that an O.I. increase on the do~~turn is needed to validate the bear signal. Similiar reasoning will apply to the market reversal from the downtrend to the uptrend
5 0. I.
87
- O.I. increase will occur at the commencement of the uptrend as new longs enter the market. The shorts have taken their ?ro:its, left the market completely, and gone to the sidelines. In this case, the uptrend from the bottom formation feeds on long accurnmulation.
SEASONAL TENDENCIES IN THE O.I, There is a generality in the O.I. on a seasonal basis. For example, O.I. usually builds up during the harvest season. The reason for this is that the producer wants to hedge to protect himself. Of course, if the public is greatly interested in the crop, at any time, U will almost invariably see a big O.I. buildup, usually with an eventual price collapse. As a speculator, U watch the O.I. and take action especially if it has built up to three times its average size for the last five years. The use of seasonal patterns of o.r. enables the speculator to note, I) any deviation thereof, which portrays a context of considerable significance, or 2) attendant ( to be expected ) build-up or decline in O.I. normally found for a particular day, week, or month, on a recent five year average for the given commodity. For instance, pork bellie O.I. normally peaks around the end of December and then diminishes as it approaches the end of its "crop" year, with the lowest O.I. during the final liquidation of the August contract, wherein O.I. climbs towards the end of the calender year once again. Hog and pork bellie seasonal O.I. patterns run roughly parallel. Potatoe O.I. climbs from the expiration of the May futures contract which signals the end of the potatoe crop year. It climbs until February of the following year and then cums under liquidation. With the grains and their allied products, O.I. is lowest in the spring and greatest during the fall harvesting season. Egg O.I. peaks at the end of summer and has a low ebb during winter. The O.I. seasonal patterns of cattle, sugar, are not subject to much change since they cum to market in fairly even quantities thruout the year. The O.I. seasonal patterns of cocoa, cotton and orange juice have a distorted pattern, due to sporadic speculative enthusiasm, altho' they are crop year products. Therefore, O.I. is of little significance
88
0.!.
seasonally. However, t~is is not a firm rule ( as most rules aren't ! ) ( cotton especially Cotton, especially, if it shud have a revival of speculation, sustained on a relatively continuous basis, its O.I. pattern . may eventually assume crop year characteristics. Plywood and.lurnber O.I. is difficult to ascertain seasonally. The o.I. of silver, copper, gold, and platinum, perceptively picks up in the three to four months prior to the calender year due to" tax staddles" • (Ask U're broker). However, the IRS needless to say is destroying the concept of the tax staddle, so O.I. patterns of the above will likely now change.
~
~r ~• :-157[·• ••
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5
••
NOV.
Here is the open interest for New York silver which makes interesting reading. At the end of 1976, 127,890 contracts were traded in a single day. After 1976 was over, trading immediately dropped. WHY ? ~ecause the silver market had become primarily a "tax deferring"
market used by high income individuals to defer or change the status of their taxes, ·and not for profit purposes. As you know, the IRS has now forbade this practice and has made a ruling which may retroactively do away with the tax advantages which many people thought existed.
r
o. I. The fcllowing g:aphs p:esent the seasonal trend characteristics o= 0.!. from 1955 to !964
120
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9(1
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COTION SEAS~ TRENDS At
OF OPEN INTEREST AV~RAGEl I~ ··!
N.Y. COTTON EXCH. (10 YEAR 19 55-64 -1~_.-
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c!. rlus may nor happen: If new lonp ce>rne mto the market. their buylfll pres-
sure will offset lbc selllnc preaurc of old lonp. ad pncca may nnr decbAc much. COIISlcler the b•.•llish tum of eYitiU. The amc thml may ha!>pen, ucq~r In Shoru w•u look to offset their posauons. In order to do 10, !bey will have to buy. Because there are more of thtm titan usual. tha burin& pressure will be Jrcater than usual. anc the mu!1111r nsc m pncc pcaibly r..-per th2n usual. HoWCYcr, a Slmilar t:aftat applacs: If new allons come mto the market. the Ouytnl pressure of olcl allons wtll bt offset by the seiWI& prcuure of new shoru. fC"Cn&.
'II-•
111 c-_,. F,.,..
Co1. c - a . . , hoflrr ~llfl. , . . , _ . - . 1912. I ~IIUQI.cl IK'tiiiiCIUU WOUIG N&IOft&lly &0..,.1 .............. u of ftll: aad fall 1ft etten Ulleftlt. T1uu. OuniiJ ft'Nift ,..,.aa of lhC Y'Ul. 1IUhCU'II C01fttft0410CI tD &IIIRift 1 ""rto""af .. ll'ftOCftC'Y (or ooen tfttcnst 10 n~e. A I&UOMJiy achun.C rut llftUN o..r "'' n.t mort U..ft aorma.!.
IS
'Of courK. '".,., t:oUid sun be uu •"'c """'..., or ,....., ~uac; Utrt ll\llfll M" c-.panoed thctr ftOtCbnp..
11m~y
Source: Making Money In Commodities Epstein Publ. Braeger Publ. Inc.
If u are able to understand O.I. Because most people don't
then the more power to
u.
97
98
CONTRARIAN OPINION ETC.
" c.a.o ft "
the. , ba.o..V.. , the. " odd6 "
CONTRARIAN OPINION The reasoning behind the theory of contrarian opinion is simple enough. A bull market cannot continue unless new bulls can be attracted to the market and at higher and higher prices. At some point during a bull market there will be no more new bulls to be found. It is at these prices that a market will end. u will have a rally with a 20 % bullish factor, but it takes a 90 % bullish factor to indicate a decline. The theory of contrarian opinion is now widely recognized and an accepted format for judgment decisions. And, it is indeed an analytic tool used by all pros. Information pertaining to current contrarian op~n~on shud be available from U're broker and some chart services.
THE COMMITTMENT OF TRADERS REPORT The committment of traders in commodity futures is released by the USDA about the IOth of each month. The report breaks down the long and short positions held by the large and small traders. Small
99
traders as we know tend to be on the wrong side of the market and large traders tend to be on the rite side of the market. The purpose of the trader's report is to enable the trader to know where the large traders are and what they're doing.
LARGE TRADJ::RS SOYBEANS Speculative Long or short only Long and shOTt (sprending) Total-Hedging Total reported by l~rge traders SHALL TRADERS Speculative anJ heuging TOTAL OPEN INTEREST Percent held by:
Large traders
----------------------~Sm~a~l=l_trauers
(In thousand bushels)
84,690 172,370 257,060
20,865 66,195 87,060 155,040 2'•2,100
54,570
69,.530
3ll 1630
311,630
82.5 17.5
77.7 22.3
18,375 F~t.,
:
-
:ns
SOYBEAN OIL l..ARGE TRADERS Speculative Long or short only Long and short (sprertdlng) Total Hedging Total reported by large traJers SHALL TRADERS Speculo~Jtive and hedging TOTAL OPEN INTEREST Percent held by:
Large traders SmalJ traders
(rn
c.ars of
tan!~
~.761
10,532
9.,-!13
15,819 33,753
9,113 19,645 22,&76 42,521
13,493
4,725
47,246
47,246
71.4 28.6
90.0 10.0
17, S7~
SOYBEAN MEAL LARGE TRADERS SpeculDtivc Long or short only Long and short (spreading) Total Hedging Total rep6rted by large traders SZ.1ALL TRADERS Speculative and hedginA
3 t :.48 8,528
5,090 3,448 8,538
14,20:>
14,4~1
22,7J3
22,979
5,080
_ _4...:., :'!_2.2.__..!!.LQ:.B-..;;.3__
27,06:
TOTAL OPEN INTEREST Percent held by:
(In hundTcd tons)
LDrge traders Sruall traders
84-0 16.0
t
I
)
062
84.9
15.1
IOO
CASE
Criticism : - the theory goes that since most losers are small traders, the safest position is in the opposite of the market to them. There are disadvantages because hedging activity accounts for the largest share of the positions, but even then by nature of hedging, hedgers lose. In fact, these losses feed the financial pot in which speculators draw for their profits. On the other hand, not all hedgers are truly hedgers. Many operators are sometimes hedger and sometimes speculator. Additionally, not all small traders lose. Finally, the report is involved with the tenth of each month. By the time the report appears, traders may already have switched. positions. Nevertheless, one can find some use for these figures. This approach attempts to focus on data showing the activities of winning and losing groups of traders and then suggests the following action : I) initiate positions opposite those of the losing group when it shows a strong preference for one side of the market. 2) initiate positions in line with those of the winning group when it shows a strong preference for one side of the market. Both long and short positions are tabulated by three groups. - bona fide hedgers, large traders, with legally reportable positions and the remaining portion of open interest which consists of small traders with less than a reportable position. When large traders short positions are low, perhaps 6 % of total O.I. it might be assumed that they are strongly biased to the bullish side of the market, and prices therefore shud rise. When they are high, possibly 9 % or higher of O.I. , then an important degree of pessimism wud be indicated and lower prices expected to follow.
CASH The cash price is the price fixed in the wholesale and retail outlets of the country. ( While the futures price is the price at Chicago, New York, Kansas City etc. commodity exchanges. ) Cash price fluctuatesthruout the year. The futures price will fluctuate above and below the cash price, but will never vary too widely from it ! Cash price sets a ceiling on how high futures prices rise and a floor on how low futures prices fall. Futures prices will not fall so far below cash prices that cash " dealers " wud be better off by buying the futures contract.
CASt.<
( ( ( What happened to the last· ten pages. Don't ask I don't know. - Chas. Drummond ) ) and, taking delivery, than they wud be by buying the actual cash product. Futures prices will never rise so far above the cash that the exporters, merchandizers, farmers and millers wud be better off selling on the futures market than they wud be by selling on the cash market. The futures contract will never vary much from the current cash price. So it is rather important to watch the cash market closely. By utilizing " basis " charts ( coming up next ) a trader will know exactly by how much price variation exists. Also, it is very important to watch closely the relation of the present cash to the normal seasonal price patterns for cash as in th~ following illustrations:
Ll\'E nr::J:'!'" CJ\'M'Lt::
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Each month's cash price is compared with the previous month's price. The figures are not always balanced because some years are 'tied'
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It is interesting to observe in particular the validity of the long run trend line and the frequency with which intervening price swings approach to a point of tangency and pary without penetrating it. ~he phenomenon appears so often that a correctly inscribed trend line is an extremely valuable tool. The more often bottoms re-occur along an uptrend line, the greater is its technical importance. By the same token, if a trend line is tested repeatedly the more likely the direction has apparently reversed after this trend line is ultimately penetrated. Once prices have taken a header thru a major uptrend line , the advance has temporarily expired. At an appropriate time, a down trend line can be drawn. Down trend lines are determined somewhat differently.
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A straight line more than likely harnesses price tops together, as opposed to an intervening rallies as the bear trend evolves.
Create a weekly high/low/close bar chart and take a look at those trend lines
\
There are three tests of trend line validity. I. number of times the trend line is approached 2. its steepness 3. length of time the trend line prevails When a trend line is drawn rather steeply, I tend to be skeptical of its validity. It can usually be retraced on a flatter plane. The steeper the trend line, the more easily sideways movement can
I28
TRENDS
honey-com it. On the other hand, if trading activity matcri~lizes considerably above this trend line, then prices must have a substantial distance downwards to reverse it. Penetration of a trend line attests to the need for examination of other technical tools. Directional turns of major movements are usually accompanied by deviations in trading activity. The penetration of a trend line shud raise the possibility of a reversal. A downside penetration of an uptrend line wud carry a bearish implication especially if the most recent isolated high fails to surpass the previous isolated high.
Create a monthly high/low/close bar chart and take a look at those trend lines!)
fails to go above "I" .
And, if the current action is carried below the former trading low, "2" it gives us the I-2-3 topping formation ( see chapt. 8 )
As a general rule of thumb, if closing prices violate a trend line, in the opposite direction to the trend, the trend is aborting. Once a trend line is convincingly broken and a rally to the trend line occurs or does not occur, the evolution of a major correction to the uptrend is evident and a bonafide topping formation can be considered. ( Topping formations are covered in chapt. 8 ) Suffice it here to mention that the breaking of a major trend line ( a trend line of two months' duration ) is the point at which some traders take profits or take positions against the previeus trend.
Trend lines are not necessarily straight lines. They may occur or may begin as a straight line and then curve. Chartists who recognize only straight trend lines are apt to miss many valid non-linear trend lines. However, this author feels that there are enough lines to be prolated to the chart page without getting into all sorts of circles or semi-circles. Trend lines are the simplest to utilize and shud be if possible, one of the few graphic technical
6 ~RENDS
!29
tools to which the trader shud restrict himself. In defining various trends, it is worthwhile to note that a minor trend may be defined as price flows ( advances, declines ) of 3 to IO % and medium term trend may be defined as Io to 50 % for advances and IO to 33 % for declines. A major trend may be defined as exceeding 50 % for advances and over 33 % for declines. For example, if the price of soybean oil advances from 30 ¢ to 45 ¢ , prices advance by 50 % , but a price decline from 45 ¢ to 30 ¢measures a decline of 33% . (a major trend). ( i f U're confuse with the above, read it again. )
TREND CHANNELS When a trend line exists and a parallel line can be drawn to roughly connect three or more highs, a trend channel is said to exist. Trend channels can be constructed with a little care, and common sense application. The upper limit may be subject to an occasional revision until it is clearly delineated. e.g.uptrend A derived trading channel possesses obvious benefits for the nimble short term trader. In the sense commodity prices are always running in a channel, - up - down - or sideways, and when prices trend well, that is, when they fluctuate within a fairly narrow but delineated channel, short term trading is to some traders fun and profitable. As prices oscillate upward within an upchannel, u assume they will reverse either before they reach the upper resistance line, or at the resistance line. There are two methods of interpreting price undulations within a trend channel, to the extent that if rallies fail to reach the upper limit, there is weakness in the trend. On the other hand, a sustained penetration of the upper limit suggests a trend acceleration which typifies the final stages, if it is an uptrend channel,/ of a bull market. Trend channels tend to indicate short term price objectives. Experience suggests that when an existing price trend is changed, and gains southern momentum by breaking, or northern momentum by increasing a channel momentum, that the accelerated market action will be the blow-off. Any price going thru the trend channel's limits is a call for action. A serious penetration of the outer wall denotes a danger signal to the over-all prevailing trend. In an uptrend channel, a serious penetration of the lower wall has obvious bearish implications, But
I30
TRENDS
a serious penetration of the upper wall also has a serious implication as it constitutes a trend acceleratio~ and signals the final stage of the move.
-- -- -;if /~I
Sometimes, lines connecting isolated highs and lows, 11 J J I.utilizing major trend lines create a major ~ channel, which indicates that the market is in a major uptrend or downtrend. Within these major channels, frequently, minor uptrend and downtrend lines and channels can also be contructed. Violation of the minor trend lines usually is not significant, whereas an important penetration of a major trend channel line is often followed by a substantial move in the direction of the penetration.
As in the following illustration of 'cattle' , a trend channel bottoming formation and breakout on the upside wud have _..-bullish implications which is the reverse of a top of a market and major downside trend line is penetrated, and prices may even go sideways ( they usually do ) for a while.
6 ':'RENDS
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TREND VALIDITY There are four hypothesis of trend validity. #!
Each time a market finds unyielding support, as an uptrend line, or as resistance along a downtrend line, a trend is gaining strength. That is partly because additional traders are becuming to recognize the power of the trend, apd to identify the line of operation. At the same time, counter trend positions are likely to be closed out or even reversed; - these points adding further momentum to the existing trend. The longer a trend persists, the greater the chance it will continue until some new force intervenes to precipitate a reversal.
#2
A trend has greater validity if it shows itself in actuals ( cash ) as well as in futures and in all delivery months, rather than a few.
!3!
I32
TPENDS
#3
A trend is more dependable when prices have moved in a relatively narrow, tight channel, rather than along a broad and more or less magnified path.
#4
A trend is more dependable when its' slope is deep rather than shallow
If a well established trend accelerates suddenly, this may represent the last wave of liquidation, indicating an impending reversal.
TRENDJ 0,1 AND VOLUME If prices thrive along with increasing volume and O.I., the market is technically strong. Rising O.I. indicates that new positions are being initiated. New buyers enter the market at different points during the trend according to their psychological bias. Sooner or later the shorts admit their errors and offset their positions by buying, which strengthens the swing. Liquidation of a contract reduces O.I .. Prices up and O.I. down means that the price rise is not being supported by new buying but by short covering, which adds to the technical weakness of a market. Falling O.I. in a rising market also exposes the profit taking longs who offset their positions. When buying activity dries up, the trend will be over, - even precipitously. In a downtrend, lower prices and higher O.I. expose the shorts who flex their financial muscle and long positions are covering their positions by selling. Offsetting adds to the selling pressure, further depresses prices and reduces O.I. when new sellers are no longer interested and old sellers start to take profits, O.I. is further reduced which marks the end of the downtrend. /
High volume is concomitant with a breakout, as well as the evolution of an uptrend and at its' termination and~is concomitant with the evolution of a downtrend. Volume sometimes is low. High volume can permeate a breakout of a congestion which is part and parcel of either trend.
6
TP.ENDS
:: 3 3
FUNDAMENTALS AND TRENDS We have three basic groups of commodities. I. industrial 2. agricultural 3. perishables
e.g. copper, lumber, silver e.g. pork bellies, soybeans e.g. eggs, potatoes
Industrial commodities tend to produce the longest trend cycles due to their relative stability of supply and demand. They are more subject to the longer term viscissitudes of rain, drought and spoilage. Agricultural commodities are next as to length of trend cycles. These tend to make seasonal lows around harvest time which appears around the same.time each year. Altho' current marketing activities may distort patterns, the above is generally valid. Perishable commodities tend to fluctuate in the shortest term cycle. Essentially, however, market fundamentals underpin trend direction, while charts, volume, waves and so forth portray market activity. And, don't forget this.
USING TREND ACTION Profits accrue by identifying a trend and staying with it as long as possible, and exiting when it has ended. There are many major and primary trends, and trends pulsate. Medium term trend and minor term trends rarely endure more than a few days before there is a small technical correction. The duration of longer swings vary widely. /
Traders can make money in commodity futures even if they cannot predict short term price swings consistently. All they have to do is follow the major-medium trend. Considerable success cums from quietly picking such markets. - quietly trading them and quietly waiting for the market to offer profits. Whereas a trend is an opportunity to realize one enormous profit simply by sitting tight, a congestion area is an opportunity to realize many small profi.ts by alert activity with the congestion area's life.
I34
TRE!\DS
There are only two ways to trade and that is using trend activity and using congestion activity. Most trends are by themselves actually congestions, in that they often retrict thaaselves to a trend channel, wherein several short term trades are possible. Most traders suggest restricting oneself to not overtrading in trend markets. However, because the professional scalper derives profits from trading dips and buldges of varying time lengths, it seems difficult to understand why the ability to recognize price trends is asserted by most professional advisors to be the most important requirement for successful trading. The adage: - cut your losses and let your profits run is heard by every trader alive and has been regarded as a basic rule of successful trading. Yet, the effort to comply with the directive is successful for the trader-who can consistently anticipate the continuation and alteration of price trends. The other extreme exists wherein one may be able to decipher that a long term trend is underway and holding and even adding to the position - not taking profits - until the trend has distinctly exhausted itself. However, when prices trend well, they do fluctuate within a fairly well but delineated channel and scalping and various approaches are fun and profitable. Most profits for professional traders are generated by bucking the trend and riding with it. Here, I am writing of action within the channel. Almost invariably, trends in commodities exceeds one's wildest dreams or a chart prediction. And, getting on board a major trend at its commencement involves knowing exactly what constitutes the evolution of a trend. One factor for example, is that in any major trend, up or down, it tends to start slowly then accelerates sharply as the momentum of buying or selling accelerates. If u do get a sharp upward momentum and a correction from this, this correction is natural and normally one must expect further momentum, and further momentum is either a continuation of the preceding major trend or it is part and/ parcel of the evolution of a topping or bottoming formation. O.I., volume, contrarian opinion, committment of traders and technical momentum indices enable the trader to quantify the validity of the trend. Small traders tend to rely on long run trend following methods for profits. Such trading theories result in strategies of buying strength and selling weakness which enable the small trader to reap high profits in years when such trends are in long duration. Unfortunately, the markets more often than not are trading markets rather than trending markets. That is, there is more of a chance
6
TRENDS
for ?rice reversal than for
p~ice
135
continuation.
Large traders use markets as trading markets rather than trending markets and rely more heavily on the presence of negative serial correlation for they tend to sell certain rallies and buy certain declines. It is the purpose of this book to enable the beginning trader to someday appreciate his ability to do exactly that.exactly what the large trader does. One cannot beat riding a major bull or bear and pyramiding; and within a few weeks and months creating a considerable fortune. Maybe, each commodity has one major run up and major run down each year. Even in these runs up and down, congestion areas are more frequent than infrequent and it behooves the trader to recognize I) when a market is strongly trending 2) when it is entering a congestion, and 3) is congested and 4) when the market breaks out and 5) being able to anticipate the breakout. In contrast to a $I.OO move in pork bellies, if prices move up and down five times in a IO¢ range, one has the same amount of profit as in the $1.00 run, and sometimes with less attendant risk. { However, it is very difficult to pyramid in congestions, - pyramiding wud give the trader a greater profit in a trend market ) .
The following is a list of some ways of using trend action. I. trend channel - each time a lower wall in an uptrend channel is touched or approached wud be a buy point and each time a upper wall is touched or approached wud be a sell point. 2. as a general rule of action, using a closing price that violates a channel line in the opposite direction to the trend - get out of the position or switch and reverse. Of course, there are false moves where the price returns to the channel, but there are not very many of them in proportion to the times the trend is actually broken by a move through major channel lines. Be aware that a move thru the upper wall in an uptrend channel constitutes a trend acceleration, which often signals the final stage of the bull { or bear ) market. The steeper a trend's angle of ascent or descent,
I36
TRENDS
the sooner the trend will reach its ultimate price objective and corresondingly, the shorter will be that trend's life. 3.
bucking a trend in anticipation of its reversal. - bucking a counter trend to a medium to major trend enables the trader to board L~e overall larger trend.
~~~){~ter
r
trend
trend bucking
Trend bucking, however, is mostly employed to profit from nominal price swings within congestion areas and trend channels.
Trading within the confines of a trend's channel walls, a trader may buck the then prevailing nominal trend, or counter nominal trend, on the premise that the price will continue to remain within its prior confines. Bucking any trend implies the anticipation of its termination in "v" or inverted "v" fashion, giving U isolated highs and lows.
Such sudden reversals rarely occur with major trends, sometimes occur with medium trends, and more often occur with minor trends and frequently occur with nominal ( mini ) trends. Also, "v" reversals terminate counter trends more often than they terminate trends heading in the same direction,
6 ~P..ENDS
as the overall trends. To sum up, a "v" or inverted "v" will tenninate in ~he ::allowing frequency nominal countertrend nominal trend minor countertrend minor trend intermediate ( medium ) countertrend medium trend major trend 4. boarding a trend during a period of consolidation in anticipation of the trend's subsequent continuance. The biggest danger here is that the anticipated move does not occur at all but consolidation evolves instead as a top or bottom. Sideways action that extends beyond three months shud be regarded with suspicion i f one is anticipating the consolidation area as a continuation formation. 5. buying during the fonnation of a bottom or selling during the formation of a top. The biggest danger here is that the anticipated bottom/top evolves instead as a continuation pattern. There are two principle advantages to positioning in bottom and top areas. First, one's risk is easier to calculate and limit. Taking a position after a trend emerges runs the greater risk of a nasty loss from a counter trend. Second, traders often believe it advantageous to take modest positions, in that he/she will have his feet wet by the time the trend emerges whereupon he is encouraged to more aggressively increase his position. However, more often than not, after a consolidation area breakout, the overall t~nd is sometimes followed by a brief counter trend and bucking this counter trend can be very lucrative and enables the trader to board the major trend , often with the previous congestion area providing support.
breakout
-l
~ congest~on
~,ounter trend
f
/-bucking support
I37
:38
TRENDS Often, before a trend finally emerges from a top or bottom, it will have a few false starts. Being able to distinguish between a false breakout and a valid one, requires judgment fueled by a great deal of knowledge and experience. Any 3 % breakout from the upper price of a bottom, or lower price of a top ( $1.50 on a $50.00 price ) shud be regarded as potentially important.
6. buying or selling upon the breaking of the first minor counter trend after a breakout from a bottom or top. 7. buying or selling immediately on perceiving an uptrend or downtrend. This can easily be perceived by the breakaway gap from a congestion bottom or top. These kinds of breakaways do not occur that often. Unfortunately, the memories of these breakaways often prompts many traders over the next few years to jump aboard other trends prematurely.
8. gap action positioning procedure when U get a sharp downtrend which remains for several months and u get a movement out of that downtrend into a sideways pattern, u shud a) start expecting a period of a month or two while prices continue to consolidate into sideways action. b) start looking for an accummulation procedure. c)expect a rally once the prices start to break out of the consolidation pattern to the upside. 9. positioning trends by the moving average method.
BREAKAWAYS After a congestion area has prevailed long enough to be widely recognized, buyers and sellers will usually have accummulated in the wings ready to jump into the market. And, on the breakout there will be marked pick-up in activity. This volume action has no prognostic value; the customary market pick-up and trading activity after a breakout tends to leave the validity of the
6 TRENDS
I39
breakout in doubt. If the volume subsides and the trend proceeds on its way then the breakout was indeed valid. But if the volume remains high and the trend promptly reverses itself, the breakout's validity will continue to be left in doubt. Many seasoned traders avoid positioning markets in anticipation of breakouts. They claim traders are better off waiting for markets to tell them what to do. There are some seasoned traders who position markets in anticipation, but profits in this type of positioning is only of minor attraction to these traders. What they consider important is the added confidence in markets they have operationally anticipated. It is now suggested that a combined rise of price, O.I. and high volume has bullish significance in the early stage of an upmove. And, it appears to be significant in confirming a trend at its emergent stage. Often, on the breakout, for example, the upside of a congestion area, is that a support area exists along the confines of the upper prior congestion, lending credance to the breakout. It must be pointed out that as more and more market participants attempt to predicate every action on chart rules, the accurnmulative affect of these similiar actions self-creates price fluctuations, which may destroy much of the validity of all chart technique. In particular, the placing of stop-loss orders at identical points by hundreds of traders may create false penetration of trend lines and congestions. When prices stall shortly following a breakout and congests, a trader is warned that the prior relationship between buyers and sellers may be in the process of major alteration. Most stop orders are placed just above or just below congestion areas and these breakout points frequently turn out to be traps. The user of stops in such occasions shud be aware that he has plenty of company which will often result in mangled executions. Occasionally, prices may break thru the top or bottom of the congestion and then reverse with two consecutive days action back into the congestion. If this happens, the new high or the new/low becums the upper and lower limit of what is now a new congestion period. Also, a sharp trader is not likely to short a market during a technical reaction following a major upside breakout. \ _ don't short
~#J\MMA /
here !
I40
':'RENCS
Happily, a breakout point is necessary to the birth of most trend action.
by all means refer to che chapter on congestion re: breakouts and end-runs )
GAPS
( refer to chapt. 23 ) The breakaway gap is useful in predicting the end of the consolidation phase of the market, and it can herald a dynamic move to follow. The ability of a market to jump price levels certainly signifies a powerful underlying trend, or it cud result from the purely coincidental fact that some significant development occured after the market has closed. A breakaway gap ia accompanied by a sharp increase in volume. Once a break-away gap occurs, prices on the chart shud not be filled in by trading on subsequent days, if the move is to be of major proportions. If the gap is subsequently filled, it may still prove to be significant, altho' somewhat more caution is necessary in attempting to evaluate the prospecti~e size of the anticipated price movement. The "common" gap is usually formed in a market trend with small volume and usually these gaps are subsequently filled. The common gap has no particular significance. Run-away gaps appear following an already substantial price move and some chartists believe that their appearance marks the mid-point of a major move.
6 TPZN~S
I4I
Exhaustion gaps are normally followed in a short time by a key market reversal and signifies usually the commencement of the topping formation. If u are a good 'gap man' u will make a considerable amount of money. Understanding the above four gaps will enable the trader to have a finger on the pulse of any major trend.
STRAIGHTAWAY A run-away, - straight -away market is made up of multiple consecutive days ot closing prices in the same direction, occasionally broken by one day in the opposite direction of its trend. Because of the strong pressure of a straight-away, two consecutive days in the opposite direction to the straight away is rare.
WHEN THE TREND STILL HAS STRENGTH As the trend evolves, the O.I. and volume will not rise inordinately and price swings will not be wide and prices will be moving within the trend channel. Counter trend corrections will be at most, 50 % retracernents and momentum will be moderate, or aggressively consistant. Following a very steep move, often the trend will still be valid as the correction will only serve to alter the sharp into a more moderate trend in the same direction. As a general rule, prices have a tendency to crack about 50 % following an extended priee move. A correction of less than 50 % is evidence of a powerful trend. So, if the SO % correction from a steep move corresponds to a strong support or resistance area, it is very likely that the correction will be altered or be arrested at that level and the trend will still have strength. Remember that trends tend to last longer than most people can anticipate and major topping formation of a major trend usually evolves with a considerable degree of dancing around. As prices commence their topping activity, it will give the trader ample opportunity to take profits and possibly commence shorting procedures.
I 42
'!'P.E~I)S
TREND
\~EAKEN
I NG
A greater than 50 % correction from a very steep move is a possible form of a reversal and the harbinger of reversing prices yet to cum. The trend is weakening. for example, if in an uptrend channel, prices fail to reach the upper limit of the channel, there is weakness developing in the trend.
Also, penetration of the upper limits of the trend channel is an acceleration which typifies the final stages ( how long ? ) of the bull market.
Further signs of weakness: e.g. upmove the uptrend itself is broad and not very steep the final stage of the upmove is accompanied by a reduction in O.I., indicating that the market strength is attributible to short covering the first rally to the preceding high fails the top of the preceding one, giving a I-2-3 formation. I
/'h a trend line is broken the decline penetrates recent support levels. O.I. is running high and activity expands on the decline also consider contrarian opinion committment of traders cash,basis,odds also see straightaway pg.
I4I
/
':'RENDS
TREND REVERSAL There's a whole chapter on this. See chapter
8 ·
TREND BUCKING The theory goes that since most losers are small traders, the safest position is opposite to the market. Also, hedging activity accounts for the largest share of the positions. Trend bucking is mostly employed to profit from nominal price swings within congestion areas and trend channels. By virtue of the customary narrowness of trend channels, lucrative trading therein requires a great deal of trend bucking. Bucking trend implies the anticipation of its "v" or inverted "v" fashion. Scout thru this book for scads of info on trend bucking. Make U're own list, but be aware of all the perarneters involved before U assume that U can buck trend effectively.
PROFIT TAKING There are two ways of taking profits within the confines of a trend move. First, one takes profits on the intermediate -medium term and intra-day swings that occur during the trend move, incurring many, many trades over possibly· several months. This aPProach is at best risky for the novice trader and maybe shud be left for the professional scalper. Second, a large trader will often utilize only the major price move and will have established a good market position at the beginning of the major price move and nearly all of these large traders take their profits long before the move has run its course. The large long-term trader cannot score a profit by buying and selling with the public. He very rarely takes profits at the end of the major move. Take profit @ target area pg.256,2-day line?pg.360. Develop U're own list as part of U're game-plan.
I43
::44
TP-ENDS
WHAT SYSTEMS WORK BEST IN TRENDING MARKETS :·lost models and systems work well in a strongly trending market. This author has a saying that ' any damn system will work in a run-away market. Any fool can make money . It's when a market commences to top that most of these systems start to short circuit and traders frequently lose the money they have accummulated during the market advance or decline. Take U're pick of any trend following system ( there's millions of them ) and U will find that it works very well in strongly trending markets. I repeat, all systems work well in strongly trending markets. If they're trend following methods. What U want is a 'system' ( putting the basics like O.I. volume contrarian opinion, committment of traders, fundamentals, conventional understanding of the character of trends, congestions, and reversals aside ) , - that handles markets when they are not strongly trending. If u do not have such a system, stay out of all markets that are not strongly trending. Remember that most technical signals becum false or mixed towards the end of a major move and when patterns are incompletely moulded.
145
CHAPTER SEVEN
CONGEST IONS Mgume.nt , pJU.l..o.oophy a.dva.11-t.a.g e1.> c.ha!ta.c:c~ :tJ..CA
on
c.a.-t. e.g 0 tU. el.> c.onge~.>tion
a.c.tion
a.na.ty zing c.o ng e1.> :tJ..o no c.onge~.>tion,
0.1. and volume.
rn-i.d-wa.y c.ong e~.>tion pati:Vtno e.nd- !ULYL6 a.n;t,i.cJ.pa.,ting .:the dbte.c.:tJ..o n o 6 bJtea.fwld: a.n:t.,i_cJ.pa.,tin.g the. e.xte.n.:t o 6 the. bJtea.k.ou;t move. .6 up po Jt.:t
a.nd Jt e1.> -i.-6 ta.nc. e.
50 % Jt e.:tJta. c. em e.n.:t-6
u.!l-i.ng c.o ng e1.> tic n a.c.tio n
prvi..c. e. Jt e. veMa.£. c.o ng e1.> tio n6 c.ong e~.>tion a.nd :Otend d.a.y c.o ng e1.> tio n
I46
CONGESTIONS
ARGUMENT
J
PHILOSOPHY
A price
at rest tends to stay at rest.- a price in motion stay in motion are the essential tenants of the sharp, s~arp trader. A price at rest exhibits an established floor or ceiling for itself which is merely the graphic representation of supply and demand conditions at the prevailing price level. ~ends
~o
Market congestion is the temporary occurence of price stability - a range defined by a specific high and low price, the duration of which lasts from one week to several months. All we really know about prices is that they fluctuate and that conges~ion areas are one expression representing price movement. Conges-tion areas have been said to exist 65 % - 85 % of the time. To this author's view, there are two categories of price congestion. I. horizontal, sideways congestion within
a
confined high and low price
Mf\N\ 2. congestion areas within a trend channel
If u accept this premise, one can readily see that prices are in congestion one way or another, almost 90-95 % of the time. The astute trader can make use of price movements within all conqestion patterns, if he/she has a reasonable plan approach. Accordingly, the trader will concomitantly and consistently garnish enormous profits almost on a day to day basis. This author prefers to designate the above congestion area #I - horizontal congestidfi as 'resting area' - that is, prices are banging around within distinct high/low prices for a considerable length of time, ( 4 - 20 days , to months to years ) . And, #2 , the more vertical congestion area of trend channels, this author designates as 'angular congestion' , the trend channels, or restriction of prices by trend lines. The argument on behalf of resting areas - congestion areas, - is that the market is fairly happy with prices, sometimes within a narrowly defined range. The argument on behalf of 'angular congestion'
7
CONGESTIONS
I47
is that the underlying fundamentals underpin the trend movement and prices are restricted by prices plotted on angular trend lines. Congestion areas have been submitted to considerably more exhaustive study than any other aspects of technical analysis. The objective being to determine the direction of the trend when it emerges and also to judge how long the congestion area is likely to last and possibly to judge how far the ensuing trend is likely to carry. In this context, all we need to realize is that sooner or later, a congestion area is fated to have one of its boundaries sundered and possibly a trend continued or a trend reversed. Since most studies utilize the analysis of congestion areas - resting areas to interpret and anticipate movements out of the resting area, then it behooves the trader to becum aware of all the acceptable technical format in that regard, by which this chapter is formulated. However, in the chapter on P&L charting, the author will attempt to lay some ground rules that will anable the trader to accept this author's hypothesis, for effective congestion trading, or to develop his own, using P&L charting as one format. The point can easily be made that a price movement of $I.OO in silver may take one year. ( sometimes in one week ) . On a trend price movement basis. However, if silver moves a IO¢ span, up and down,five times, we have that same $I.OO price move and it is fairly easy to pick a IO ¢ move in silver at least twice a month. So we have the same $1.00 price movement in one to three months. Needless to say, silver will move IO¢ in one week, and it is fairly easy for the experienced trader to make use of this small time span trade, if silver is not really strongly trending. This argument is readily presented by many authoritative traders in the commodity futures business. However, many effective professional advisors contradict the effectiveness of congestion area trading and to this, I wud agree, in that the novice to moderately experienced trader shud beware of the emotional traps and whip-lashes that evolve when the less experienced trader assumes that he/she can effectively handle resting area day to day trading. But, certainly, being aware of the possibilities of / recognizing effective trading within resting areas, enhances the trader's capacity to either do some trading in resting areas or to utilize this information as a supplement to the standard . technical indicators, as are presented in this chapter to board the trend as it evolves out of the resting area. Whatever one believes is being measured, this ~ntire approach is based on the assumption that certain repetitive patterns of price and action will often occur before significant price movement.
I48
CONGESTIONS
ADVANTAGES Wh er ea s a trend is an opportunity to utilize one enormous profit essentially by sitting tight, congestion area is an opportunity to realize many small profits by alert activity over the congestion area's life. During a congestion area, dozens of clear cut buying and selling opportunities present themselves. The moment one can identify a congestion area, these opportunities are there for the taking. The biggest problem for traders is when to buy and sell. It is not too difficult to predict the direction of a current trend, or that it may reverse in the near future. Anyone can follow a trend and all trend following systems work well in a consistent runaway price movement. We know for sure that prices will fluctuate, but not now much and because U trade only in a congestion period, U are protected from large losses by being aware of the congestion area's confines. This author isfirmly committed to the view that the successful commodity trader requires him to be both an astute trend and congestion area student. Let me explain ..••. small traders tend to rely on long run trend following methods for profits. Such trading theories result in strategies of buying strength and selling weakness, which enables the small trader to reap high profits in years when such trends are in long duration. Unfortunately, the markets are trading markets than long trending markets, and there is more of a chance of price reversal than for price continuation. However, please, please do not forget that astute knowledge of trend following can probably make U all the money U need with much less bother and stress, especially if U have another occupation than commodities. Great profits can be made by sitting and waiting for trends !!! Large traders, on the other hand, tend to use markets as trading markets than trending markets and rely more heavily on the presence of negative serial correlation, for they tend to sell certain rallies and buy certain declines. /
Ones' system must not be rigid but be flexible to status of the market.
~~e
current
Technicians are famous for making spectacular profits one week and enormous losses the next. It is a fact of life that prices will .: not fluctuate according to what their past performance dictates on a medium to long term action. In contrast, P&L charting enables me to expect the action on a day to day basis, based on the action of the last three days. When unexpected moves happen, these technicians must start all over again.
C~NSESTIONS
CHARACTERISTICS OF see also chapter on P&L charting ) (9) A congestion period is characterized by an abundance of two consecutive days' moves, for example, two days up, one day down, two days up, maybe two days down, one day up, two days down, two days up etc. etc.
Using this knowledge,. we have two basic categories. I) prices close two days in one direction, then close one day in the opposite direction
!II~\
\~~r
2) prices close two days in one direction, with one corrective day and then two days again in the one direction, but then expect two days in the opposite direction.
days down
I49
ISO
CONGES':'IONS A note: - in a runaway market, a consecutive two day period in the opposite direction to the runaway is the first signal that the market is congesting and possibly forming a top, or bottom and the runaway move is over.
Definition of market congestion : - when a high and low price is not broKen ~hru by s~s~quen~ closing prices and are both immediately followed by two consecutive closing prices in the opposite direction, a commodity is in congestion.
~
days
market is now in congestion
low The above sounds simple enough, doesn't it ? Take a look at some charts and see if U can find these two day patterns. This author leaves it to the reader to recognize all the other characteristics of congestion areas by recognizing that that is what this chapter is all about and the above two day format is offered as a supplement to it.
CATEGORIES Long and maxi-term trends without congestive interuptions of major importance are virtually non-existent. Most traders sooner or later becurn serious congestion area students. Congestions fall into four categories. I. area of distribution ( top ) 2. area of re-distribution ( downtrend resting area )
CDNGESTIOI~S
IS!
3. area of accummulation ( bottom l 4. area of re-accurnrnulation ( uptrend resting area Congestions may be the temporary interuption of a price trend or may be the final termination of a price trend. Where a congestion area is clearly established, its identity can be one of two choices:!. a top or area of re-accurnmulation 2. a bottom of area of re-distribution The trader must attempt to distinguish re-accurnrnulation areas from re-distribution areas which this chapter will attempt to do.
CONGESTION ACTION All medium term trends - days to weeks - are virtually without exception interupted by a resting period which alters the disequilibrium that exists in a trend move to a period of equilibrium during the congestion's life. A trend interuption, permanent or temporary, occurs as prices shoot past the prices at which the market at that time considers a more equal equivalent of the laws of supply and demand. And, accordingly, market movements will adjust until this price of equivalent equalization of the law of supply and demand has been reached. During this period of equilibrium rest, new forces, both technical and fundamental will enter the market, which will influence prices in the direction of disequilibrium from the period of resting equilibrium. This disequilibrium - trend - will continue with further periods of equilibrium - rest - until fi_nally for the contract for that year, we have distinct topping, bottoming equilibrium, from which a trend emerges in the opposite direction. Since, in trend, the law of supply and demand is out of balance, and since the trend will exist until either supply or dernand~s exhausted and prices rubber-band into equilibrium, the first snap of this rubber-band entails high activity. Volume is greatest at the resting area's conception and then as equilibrium is effected the volume will gradually ebb towards the resting area's termination and on the breakout from the congestion, the new forces of supply and demand and concomitant technical factors, snap to it, with high volume. Thus, high volume generally figures most at the birth of a area and as the chart unfolds, volume ebbs and then runs to a
I52
CONGES':'IO!~S
peak on the breakout. The longer the sideways movement lasts in a resting area, the more we can assume that old positions are being liquidated and new positions are being established, within the constricted price range. As soon as the resting area has prevailed long enough to be widely recognized, a large number of buyers and sellers usually will have accummulated in the wings, ready to jump into the market every time the resting area's upper and lower limits are approached. Consequently, a downside breakout for example, buyers will have to be satisfied. In either case, the result will be marked pick -up in activity and such wud be generally expected. Take a commodity which is trading for example, in a 20 ¢ range. Everytime it hits the lower area, U have a great deal of activity and it looks as tho' the bottom is about to drop out. This action wud be attendant with a resting area of re-accummulation. Most of the activity, in this example, occurs at the lower level of the congestion area; then when prices go up to the top, the market becums very quiet and it seems as if there's not a friend in the world for the bulls. This may seem illogical when one's actions are being influenced by emotions, rather than by logic. All that activity at the lower edge constitutes an outward expression of friendship in support of the commodity, at a price below which it is not likely to go, by reason of those friends waiting to buy it there. And that lack of activity 2 ¢ higher is in large part prompted by a concern that aggressive buying there will induce some ill-advised bears to grab tighter on to their dwindling supplies. Clues generated by such action are especially valuable to those who are alert to them, because there are so few who perceive them when they do occur. ( Therefore, it behooves U as a trader to go to someone and try to explain the above in order that thru teaching U will know this phenomenon inside out !!!! ) Looking at the reverse of our example : wherein we have a period of redistribution of a downtrend - a resting area - which we anticipate to be a continuation of the downtrend, and using tRe 2 ¢ range, the activity will be high at the upper edge of the resting area. The volume is high in this area, representing eager sellers and two cents lower, volume subsides and we have an exhaustion of buyers, which when finally satiated, prices continue lower. Summary: - using the congestion action , we realize that at the congestion's birth, activity is high, particularily in market tops and less so in continuation patterns ( flags, pennants, triangles, wedges ) and that during the resting area's life, the volume activity will gradually subside a~ the congestion area evolves and
I
.... J
CONGESTIONS
153
most of the activity tha~ does exist occurs at the opposite end of the resting area from the path in which the new trend is likely to emerge.
texl?ect lpr~c~s
to
i resting area
~
II ~!
I
I
I
I I
I I I
r~se
higher volume
And, of course, on the eruption from the resting area, activity will pick up as those who were wrong in the resting area cover to protect their losses and new buyers enter the picture in anticipation of getting aboard the new trend. These pull-backs, consolidations usually last around five days and up to twenty days. During this resting period, there is an abundance of two consecutive days' moves. After a two consecutive day move in one direction within the resting area, there is a high probability ( 75 % ) , that the third day will go in the reverse direction for one day, and sometimes will continue if the congestion area is broad, as opposed to restricted, that prices will continue in the same previous direction for another two days, upon which the probability is high that with a pattern similiar to this, that prices will move in the opposite direction two days in a row. Generally speaking, if prices close higher than the previous day's closing two days in a row, this means that on the third day there is a 75 % chance that the price will close lower than the second day's closing and that if prices close higher than the previous day's close two days in a row with the third day's close in the reverse position and a continuation of two more days in the same direction, that the prices will move in the opposite direction two ( as opposed to one) days in a row.
I54
CONGESTIONS Usually this two days forward or down and one day back ~ill continue thruout the life of the congestion area ( resting and 'angular' congestions ) . Utilization of P&L charting ( chapter nine ) will further enable the trader to first of all recognize congestion at its' onset, ( within a day or two ) and also using the factors presented in this chapter, enable the trader to either I) trade in congestions or 2) -accumrnulation ·in anticipation of the trend that will evolve, or 3) recognize the emerging trena and board it on breakout. This above action is particularily true of continuation patterns. ( triangles, wedges, flags, pennants, and platform formations ) However, market tops are different in that action is usually more hectic or incredibly constricted. Putting this all together, one shud be aware of the congestion action peculiar to bottoming formations, topping formations and continuation patterns. At the bottom of a cycle, buyers are accummulating positions in anticipation of an upswing. This period of aquisition may be protracted. In the case of a rounded bottom, further sufficient optimism to propel prices upwards is required and then a trend is born. After a rapid ascent, prices may retreat somewhat into a consolidation period. This plateau is an ordered sequence of re-accummulation. At the top of an advance, periods of distribution develop and on the way down, further regions of consolidation or redistribution spawns as the market adjusts to new prices. Thus, after a substantial rise or decline, fluctuations initially are apt to be wide and hectic in reflection of the market's struggle to adjust to the new price level and then will gradually simmer down. This is particularily true of triangles, wedges, pennants, platforms and flag formations. Sometimes, mid-platform breakouts are normally accompanied by temporary pcik-ups-in volume. A similiar declining is characteristic of volume action in multiple "v" shaped formations.
ANALYZING CONGESTIONS Some clues that are useful are I) location of congestion area· in recent historical price range
!55
CONGESTIO~S
2) breadth of congestion area
3) location of price change activity in latter stage of congestion area 4) location of volume action in the latter stage of the resting area 5) P&L charting With #I find a chart somewhere and talk about the specific chart wha~
can U find in the following chart .. -. ~~~~~~~---------------~~~~~.----~-------,-~ c..ft ,.,... CDIICIDZ,. CIWI:r SEJ!nCZ
A
"'•ekl:r
~1c:.ti.,.
ot
~-~. JIIC. - - ~~ Plna 11.~ • .•·~·.'~ ~
;n .
~II
11!1
1%10
--
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I
Ht.runn
lL lflt,
ll
1r
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-l.'
'111'1~
"1!1 ' .,
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tlJ
f'. ;( iA J T~~-
For u avid enthusiasts, to be, of Point and Line Charting, do U notice how the distance between •a) crest# ! & 2 & 3 & 4 & 5 are approximately equal
A Q •""
oF-~ C"eco•S.S'. •1=V w •.114, 'wit • TE
'T"""'
,..,_
9
?&L
b) 5 & 6 is approximately double 4 to 5
c) 6 to 7 equals 8 to 9 d) distance 8 to 9 equals IO to II Do V notice how crest ¥ 3 & 4 challenged # I and how 5 challenged # 2 Do U notice how crest # I2 ( a flat one ) challenged and won over crest # 7 and, how crest # IO was a bad challenge to crest # I2 or 8 and prices consequently went a long way up ! So, for U avid enthusiasts of P&L charting ( I'm the only one so far ) ti will want to look at how the 'crests' challenge each other, how they go in segments of equal moves, and how they each provide support/resistance to the other. If anything, prices will congest at old crest areas ( if only for a day or two ) or congest at 50 % retracements, or congest a long way away from the last crest··showing a temporary top or a strong I weak market.
Do U see that crest #3 and 4 are a 50 % retracement from crest #2, and crest #7 is 50 % from 6 to 5, and 8 is 50 % from 7 to 6 . It's almost as if the market is unfolding as it shud, and it is frightfully spooky . Old crest levels have to be reckoned with, and that is that
Since prices create crest action, perhaps a look at the price action at the crest will shed some light on how we shud trade the markets. If a crest is rather valid, then prices will most certainly move away from it, either as a temporary correction or as a This is obvious ) new maier trend. Therefore, if we assume that a crest is valid, any challenge to
233
234
P&L
it by prices must be considered a threat. ; most valid crest
I.
t-1.. GI Prices
..r
price challenges crest
+crack
This being the case, that a price challenge to the crest creates a threat, then the reverse holds true that if this challenge fails, then we indeed have a valid crest. We find that most cres~ are challenged, however, sooner or later, at least once. - if not within a day or two then most likely a week or two later. l leave it to U to find these crest challenges on our silver chart, here's an. example,
-
Ever, if ever in what appears to U as a topping market, a crest is challenged and fails ---- watch out ! The little baby bear has a grin that wud split a pumpkin ! Needless to say, if the price challenge one way or another proves effective, we cud, just cud have a continuation of the move to at least double the last move. ( Remember how the crests were equidistant from each other ? Also see the theory about target projections, coming up ) . Pg. 2 56 A hint : - if the close of any trading day's activity is above the crest per in the following illustrations, then u have a good idea that the crest will fail - don't U ? anc, if the close is behind
P&L
tbe crest then the crest stands a good chance to be valid. Well, anyways, let's illustrate
---
--
-
l-:-
~··--
crest challenged, - close above the crest and challenge is successful - days # I, 2, 3, 4,
close behind or under the crest, and crest is valid at least temporarily, -days# 5,6,7,8,9, IO, All we're trying to get at here is that the closing price of any day subsequent to the t~e a crest is formed can either represent a challenge, close is above
• or below ·,
.~.
235
236
P&L
and ~~d appear to be a successful challenge 80 % of the time and if the close is below this crest ' •
·~
then the crest is at
least temporarily valid. The key here is to use the challenge to the crest as a signal that prices may, just may go on thru, and if the trend is very strong, it will gap thru. ! leave it to U to develop rules of U're own on this topic. Just keep in mind that crest formations and their intereactions with each other, and crest price patterns are realities and do happen, and happen with incredible repetitiveness. They have to ! AS ! said before, the markets seem to unfold as they shud.
THE CHANNEL SYSTEM This is a
' biggy
'
I
Terminology
I) channel wall 2) main channel 3) main channel line (
thru dots
)
4) outer channel 5) outer channel line /
P&L
237
What we're into here is creating channels on either side of ~e 'dot' line, and the walls of these channels are absolutely parallel to it and to each other,and are equidistant from it. Silver, for most of this year has been moving in a channel about 7 mm wide on either side of the dot line, the main channel line. A couple of years ago it was 8 mm. Soybeans travel in 8 mm channels. Each commodity has its' channel width for its particular season, and can be readily determined after U haye graphed a few weeks of the commodity U are interested in. For silver, we take the main channel line, and draw two lines
parallel to it, 7 mm ( mill~eters) on each side, creating two channels.
-~
.!. . .
--~---------~-------:-----.-----
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__ J
P&L An uptrend begins when the last peak of a rally from the down market is penetrated on the upside. This new trend stay in effect until prices fall below the most recent low. There is an absolute market with this concept. An uptrend can be reversed in only one fashion, and a down trend can be reversed in only one fashion.
We'll look at the above silver chart. Remember, U alternate from one T.R. to the other. Up then down, then up, then down etc. Note : T.R. 's A,B,D,E,F,H,K,L, are phantoms. Starting with position a - go long one contract, re: pyramiding formula I-2-4-5-7 and goshort with position T.R.'B', but still one contract because we have a profit. Position B turns out to be a loss as prices go thry T.R. 'C' and as we go thru 'C' we will be carrying two contracts. Running thru silver to Oct. I9th'78 ( Dec. Chic. contract ) , we end up with the following story.
247
248
P&L Position
A B
c D E
F G
H
I J K
take take take take take take take take take take take
I contract contract 2 contracts 4 contracts 2 contracts 4 contracts 2 contracts I contract 2 contracts I contract 2 contracts I
profit loss loss profit loss profit profit loss profit loss profit
2I
¢
II ¢
I ¢ I ¢ I ¢ I7 ¢ I ¢ IO ¢ I ¢ 7 ¢ IS ¢
Profit/loss I¢ = $50.00 Position
A
B
c D E
F G
H I
J K
2Ix50 IIxSO Ix50x2 ( cts.) Ix50x4 (cts.) Ix50x2 ( cts. ) I7x50x4 ( cts. ) Ix50x2 ( cts.) IOxSOxi (ct.) Ix50x2 ( cts.) 7xSOxi (ct. ) ISxSOx2(cts.)
= !050 profit = 550 loss = IOO loss = 200 profit = roo loss = 3400 profit = IOO profit = 500 loss = IOO profit = 300 loss + ISOO profit
profits = 6350 losses = ISSO net profit = $4,800 subtract commissions ($42.00 each ?) , 22 cts. total x $42.00 = $924 Net profit/loss after commissions is $3,876 profit. ( We are not taking into account bad fills. So, using $IO,OOO starting capital, I guess that's 38.76% return on U're money in I4 weeks. Not bad, I guess. It's quite an approach. Remember Murphy's Law ? - wherein, if anything can go wrong it will. Probably if U were to use this approach in actual market conditions, it wudn't work. Something wud go wrong. But, my goodness gracious me, it seems to work everytirne I see it on the charts.
9
P&L
249
T.R.'s can be a very powerful market force. If U were to keep it in mind, U wud in time see what I mean. It relates to support/ resistance classificatio~ as ' transformed support/resistance' per chapter 7 . I like to use these T.R. 's in knowing what has to happen with my point and line charting ( cuming up in 'hitting/digging' and blocking. ) Now, guess what T.R. means ! U guessed it .....••.••. trend reversal
HITTING / DIGGING Let's
assume an upmarket.
Prices are going up, dots are up, channels are up and everything appears happy and normal for the bulls. Now, we know that there are such things as trend lines, resistance lines and now with Point and Line charting, we have the 'channel wall' and the 'main channel ' . It may sound ridiculous, but I envisage the market hitting its head against these little lines on the upside. The market goes up and then hits its' head against a trend line, resistance, or the above two tines. /
Big deal U say. But what happens if prices continue to hit its' head in subsequent trading days and eact time within the same general area ? Wud U not say that there appears to be resistance ? Well, there is. Prices may hit a trend line and stop. Maybe it hit its' head hard enough so that one of the 'dots' moves off the main channel line and starts to swing and roll over.'Nine times out of ten when that dot starts to swing
250
P&L
off the main channel line, there's going to be a lot more head hitting. Are u starting to get the picture ? Altho' the market may continue to rally, it's going to hit its head on the next available line and keep hitting its head, sometimes 3 or 4 times -maybe 4-6 trading days .•.• resistance is incredible. No way is that market going to go up. not a firm rule, but firm enough )
~=a
'hit'
· Let's look at our silver chart again.
~~~~
.
•
-
'
- -- .--------;
•..
t·
.•
·--: 'H.~-
--·· ..•
~~-: ..
··---.
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.
.
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.
.
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.
.
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i
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. - -
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.
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..
.
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.:
: : t~~;-~~~r~~~=J~ :~)~:.;·=~-:~-:-~~r:__:_::~ .... .. ::! : .: .. :::: :· ;- - ._·_•.:[_.• }"'_:;;···~C-,~11cati- of c::r::»>IIIC%"'1 ~ DC. One l.Uoerty Plau X. T. X.T. 2 OOOfi
•UJIEAU.
TREND Trends by themselves can influence prices. Once a well-established trend is well under-way, it tends to perpetuate prices much longer than most traders wud anticipate. Most commodity advisors recommend trend following. Accordingly, this trend business feeds on itself. Unfortunately, these poor dear chaps don•t realize that prices are always going up, downwards amd sideways, that price direction will change.
r
PRICE INFLLTENCES
Without a firm market approach, trend following will enhance the destruction of U're profits inherent with the trend run. However, once a trend is established, it tends to continue. But, don't forget that towards the trend's end, U are becoming part of the mob and the trend itself is influencing the price until, of course other market factors take over.
SPOT PRICES The following table will illustrate what one can expect from a rise/fall in the cash price and its relation to futures and the concomitant results.
VAJUA'nONS IN CAINS OR LOSSES RES1JL'l1NC FROM DJFRRENCES IN CASH AND Ftl'nJilE PltJCE MOVEMENTS
Results
Price Movements
to one who is
Mshort~
to one who is "long" in the cash market
in the cash market
Unhedged
Hedged
Unhedged
Hedged
Falls by same amounts as cash Falls by greater amount than cash Falls by smaller amount than cash
Loss
Neither profit nor loss Profit
Profit
Neither profit nor loss Loss
Loss
Loss, but smaller than unbedged loss
Profit
Falls
Rises
Loss
Loss but greater than unheciged loss
Profit
Rises
Rises by same amount as cash Rises by greater amount than cash Rises by smaller amount than cash
Profit
Neither profit nor loss Loss
Loss
Loss
Loss. but smaller than anbedged loss
Falls
Profit
Profit, but smaller than unhedged profit Profit, but greater than unhedged profit
Loss
Loss, but
Cash price Falls Falls Falls
Rises Rises
Rises
Future price
Loss
Profit Profit
Profit
Loss
Profit, but smaller than unbedged profit Profit. but greater than unbedged profit Neither profit nor loss Profit
greater than unbedged loss
SOURCE: B.S. Yamey, "An Investigation of Hedging on an Organized Prociuce Exchange.-
Manchester Sehooll9 (1951), 308.
277
278
?RICE IKFLUENCES
WHO TRADES .Loc.a.£6 b-
on
6
7. the ma~ket place 8. method~ o 6 6o~eca~ting
-
---- .. -·· --·
------
tf.>
p~ice~
·---- ---·- ·-------- - - - - - -
I3
1. vo.tu.me. 2. cpe.n inte.~e.~t 3. c.c nttz.a.Jtia.H c pinion 4. c.ommittment c~ t~ade.Jt6
5.
'c.a..6h'
6. 'ba..oL!>' 7. , 0 dd.6 , 8 • .6ea.6onal patte.Jtn.6 9. c.haJtt pattef!.n.6
bec.u.m a p.6yc.h~atJt~.6t/p.6yc.holog~.6t ( go to a p.6yc.h~atJt~.6t nof!. one yea!!. - make the ~nve.6tment ) and Jtec.ogn~ze
I. the w~nnef!..6 and lo.6ef!.6 Z. e66oJtt and d~.6c.~pl~ne Jtequ.~Jted 3 . .6 el6- awalt en e.o .o 4. nec.e.6.6af!.y peJt.6anal~ty tJta~t.o 5. who tJtade.6 and how
above all know
eveJtyth~ng
1. Z•
tr~end.6
3.
p!!.~c.e
theJte
to know about
c. o n 9 e.o t~ o n.o JteveJt.oa.l.o
maj cr~ t-~~end ~nte.Jtmed~ate m~nof!. tltend do U know wha.t a c.cntJta-tJtend p~n-po~nt
~.6
the
tJtend ~.6
?
ma.jof!. tJtend
f~ne.o ~nteJtmed~ate tJtend m~nof!. tJtend l~ne.6
l~ne.6
both top and bottom ~dent~nY
the tJtend channel vol. 0.1. c.omm~tt. o6 tJtadeJt.o, c.ontf!.. o p~n~o n, c.a.6 h, ba.6 ~.o, o dd.o, .o ea.6 o nal patteJtn6, c.haJtt patteJtn.O
bec.u.m an a.otu.te. bltea.kou.t a.naly.ot
3 types
i~
~uppcnt
I . c. ana eo :U...c n 2 . bLend .U.ne 3 • bta.n-6 t 0 Jtm e.d
bec.uming ne~i~ta.nc.e
i~
en
to be a.) c.ontinua.tion b J n e v en~ a.t
c.onge~tion ti~ety
Con~iden
thnee.
c. a n.6 id en
ne.~i~ta.nc.e ~uppont ?
: volume a) high/tow activity duning the. da.y b) high/tow a.c.tivity a.t ~uppont a.nd n e.~ i~ tan c. e. c.) nean a.pex a.nd at binth
da.y~
up/down, one day down/up ?
length o6
c.onge~tion
he.igth o6
c.onge~tion
0.1., c.ommitt o£ tnaden.6, c.ontn. opinion c.a.~h, odd~, ~ ea.6ona.£. pa...ttenn~, c.ha.nt pa.tte.nn~ .
did U ~ee it developing ? do U ~e.e i..t developing ? ha..6 it developed ? c.la..6.6i£ic.a...tion : - 'v' , head & ~houlde.n, double, tnipte, ~auc.en, nec...ta.ngte diamond c.on.6iden : volume
I3 P:...A!~KING
0. 1.
ccmmitt. c6 t~ade.~~. cent~. opinion, ca..!:Jh, cdd.o, ba.oi,!l, .oe.a.oonal patte~n.o, cha~t pa:tte.Jtn.6
via
~e..6e.a.Jtch
0. 1.
comm. c6 :tJtadeJt.6 volume inde.x(chap:t.2) ba.6 i.6 pJtemium monthly,we.ekly baJt chaJtt.6
Now, apply
U 1 Jte.
kit on tool.6
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337
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I. chin-wag with 6ellow t~ade~.6 unle.6.6 it6 so~ long, long te~m t~ade6, a 6o~t on nact ninilng mi.66lon, the Qlnd u wait month.6 no~. 2.
Re.6ea~ch
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onnice activitie6
nundamental6 vla I. Commodltle6 Magazine
( a mu.6 .:t
2!9 Parkade, Cedar Falls IA
2. Commodity
Re6ea~ch
506!3
Bu~eau
One Liberty Plaza N.Y. N.Y. 10006
Sub.6c~ibe
e.g.
.:to a
cha~t .6e~vice
I. Commodlty
( it'6 handy
Re6ea~ch
Bu~eau
One Liberty Plaza N.Y. N.Y. !0006
2. IBEX Chart Services Box 693
2420 Ist Ave. Seattle Wash. 98I2I
I3
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BJtu.c.e. Gou.ld. Box I6
Se~ttle,
Washington 98II
-get the back issues too!
FIRM RULE NEVER COMMIT MORE THAN 30% OF EQUITY AT ALL TIMES I tend to use 20%.
ThJtow :th-Cb boo~ ~w~y i6 U b!te.a~ :th-Cf.> Jtu.le.. r don':t wan:t u in my c.~mp. and, ab aw~y
down.
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I'm c.onc.e.!tne.d, T~ROW :thi6 boo~ pabb it on ) i6 U do not WJti:te. e.ve.Jty:thing
ab
O.K. gang. Now U know the ground rules. do the above U've got it made.
~nd
O.K. now that U have committed U'reself to the above, and have becurr. totally exposed to all their facets, we will get down to some more details such as record keeping, what I wud do if I had $2,000 to invest or one million. I will explain how I trade long term, day trading, and swing trades. I will explain what a fool I can be, and then again how easy it is to make money, consistently. How I trend-buck, trend follow, pyramid, congestion play and how I handle tops/bottoms. We will discuss what I wud do if I was not a full time trader. And, U will get an idea
ho~
I use Point and Line Charting!
But, first, let's have some more discussion
Essentially a trading guide prods U to proceed as if U knew what u were doing. It also induces U to formulate a set of rules u can live with. If they are good rules, u record them and stick with them. The first step is to elect whether U intend to operate for a small quick profit, day-trade, seasonal
340
?LANNING
play, straddles, or just do what naturally corresponds to U're instinct, or any combination thereof, taking into consideration U're financial status at the time. Self-discipline is the purpose of developing a trading plan, and self-discipline creates the trading plan, and 'writing it down' creates the wealth. To achieve this objective, a self-created rather thanan 3dopted plan is superior. Too many people master one technique, then want to begin experimenting with others and too soon, and gamble too much on the first draft of the scheme. Remember, there is wisdom in patience. Once a plan has been formulated it must simply be adhered to. And, remember also that any approach must be regarded as unprofitable until it has proved otherwise. Perhaps the most stultifying mistake that can befall the trader is the assumption that success can be certain if he/she adopts a rationale trade selection strategy and intelligently follows the elements of a successful plan. Putting aside the 'human element' ( we all make mistakes ) unfortunately there is a final obstacle to success ----- money management. ( chapter I4 ) . If the trader lacks the discipline to set objectives, to include what return he/she wants from capital, how much to commit to the market and risk limits, and to act when any of these are reached, according to his trading plan, - he/she shud not trade futures contracts. I hate to be so negative about all this, but U shudn't. ( If U're already programmed to be a loser - why bother ? ) The trader, like the gambler, will find it far mo1:e difficult to handle his money in a 1ogical and disciplined manner, than to learn the rules of the games, if he does not include as a rule of the game - money management . It is impossible to develop a set of rules to serve as a guide to all traders under all conditions, and this trader will not attempt to do so ..... only suggestions, and what I might do under certain circumstances. The trader who succeeds in the long run is able to recognize and develop his behavioural skills on his own behalf ....... thus my emphasis on psychology in this book. / There has never been a successful trader no matter how magnificent his style who is not a superb manager of his money and a student of market psychology. Food for thought : . 12ever t_ry to reduce trading to a purely mechanical exercise. Mechanicalness must be displaced by awareness
what to do to make a great deal of money ...... keep things simple ..... that applies to every aspect of trading .... .... U're market and research approach ..... U're timing .. .. .. U're pri:.:e objective studies it's no trick at all to be right on the market .... traders who can both be r-ight and sit tight are uncommon .... it is only after an operator has firmly grasped this fact that he can make big money 'food for thought' both minds and trading plans must be sufficiently flexible to acquire profits, especially in unusual and adverse times .... U're trading style had best accommodate itself to prevailing market conditions . the chart purist who does not wish to knok' anything about fundamentals ot the market, seems to represent too extreme a view for the successful long term price forecasting ... ... the ideal compromise is to use both .... when they agree, the combination seems likely to be highly profitable when they disagree, the market shud be approached with caution so-so trades that offer a possible gain equal to or greater than risk must eventually drag most traders down. We tend to overlook the best trades .... there are mediocre trades presented every day and as well, sure-thing trades .... ... high risk trades nickle and dime to death ... big money is made by sitting tight on good positions, confining trades to situations of unusual appeal very few can trade everyday and emerge winners. Almost anyone who has the fortitude to await those opportunities for which his style is tailor-made will succeed, where his astute but more active peers will fail. it is obvious that a trader k•ith less probability of success but trading conservatively can actually have a better chance of long-term success, winning the game, than a trader~·ith a higher probability of success, but who chooses to trade more aggressively ? . some professionals believe that it is best not to lean too heavily on mechanical approaches to the market analysis ... ... if they really performed all that well, profits wud disappear because everyone wud apply similiar analytic procedures ..• traders can make money even if they cannot predict short-term price changes consistently ... a trader can simply follow a trend
342
PLAL~KI!~G
successful trading can be aided by knor,.'ing current conditions in a commodity knowing what changes to look for knowing how to interpret major news items ****** * and proper handling of one's position in the market. Do not distain, and do not wholly believe any sources of information . .... the best u can do is to review all carefully and make an educated estimate of their accuracy and more important as to their eventual effect on the market. The more information a trader is able to accummulate, the more likely it is known to large numbers of people, and the more information he requested in rendering a trade decision, the lower the potential profit from a current decision. Generally, the investor's goal is to achieve a workable approximation of truthfulness ... think independantly, avoiding the herd instinct .... the herd is often wrong, if not always wrong remove a portion of all profits from U're accounts, as part of a trading plan . the human element is undoubtedly the private investor's biggest enemy in any type of trading remember that prices tend to exhibit more sustained price trends than wud be expected on the basis of pure chance and that significant price moves take time to develop, as they do not cum overnite .... essentially, market fundamentals underpin trend direction commodity education is extremely worthwhile, since it enables one to evaluate a great many things one reads, ana also teaches patience, perserverance and controls other human emotion if U play U're hand correctly, with a plan, U are more than likely to end up with more profits than U anticipated
U losers in this world, have probably not even bothered to read the above. )
OKAY
- for U winners and losers, NOW CUMS THE FUN PART.
see next page
here we go
?:i.-:.!~X!NG
STEP # I Precis this book - at least ~~e technical sections. List the items of importance for each topic - there must be one on every page . Itemize all the facets for trends, congestions, reversals, volume, 0.!. , contrarian opinion, basis, odds, seasonal and cyclical pattezns,( did I miss anything ? ) - list them, categorize them - ready for handy reference. This shud take U at least two months. Study psychology and factors influencing prices.
STEP #2 Get U're basic charts ready. I have four for each contract. one : - unadulterated bar chart with no markings at all so I can see the forest. 1 memorize major and medium trend lines , and chart patterns with them. But no scribblings. At the bottom I place volume. ( 0.1. I just keep a weather eye on, and get from a chart service )
3 43
344
?LANNING
two
daily bar chart with my 'dot' in place, but nothing else just for visual observation - no scribblings - looking at the trees.
three
- c,hart with just the dots in place - easy to observe dots by themselves to analyse crest§ and 'waves' - to look at the forest and the trees.
PLANNING! ::our
345
- daily bar charts with dots in place on which I do all my scribblings of lines or whatever gets quite messy - channels, trend lines and whatever. Place other moving averages on in different colors if u·wish and maybe oscillators at the bottom of the page. We're looking at the roots !
(Also, prepare a weekly and
month~y
bar chart to look at the 'forest'
!~!)
Next, I prepare the 'basis' chart if I'm trading grains, and products, meats, cotton, copper, plywood, lumber and perishables ( eggs etc. ) . I don't bother with silver, gold or financial futures. + IO ¢
see pg.II3 /
+- 5
¢
0
- _s
¢
- IO ¢
346
PLAl-lNING!
Next,
have
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Two o: them.
for every 'thirty day period.
remember - writin down ?
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Now, let me show U how ! use trend lines. Part of P&L Charting ) It's going to blow U're mind and cud make U a millionaire. I shall try to go thru it in detail and hopefully U will grasp it. It's incredibly beautiful.I hope U're ready. It's one of mv secret, secret weapons and I'm glad to give it to U. ( Some people wud charge thousands to reveal this one.What the heck. Why shudn't I give this one to U .) Here we go. Before we start, there's one little rule that I wud like to mention. (U will see the trend lines in the following silver chart and know how they are developed by following closely tae description and refering to that chart). But for the moment, I want U to remember a pretty fair rule and the only special caution to my P&L charting trend lines and it is : - always close the gaps
is closed not thru here
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374
every market I trade, and is part of my P&L system. If I wish to be a position-swing trader, I look for some justification to reverse myself every three days. It's just a guideline and more often than not let's me pulse with the market. Please do not get too many bright ideas about this, but a commodity that is no~ a runaway market ( I hope U know what a runaway is. ) , is~a commodity that runs in these three day cycles. This trader uses this concept to know that every three days, something is up and to be looking for it. That is why as a position trader (who occasionally day trades ) , I find myself switching positions about every three days, unless I'm into a roaring bull or ranting bear. (What can I say?) (I'm just trying to help U.)
CONGESTION TRADER --·-------
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A very subjective creature, but very astute and usually experienced. He can sniff out a congestion and play his little games, with his set of guide lines. See if U can understand from the following
375
what his guidelines cud be.
Day I -prices are on a trend line so I'll go short ~ 572 and see what happens. Take profits next day @ 566 Profit S250 Day 2 - I will risk shorting into previous high 574 as I think after that long run up there will be a resting of prices. Short @ 57! . Profits next day thru imaginary bottom line of a flag @ 562 Profit $400 Day 3 - buy at bottom of flag congestion. Take~profits next day @ 582 . Profit $950 Day 4 - prices @ support - buy 562 - sell @ 50% retracement reverse @ 573 day #5 Profit $500 Day 6 - (short from 573) buy, reverse @ support again - in congestion! - profit @ 562 is $500 Day 7 - hold long 562 to see if market challenges old high 588 It does - short @ 583 , reverse on close day #7 , market probably in congestion between 588 and 560 . Profit $1,000 Day 8 - hold to see how 560 challenged - prices break thru so he holds short 583 , takes profit @ 550 (50% retracement down) Profit $!,600 Equity now $8,100 , enough for two contracts. Now the congestion trader may bounce up and down in the congestion. For our argument, we will just go long at the bottom of the congestion, @ day #9 @ 550 . Take profits @ 50% retracement up @ 565 . Profits (2 contracts) $1,400 Day IO - buy @ 552 and sell and take profits and maybe go short on first challenge to 569 on day #II Profits (2 Cts. ) $!,600
Our equity is now $I0,300 and we're getting into formidable profits, but I wish to stop right here. Congestion trading can be very subjective, because U can find many variables why u shud take a particular action and this author cud cum up with one for any point I wished to choose I may be leading either U or myself up the garden path. conoestions are easily recognized, particularily with P&L charting, and easily traded and profits easily procured, ~f U're experienced or aware. Develop a congestion area plan of U're own to have ready when prices rest. Look for
I. support and resistance lines 2. trend lines 3. 50% correction areas 4. flag,pennant,reversal formations or other chart formations 5. 3 days up/down patterns
And, then analyse breakouts ner chapter seven and nine.
376
To civerge somewhat, this a~thor wishes to categorize what he calls the four kinds of trader. I. 2. 3. 4.
sandwhich t.rader day-trader position trader sure thing trader
This author switches from one to the other to relieve boredom or to meet market conditions. The sandwich trader is the big-time
trader with perhaps millions at his disposal. He will have done his homework, his fundamental homework, and waited until the market had already commenced its' move to confirm fundamentals and then applies his technical tools to enter the market. In a bull market he will have sandwiched himself/herself above the lows - he/she may have already started to buy near the lows - testing the market, and as prices enhance upwards, he commits more to the market, and sits back and waits, waits for the moment of truth when finally prices move upwards. He/she never sells at the top. He/she is happy with calling the long-term market correct and very quietly gets out and moves on to another market already being studied for months. This trader sandwiches himself in between the top and bottom and is quite content to be there. U never see them cuming and U never see them going, except possibly via volume analysis per chapter two. Their entry and exit is unobtrusive and never rocks the boat. It's the ardour of the public who wants to get rich quick who creates those wide swings. Someday, u shud be a sandtdch trader, if U persevere. There's lots of room for everyone. The next trader is the day-trader, who may not hold a position over nite. Perhaps he takes that three days up/down and gets out that day, or the nex~ day.
/f-'"\
The position trader tends to take advantage of those three day
swingdsl~ was dtellhing U. at~outf, maybde selling on
tren ~ne an t en wa~ ~ng or a ay ~ or two to find an excuse to buy and reverse again. ( This is a very / delicate operation. ) or he may just be that 50% trader, buying selling support/resitance. He most certainly has a trading plan and style and is experienced. The next style is what I call the sure-thing style. This person will wait, and I mean wait, for what he calls a sure thing and then mercilessly hits the market with everything he's got and pyramids. Let's look at these people.
i3
377
----·-·
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-~A.~ ~ :::.:~
:: : efcmo consitierilll!. a positioft to be worth talcill~t. So far the ideal periocl II> wait has bisloric::llly 10 ...,. hom one to :54 days. but Cary Deli.- that the key is on lbe chart -n.e and neecis IIMIJ'IIiy to be dia~. Currently be is tll\lllole to tncie cyilow becatDe be bas lost ~ thirds ol his c::apilal tradinc ~ly and spmt tbe otlaer third 011 chan paper. coioreti pem:ils. and tbe prwactOr.
""'*
WINh~RS:LOSERS
F~d Fcntc•y turned to commodity trading m=y yean qo after suf. ferinst Jne¥OUS losses traciinlt Czarist bond&. He has " - e a ~ el
