...

AND LOTS OF IT
by Charles Drummond
Ted Hearne and Associates, Inc.
5520 North Magnolia
Chicago, IL 60640
USA
HOWTO MAKE
MONEY IN THE
FUTURES MARKET


How to Make Money in the Futures and Lots of It
By: Drummond, Charles
This item is currently
unavailable from the
publisher.
Item #: 2453
Pages: 583
Type: Book - Hard Cover
Publish Date: 1/1/1979

How to Make Money in the Futures and... - Drummond, Charles
http://www.traderslibrary.com/moreinfo.asp?item=2453...D%26sort%3D%26lc%3DQuickSearch%26submit%3Dyes%23245330/01/2004 13.48.29
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
ted@tedtick.com
Or visit the P&L Dot website at www.pldot.com
This publication is designed to provide the
Author's opinion in regard to the subject
matter covered. It is sold with the under-
taking 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.
r
acknowledgements
N e e d l e ~ 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
I
I973 Larry R. Williams
Making
I976
Conceptual Management Carmel Valley Ca.
Money in Commodities
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
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
0
p
I973 Stanley Kroll, Irwin Shishko
Harper & Row Publ. IO East 53rd St. N.Y N.Y. I0022
The Fastest Game in Town
I973 Anthony M. Reinach
Random House
Trading Commodity Futures
Trading
IS74
in Commodities An Investor's Chronicle Guide
c.w. Grainger
Woodhead - Faulkner Publ. Ltd. 7 Rose Cres.
Cambridge England CB2 3LL
1
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.
r
r
I
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 knowledge-
able 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.
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 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 ismeant 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 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 it!
( 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.
1
PART
contents
A THIS IS THE FUN PART C TECHNICAL )
CHAPTER 1 JUMPING INTO THE FORAY ....... pq.I
CHAPTER 2
CHAPTER 3
the who's, where's, why's & a few how's
introduction;charting;chartists;
fundamentals vs. charting
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 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
opinion;committment of traders report;news; /-1
point and trend analysisf f_({( J
warehouse receipts. H
I WANT U TO MEET THE MARKET PLACE
the commodity market-opportunity knocks;
why invest in commodities;stocks vs.
commodities;what the market place is like;
. . . pg. 3 8
\7 speculative activity;conspiracy theory;
f\JO /-(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
secret of the pros
pg.54
critique;classification;volume in congestion
analysis;volume in congestion breakout analysis;
volume in trend anal sisvolume in
reversal
(.;.:;'" * "\'<CAl
summary.
CHAPTER 5
CHAPTER 6
CHAPTER 7
K.
o\,
\>ol.J.J

OPEN INTEREST
.. ..... . . . pg 7 I
what it is;rules;further information:
criticism;O.I. in trend analysis;O.I.
in congestion analysis;O.I. in market
top analysis;O.I. in market bottom
analysis;seasonal tendencies in 0.1.;
O.I. and volume;O.I. and commdttment
of traders
CONTRARIAN OPINION
COMMITTMENT OF TRADERS REPORT ...
"CASH"
THE "BASIS"
THE "oDDS"
pg.98
pg.98
pg.IOO
pg.II3
pg.!I4
TRENDS
.. pg.IIB
how to make a fortune overnite ( more later
characteristics ;trend_action;types of
trends;trend lines;trend channels;trend
validity;trend and O.I.,volume;fundamentals
and trend;using trend action;breakaways;
gaps;straightaways;when a trend still has
strength ;trend weakening;trend bucking;
profit taking;what systems work best in
trending markets.
CONGESTIONS
........ pg . I 4 5
where most of U're money will be made ( more later
argument;advantages;characteristics of;
categories;congestion action;analysing
congestions;congestion O.I. and volume;
mid-way congestion patterns;end-runs;
anticipating the direction of breakout; /
antici atin the extent of t e br a o t
mov u port
r
r
PART
CHAPTER 8
CHAPTER 9
TREND REVERSAL
. . . . . . . . pg . I 7 8
this is where U take U're money and ruri ( more later
anticipating a trend reversal ;!comments/
patterns of trend reversal;fundamentals
and trend
opinion,committment of traders during
trend reversal;trend reversals and 50%
retracements;bottoms;tops.
POINT AND LINE CHARTING . . . . . . pg . 2 0 5
( the more later )
how it developed;historical basis;philosopPy
behind it;what it to apply
distance;distance from
dots;dot swinging;dot turned up/down;crests;
channel system;T.R.'s;hitting/digging;blocking;
normal tops/bottoms;secondary keys;application
to trends,congestions.
B NOW IT'S TIME FOR A CHIT-CHAT C PHILOSOPHIC )
CHAPTER 10 PRICE MAKING INFLUENCES ...... pg.267
and how to use them
prelude;news;weather;seasonal influences,
and cycles;fundarnentals;price level influences;
trend;spot prices;who trades;chart patterns;
market psychology;inertia;general business
conditions;money-devaluation;changing
policy;the biggest factor influencing prices
to-day and worldwide:-socialism.
CHAPTER II MARKET THEORIES . . . . . pg . 2 9 5
...S.<JVJO

_w\ \d \'"' t-
I hope U get thru this one
prelude;historical;hypothesis of price
fluctuations,expectations,supply and
demand,elasticity,price and price level,
market psychology hypothesis,gaming
hypothesis.
PART C
CHAPTER 12 SYSTEMS AND SERVICES
. . . . . . pg. 3 I 4
a criticism
models;model building;a chit-chat;
discounting of systems by individuals;
discounting of systems by the market
place;services.
CHAPTER 13 PLANNING
the ultimate key to making
...... lots of money
. . pg. 3 3 2
herein we try to tie everything together.
CHAPTER 14 MONEY MANAGEMENT
. . . . . pg. '3 8 6
how to make sure the ultimate key works
socialism;objectives and criteria;asset
preservation;making $I00,000;30% equity
rule;accept only IO% equity loss per
trade;four basic elements of money
management;sitting on cash;risk;pyramiding;
congestions;day-trading;and lots more.
CHAPTER 15 MAXIMS
. . . . . pg . 3 9 7
a critique
criticism;some essential rnaxims;maxims for
the pessimis=;fussy maxims.
N0\'1 WE'RE GETTING DOWN TO SERIOUS)
SERIOOS BUSINESS C PSYCHOLOGICAL )
CHAPTER 16 WINNERS AND LOSERS
... pg.403
who are they ?
how the loser thinks; how the winner thinks;
portrait of a winner;portrait of a loser;
what success and failure means;table of
what winners,losers do.
CHAPTER 17 EFFORT AND DISCIPLINE
. . . . . . pg. 4 2 5
CHAPTER 18
what the winners have
discipline: what is required,what to do,
some disciplinary rules;effort:what is
required,results.
SELF-AWARENESS
the 'holy grail' and the most
important part of this book
successful speculation requires;what
impairs the decision making process;
what self-examination will reveal;
trans-actional analysis;behavioural
skills;fear.
pg.435
CHAPTER 19 NECESSARY PERSONALITY TRAITS .... pg.448
U may not like this .
CHAPTER 20 WHO TRADES AND HOW
. . . . . . pg. 4 56
APPENDIX A
CHAPTER 2I
CHAPTER 22
CHAPTER 23
CHAPTER 24
CHAPTER 25
CHAPTER 26
know U're fellow traders
kettle of fish;classification,general,
specific;short-term trader;day trader;
scalper;floor trader;long term trader;
large
trader;protessional trader;technical
trader;trend bucker; 'gap' man;the trade;
exchange member;female trader;small trader;
average trader;public trader;beginning
trader. /
ADVICE FOR THE INDIVIDUAL
PRACTICAL TRADING HINTS
CHART PATTERNS
SEASONAL AND CYCLICAL
THOUGHTS
TAKE A LOOK
pg.487
pq.498
pg.SOS
pg.554
pg.568
pg.573
.PART
A
t hi s is the fun part
the technical part
JUMPING INTO THE FORAY
I n:t:Jz..o du.c..;ti_o n.
Cha.Jttin.g
a.pp11..oa.c.h
of, c.ha.!7..ting
of, c.ha.!7..ting
.{.n.c.1..u.din.g .6 UC.C.e-6 .6 6 uf. C.h.a.J7..:ti..6 U
a.nd un.6 uc.c. e-6.6 6 uJ!.. c.ha.Jtli.o :t.6
Cha.17..:ting
INTRODUCTION
wea.kne-6.6 of,
.6:tl7..eng:th o 6 f,undamen.t.a...e.ll
U.6 a.g e o 6 6
CHAPTER ONE
In the 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.
I
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
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 inter-
reacting with the market. Since we cannot insert people into
test-tubes ( at least not yet ) to research their psychological
T
THE FORAY 3
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
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.
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 attemptis 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 unpredicta-
bility 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 5
I) support and resistance levels.
2) pattern count other
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 of
chartists, may create false penetrations of trend lines and other
formations.Charting is inevitably to some extent an inexact
science.
It is a 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,
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 .. 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,
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
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 off-
guard 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
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
l
THE FORAY 7
tend to anticipate trends. This is a fallacy. One cannot asume
or 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.:t<.ng
If U can survive and live thru I-2-3-4 years of commodity trading
U will see every price pattern U will ever see ( read that again ) ,
and the rest is simply a repeat over and over again of the
various patterns. One of the interesting things about trading in
commodities is that as U watch markets move up, and U see other
markets which are resting down at the bottom, ( the end of bear
markets ) u can say to U'reself " O.K. is it their turn to move up
next ? " Sure enough, one by one, they eventually start the cycle
8 THE FORAY
over, from the bottom up to the top and of course, from the
top down to the bottorr.. All markets will one day cease to move
down in price and then each will move sideways for a while and
then advance in price. One day there is always an end to bear
markets in commodities, and there's always an end to bull markets.
What I have just gone thru represents a philosophical long term
approach to the analysis of market prices. In other words, if
market prices have cum down the last year or two, the end of the
bear market is in site, and eventually all commodities will start
to rise again. This can be realized almost without looking at a
chart. But in analyzing the chart, one becums aware of the termin-
ation of the bear trend and the trader can take a position.
It is impossible to trade on the assumption that by being aware
of general movements of prices by reading newspapers, or "thinking"
about it, that this may enable u on the medium to long term basis
to assume price movements. More often than not such an approach
will not restrict the limits on losses once the market has been
entered, due to an adverse price movement or once profits have
acoummulated. Most individuals who do not use chart methods in an
up market, for example, are caught by surprise by a bear crack &/or
a major bear trend evolving. Chart analysis is absolutely essential
to protection against losses and protection of profits !
CHARTISTS
The argument used by the chartist is" follow the other fellow ..
He probably knows more about the fundamentals than I do. " The basic
tenet of the chartist is " the trend continues until it stops."
Most chartists attempt to anticipate a trend move. Chartists are
famous for making spectacular profits one week and enormous losses
the next. The chartist is always concerned with his ability to
/
recognize the commencement of either a congestion area or a trend
reversal. So long as the trend continues the chartist is happy.
In analyzing the likelihood or the occurence of a trend reversal,
or the activity of a congestion area, or something is wrong with
his trend, the chartist becums very unhappy.
The chartist is quite a species. He really gets off on all the
wiggle-waggles. What usually happens to the chartist is that he/she
does not see the forest but for the trees. And, the chartist's bag
of tools is never over-filled until that final moment when the noise
of the information and systems clogs the channel of clear cogitation.
l
THE FORAY 9
He stares in blank, hypnotic, unreceptivity for hours on end
at the chart, not knowing what his chart is telling him. His
major fault here is that he/she looks towards the charts to
tell him what prices are doing, rather than he telling the charts
what he requires lf it.
A suggestion: When the chartist evolves into
the fog-like state, he must sit down and write
on paper his/her written request from the chart.
The chart is none other than the computer of facts
and information, and as with a computer, one must
punch in what one wishes the computer to start to
tell him, and by what criteria, and, this can only
be done by a pre-programmed trading plan. The first
pre-requisite of the chartist is that he have a
trading plan and exterpolates from the chart a
criteria which is palateable to his plan.
Most successful chartists are
a) less likely to take long positions
b) they are more likely to close out positions
before receiving a margin call.
c) less likely to put up additional margin if
they do receive a margin call
d) more likely to trade in a larger number of
commodities and to pyramid their profits.
The unsuccessful chartist
a) has a clear tendency to cut their profits
short while letting their losses run
b) more likely to be long than to be short
c) has a clear tendency to buy on days of price
declines and to sell on price rises. This action
indicates that these chartists are predominantly
price level traders.
There is no track record possible on chart readers in general, but
a track record is certainly feasible on the performance of any
particular chartist. Until chartists are willing to subject
themselves to one kind or another of track record, it is impossible
to take their claims seriously. Few chart readers wud have doubted
IO THE F8RAY
the existence of the "head and shoulder" formation. However, one
mar.'s reversal signal will be another's flag continuation pattern.
More often than not, if a chartist is vindicated his market decisions
were more often than not, a result of luck. The trader is more
painfully aware that technical competence does not insure
competent trading. Chartists who lose money do so not always
because of bad analysis but because of the inability to transform
their analysis into sound practise. Bridging the vital gap between
analysis and action requires overcoming the threat of greed, hope,
and fear. May I suggest that it means controlling impatience and
the desire to stray away from a sound method to something new,
especially during time- of temporary adversity.
FUNDAMENTALS VS. CHARTING
w e.a.kn.e..o .6
The \Jeakness of fundamental analysis is that U can never be sure
if the facts known to U are all the relevant facts.
The best analysis can be overthrown by changes in government policy
or essentially speculative decisions on the part of other investors.
Often the market goes completely contrary to fundamental consider-
ations due to technical and other factors. The fundamental trader
is interested in the long range price movements and must be
prepared to wait it out. Fundamentalists may deny it but there are
too many external factors to be taken into consideration. The
natural response to fundamental influences reflected in the day
by day fluctuations means that there is no need to seek them out
for analysis. The same holds true , if acts pertinent to fundamental
analysis are subject to statistical errors and to subject evaluation.
Unfortunately the trader often learns of changes in fundamentals
gradually or often occurs that before the fundamental
analyst can say for certain just what has changed, futures prices
will have anticipated the changes which will eventually appear.
Personally I find fundamentals at times simply too much to cope with.
I suggest U look at the following illustration, to see if U can cope
with all the fundamental manifestations surrounding
11
wheat
11

l
u.s.
FINANCING
SV"Pi.IES
0'
Rvt.
RIC.
ETC
MAJOFI RELA TIONSHI!'S IN THE WH:A i ECONOMY
PRICE IN
PRECEDING '\'VIR
TOT AI. DOMESTIC SUPPL 'f
Sa
,--- --,
I '
I GOVERN"""" \
I 1
, PROGRA""S I
'-------/
U.S.-OATS
.. ll. GOOOS AHO
SEFMCES


\
'
'
'
. . (Courtesy of The Demand and Price Structure tor WHEAT, Tet:hnit:al Bulletin
1136, U.S. Department of Agrit:ulture, 1955, p. 12.)
THL FORAY Il
I2 THE FORAY
Most traders recognize that fundamental analysis provides some
indications of price levels, justified by known facts. A trader
who finds some limitations in fundamental analysis will treat
fundamental data as background information, which may influence
his general attitude toward whether prices are high or low,
relative to the over-all supply/demand environment he foresees
in the months ahead. Such a trader may view futures markets as
distinct entities having a character of their own. Fundamentals
underpin trend direction. And, taking into account the funda-
mentals of a given commodity enables the trader to anticipate
a) the continuation of the trend
b) the likelihood of a price reversal
or top/bottom formation.
One ultimate key to the employment of fundamentals to the market
place is that prices usually discount fundamentals. Being aware
of the fact that by the time one receives news, particularily
after an extended price move, that this news has in effect already
been discounted by the days, weeks, or months previous by the
price movement itself.
( If u don't know what "discounting" is, call U're broker. )
As soon as u see the people filling their shopping carts full of
bags of coffee or hoarding sugar, one shud be aware that the high
price and the transmission of news of the "shortage" to the
general public means that the price has already been transmitted
to the futures market and that a price top in the futures market
is w i L ~ i n days to weeks of topping.
U.oa.g e.
While a pure chartist does not wish to know anything about
fundamentals , the wise trader will try to combine futures trading
from both technical and fundamental strategies. U shud be able
to develop some idea what the market is doing without the formal
framework of a technical model. The beautiful advantage of usage
for the fundamental trader is that it involves long-range movements.
At one end of the spectrum u have the appropriate technical analysis
which is based on short term price fluctuations and at the other
end, fundamental analysis which enables the trader to adopt a long
term approach.
l
THE FORAY !3
Acknowledging the importance of fundamental analysis, major
technical indicators which run counter to fundamentals oriented
conclusions shud be seriously heeded. Experience has shown that
significant fundamental market changes frequently obscure until
after the market price has already discounted the change.
Stubbornly maintaining a position based on a fundamental analysis
in the face of adverse technical indicators and an adverse price
trend constitutes a quick method of running up substantial trading
losses. In short, do not ignore the technical action of the market
no matter how fundamentally oriented a trader U cud be.
I 4
CHAPTER TWO
METHODS OF FORECASTING PRICES
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2
1
METHODS IS
DISCUSSION
Never in my life have I seen anything like the plethora of methods
which are coming on stream for the use in forecasting commodity
prices. There are literally hundreds of techniques and approaches.
This chapter will present rather briefly, but a few.
Some of them are rather conventional and this author will place
an asterick beside the ones which he personally uses. Listed in
this chapter there are approximately thirty-six ways and means of
forecasting prices. This does not take into consideration all the
wonderful glorious little tidbits that cum thru the revelation of
P&L charting.
( This author is very happy with P&L charting, for it enables this
trader to quantify price action on a daily and intra-day basis.
I know of no other systen wherein each day's specific activity
means more than the trend or congestion in which prices are trading.
Each day's activity thru the use of P&L charting portrays the
evolution of a trend or congestion, sometimes within one day. )
However, this author is most irritated by those traders who are
convinced that their moving average, point and
index, volume oscillator, balance volume, weighted moving averages,
god knows what else, - basis, cash, - are the only sytem which is
effective. And, that the system that they are using is the only
one that will ever be effective and that they have no use for
volume, open interest, seasonals, fundamentals, contrarian opinion,
wave theories, point and figure, moving averages, oscillators,
chart patterns, momentum indices, whatever, and are blindfolded
to the evolution of anyone else's approach. ( There. I got that
off my chest. )
Often these traders do not even use their own systems and seem to
me, at least, to be continually fighting the market. If a trader
has a trading plan incorporating several methods of forecasting
prices and combines them in a way which he can continually trade
profits from the market, then this trader is worth listening >o
In the section on planning, this author will succinctly portray
his approaches to the market place and U will be surprised how
flexible he is.
2
METHODS
There are three basic methods to analyze the market behaviour of
commodity prices.
I) fundamental
2) mechanical
3) technical
FUNDN'...ENTAL
Often the market goes completely contrary to fundamental
considerations due to technical and other factors. The fundamental
trader is interested in long range price movements and must be
prepared to wait it out. Fundamentalists may deny it, but there
are too many external factors to be taken into account,
such as the natural response to fundamental influences, reflected
in the day by day fluctuations. So there's no need to seek them
out for analysis. HOwever, fundamentals underpin trend direction.
MECHANICAL
Mechanical methods use price and price alone to determine what
action to take and this action does not require any decision on
the part of the trader. There are three mechanical methods.
I) chart
2) computer summaries
3) moving averages
These are rigid trading rules to be followed faithfully and it is
usually based on some mathematical formula to predict the right
time to trade. The computer tells U what a mathematical formula
thinks u shud do. One of the beauties of the mechanical method
is they can be back checked. Computer oriented methods usually
bias themselves towards mathematical trend analysis, using moving
averages and other trading systems. The computer can be used as
a chart reader and it can formulate and test any and all
rules.
TECHNICAL
In the last several decades, a vast amount of work has been done
to erect a means of technical tools, - all with the aim of
anticipating futures prices from trading statistics. e.g. price,
volurne,O.I.
1
METHODS I7
The technical approach from the simplest to the most complex and
esoteric falls into four broad areas.
I) patterns on price charts
2) trend following methods
3) character of market analysis
4) structural theories.
There are many different methods for charting. The most popular
are
a. daily high/low/close bar charts
b. point and figure method
c. moving average of closing prices
The lists of approaches taken to technical analysis can be
cateloged by the following technical approaches.
I) tape or board reading
2) price chart analysis - which consists of
a. price trends
b. support and resistance
c. consolidation ( continuation and reversal )
d. price formations and patterns
e. meaurement rules
f. wave theory
3) volume and open interest analysis
4) other technical indicators which are
a. measures of relative performance
b. study of periodic price performance
c. opinion survey and contrary opinion
There will be more of this later.
Now, some methods,
MOVING AVERAGES
The majority of models are founded on a system of moving averages.
Some of them are sophisticated and ingest large numbers of variables.
Essentially all models draw a bead on the direction of a trend after
it is manifested and will keep U in the market as long as the trend
is unchanged. Some moving averages attempt to anticipate changes
in trend. These types are profitable to the properly capitalized
trader who can initiate a recommended position and can underlie
2
18 METHODS
more losing than winning trades. The rationale behind the moving
average is in determining when price direction deviates from
recent average prices. As long as the current price remains above
the average price of say the last ten, twenty or one hundred days
the trend spins onwards. The most ordinarily observed average is
the ten day moving average of closing prices. The advantage to
this method is that it gives equal weight to each day's price.
The moving average assumes that the trader bestows as much
importance on last week's prices as he does on yesterday's.
This does not conform to reality. A short term trader's horizon is
extremely limited.
Commodity prices do vibrate more rapidly than the prices of most
other investment forms, therefore, a shorter series of moving
averages usually performs best.
An ideal moving average shud
I) shud be able to observe a major turn of a price trend
at once and not several days after the turn
2) we do not want the plot of a moving average so close to
the plots of the daily prices that we wud be
whip-sawed in consolidation and minor swings.
3) the moving average must be adaptable to the volatility
of the particular commodity.
4) we want responsiveness in the moving average if the
commodity locks limit.
The short comings to this approach is that moving average lines
may be too langrid to use as a reversal indicator. More often,
moving average technicians tend to be guided in their trading
decisions by changes in the price market relative to the moving
average line. The more sensitive the moving average the smaller
the amount and degree of the advance differential and the greater
will be the number of buy and sell points, resulting in much /
whip-saw and consequent small losses. However, the shorter the
time span, the more sensitive is the moving average to a trend
termination of a reversal. New trends will be acted on earlier
and do not need much time to establish themselves. However,the
trader pays for this sensitivity more often than not because, and
to repeat, the shorter the moving average the greater is the
number of trades that will be made with greater commissions added
to whip-saw losses. Therefore, there is a delay with moving
averages in the indication of the turn of the price trend. Many
times the delay is much greater than wud be the case utilizing
either simple charts and point and figure charting and most
1
METHODS I9
certainly P&L charting. However, the chief advantage of the
average position is that it automatically puts user
aboard every trend of substance ( as do all trend following
systems. )
One moving average system which has some tradition behind it,
but which does not make big money is the " lagged seven week
moving average method " developed by Vunn &
Service, LaFayette, Indianna.
U take the closing price on a given Thursday
and then beginning with a period two weeks to
that, write down the closing price of seven
previous Thursday's. Compute a simple average
of the seven no's If U're present Thurs.
price is above this average U go long and if
the Thurs. price is below this average U go
short on the close ( on Thurs. ) . The action
rule states that once U have initiated a
position U hold on to that position until the
following Thursday.
WEIGHTED MOVING AVERAGES
Typical models nuture two or three moving averages - daily
high/low/close ranges, volume, O.I. % change of tops, or closing
price or even a psychological factor based on contrarian opinion.
The weighted moving average is a superior device but it also
retains the same short comings as any historical series of data.
Various weights are largely discretionary depending upon the
propensities of the speculator. I refer u to books 'Commodity
Trading Systems and Methods' by P.J .. Kaufman and 'Stock &
Commodity Market Trend Trading by Advanced Technical Analysis'
by J.R. Hill, available from Lambert-Gann Publishing Co. Inc.
Box 0 Pomeroy,Washington 99347.
OSCILLATORS
The oscillator takes a moving average to the current price -
the moving average to a weighted moving average. The drawback of
this system, as of most others, is that it functions best in a
strongly trending market. One point to observe is the momentum of
the move. While the uptrend is intact, the oscillator will be above
the zero line.
2
20 METHODS
If in each wave of the oscillator, lower highs anc lower lows
above zero have been recorded, this action suggests a weakening
o: the uptrend. If employing a ten and a twenty day moving
average one strategy is to take profits when the oscillator
indicates a weakening.
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May-October 1970.
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source: 'Forecasting Commodity Prices' Publ. Commodity Research
Bureau.
l
METHODS 2I
But do not initiate a short position until the twenty day oscillator
penetrates the zero line. This system will not put U in the market
as often but may put more profits in U're pocket when U do trade.
The major shortcoming to any historical series is that it looks
backwards.
As an oscillator moves from large positive numbers to small positive
numbers, this oscillator is a tool used to measure exhaustion of
a price trend. History is replete with examples of trends that
peaked or troughed, whereas accompanying rate of change oscillators
showed a clear loss of momentum well in advance. The disadvantage
in using oscillator signals is that during a powerful bull or
bear swing, oscillators will repeatedly move into overextended
territory and will stay there for a long time. Loss of momentum
before key tops and bottoms are reached is well documented, but
this phenomenon is much easier to see in retrospect. In practice,
declining momentum will indicate a pause in the price trend or a
reversal, and there is no way to tell which. Using this technique
the analyst can often explain past price action but he cannot
easily predict future price changes.
The term oscillator is given to a family of technical indicators
based on measurement of price changes rather than price levels,
the simplest being based on the distance the price has travelled
for a given period of time. There's two contentions on which the
oscillator approach rests
I ) the price can becum overextended and gathers
too much volicity. If the price enjoys an
unusual gain, compacted into a short time's
period, the presumption is that buying is
temporarily exhausted, and part of the gain
will be retracted.
2 ) a price trend can simply peter out as it steadily
looses momentum. In this, the price trend continues
but generates less and less energy until it d ~ e s .
The top is signaled when the price continues to
make new highs, but the oscillator moves from
a large positive number to a small positive
number.
2
22 METHODS
VOLUME OSCILLATOR
In a faster moving commodity construct a fifteen day moving
average of the high daily trading volume. In a slower use a
thirty day or six week moving average. Experiment with both
moving averages simultaneously for a while. Similiar to an
average curve, the moving average volume curve smooths out
the daily and weekly fluctuations of volume data. With
acrescent prices, volume meters activities of buyers and
with decrescent prices, volume gauges activities of sellers.
On the same chart plot also a fifteen day moving average of
prices for quick comparison to make the moving average more
sensitive to short term changes. Add to U're chart a five
day weighted moving average of volume. Notice when and how it
penetrates the fifteen day volume curve. After an interval of
observations U will be in a position to formulate U're own
rules and adapt them to U're own trading plan.
BALANCED VOLUME *
The dominant theory behind balanced volume will be that the
trader assumes that large scale accummulation or distribution
can take place in the market because the.activity wud have been
done quietly. It is further assumed that it is carried out with
small or deceptive ranges. The balance volume curve is used to
illustrate the true state of affairs by showing whether volume
is greatest during periods of rising or falling prices. When the
bias of volume deviates significantly from the price curve,
unusual activity is presumed to be taking place. Under normal
circumstances, the balance curve moves parallel to price. However,
when the curve begins to diverge from price, this divergence
indicates accurnmulation or distribution.
The bulk of the character of market analysis originates from
the belief that " big-moneyed " traders consistently take positions
prior to substantial price moves in any commodity. It is an old
approach to measuring accummulation and distribution by the action
of price and volume. Each day's closing prices is compared with
the closing price of the preceding day. If the latest date has a
higher closing price, all the volume of trading that day is
asigned a plus sign. If the latest day's closing was lower than
that of the preceding day, all the volume is subtracted to the
accummulated running total.
l
Date
March 1
2
3
4
5
8
COMrtrrATlOS OF Ol'.i.iAl.A.'I:CE VOI.U!\11!
May
d:!ily closing pric:c
27.09
27.15
27.22
27.07
2(;.85
27.01
Volume
(number of contr:tcts)
+3.000
+2,500
- 800
-1,200
+2.500
Source: Forecasting Col"UTTodi ty Price.s
Commodity Bureau
The accummulated total is the OBV.
013V
(cumulative volume)
+3.000
+5,500
+4,700
+3,500
+6,000
!1ETHO:JS 23
The absolute level of the OBV curve is of no significance. The
technician is only interested in the contour of the curve, when
it is compared with tDe contour of price. Under normal circumstances
the OBV curve will be parallel to the price. As long as this
relationship remains, using OBV has noparticular intere Stt:l:fowever,
when the OBV curve begins to diverge from price, notice is taken
because many analysts believe that this divergence indicates
accummulation or distribution.
However, research to-day indicates that the profit-making ability
of the large trader is impressive, but these studies have shown
that large traders succeed mainly by trading short run price
fluctuations. Such conclusions do not support the relatively
longer term accummulation, distribution thesis on which much of
OBV analysis rests. However, the fact that the OBV curve deviates
from price wud signal and substantiate an upcoming price move -
at least to this author.
See graph next page.
2
2 ~ METHODS
42
41
+14
.,
I
+12 c:
40
1
"
Oolly
0
0.
f :39
CIOsinq ClfiCt
+10
..
i:
+8
"'
... :38
..
..
+6
.... 37
""
...
+4
Q
0
Q
=
...
+2
<
ID
35
;
!!:!
0
0
..
~
0
" o.
~ ..
cr
-2
a 33
n
-oil
0
=.
32
;:;
~
-6
..
-8
-to
-12
-14
-16
-18
MOy June July
August 1967 pork bellies dally cloae versus daily on-bal-ce volume
(0BV) for May-July 1967.
Source: Forecasting Commodity Prices
Commodity Research Bureau
RESISTANCE
Each day the trader calculates a resistance index in the
following way.
the no. of contracts traded
divided by (high price)minus(low price)
l
\
METHODS 25
This measures the number of that changed hands
in relation to the range for the day. If the ratio is unusually
large, it may be that unusually large transactions were
the tape. High ratios do not occur often, but they do
stand out as spikes on the chart. Here, the technician believes
that large transactions, by their very nature represent important
and seeing money. Note in the illustration to follow all
three figures greater than sixty, meaning that sixty or more
contracts change hands per point range in price that all three of
these high index days came close to advantageous buying or selling
areas. There is no question that this technique can only be
subjective and cud not be used effectively without information
from other sources or methods.
..,
c:
=
0
Q.
"'
Q.
..
c
..
..,
..
" ::>
..,
21.00
20.50
20.00
19.50:
19.00

16.00
-
eo
" ..
E 60
..,
"'
u
c:
0
410
..
v.
..
20
0

I
I
:
,..
I
I
I
I
f'J
I
I
I
N I
I
I
..__Doily tlcse
I
I
l
I
/
I
I I
I !
I
I
I
I
I
N
I
I
I
1 I
21
I
31
I
I I I I I
Ill I II I ll II
11 I II Ill
December 1970 l Jonuory 1971
June 1971 live bogs dally cloae venus dally resistance
index for December 197D-January 1971.
Source : 'Forecasting Commodity Prices' Commodity Research Bureau
2
26 METHODS
INDEX NUMBERS *
Another useful statistical measure is the index number. It
provides a system for recording comparative changes at different
points in time. Index numbers can measure any comparative of
data, such as changes in copper production from year to year -
or variations in business cycles - deviations in commodity prices
or any other quantifiable sum, reduced to a single summary figure
to register all diverse activities e.g. Consumer Price Index
( is the most popularized index ) . Such unific computations can
quickly reduce relative price changes and puts it with consumption
or anything else U may wish to compare. Indices are especially
beneficial in analyzing seasonal patterns.
STRUCTURAL THEORIES *
SEASONAL PRICE MOVEMENT
TIME CYCLE
WAVE THEORY
see Chapter 24
criticism : not all the evidence indicates that
cycles are a real phenomenon. Extremely sophisticated
mathematical techniques have not supported the
contention that repeating time cycles of any length
are present in commodity prices. All of this is very
open to divergence of analysis
see Chapters II & 24
see Chapter II
e.g. stair step principle
e.g. Elliott wave theory.
METHODS 27
It is an ~ a e a that a trend typically moves in three succeeding
waves in the direction of the major trend and two as part
of a corrective reaction in the opposite direction
, .i ;" , n ' 2) , ... -, ~ - , . 1 ., Tj
.14N. I FEB. I MAR. .-.-.
u ,.
.1UL.Y I
:-:. soYBEANS JAIL 1978 CHl: - - t t
au
28 METHODS
UNDERSTANDING GENERAL ECONOMICS *
Comprehending commodity markets draws on demand and supply
relationships for greater profits and basic understanding of
these rudimentary concepts will facilitate the use of these
principles in U're trading analysis. If U intrinsically fathom
fundamental forces within the general framework of the economy
then efficacious application of technical tools can give U
considerable success in commodity futures trading.
CORRELATION ANALYSIS *
e.g. the unpredictable ingredient
-the government
The legacy was advised by John Mitchell.
" U'd be better informed if instead of listening
to what we say, U watch what we do".
This useful legacy,that will certainly go unheeded by most ,
focuses on the attitude assumed by the successful speculator,
when interpreting official manifestations.
"Cynics survive" - the cynic recognizes that additional rules
can be introduced into the game and takes them into account.
The commodity does not differ from other markets. It happens
to be one of the last ones to be brought under the destructive
wing of governments.
MARKET THEORIES *
There are natural laws and principles which govern price activity
in the market place. Altho' there are many complex factors
affecting the market, in reality there are only a few basic
principles in price movements.
Price fluctuations are merely incidental to the movements themselves.
If the trader understands the underlying principles, why the market
does what it does, he can proceed to trade in rythym, instead of
trading according to what he/she thinks the market will do. The
only thing we really know about prices is this - they fluctuate.
METHODS 29
The simplicity of natural laws governing the markets is indeed
one of the fascinating aspects of the commodity market.
Laws: principle of rally and reaction
*
principle of market congestion
*
principle of fundamental influences
*
principle of random walk
*
FUNDAMENTAL ANALYSIS
What can I say ?
One comment : - the weakness of fundamental analysis is that U
can never be sure if the facts known to U are all the relevant
facts. The best analysis can be overthrown by changes in
government policy, or essentially speculative decisions on the
part of other investors.
Now, some conventional methods of forec<'.sting prices:
TREND ANALYSIS
*
Chapter 6
CONGESTION ANALYSIS
*
Chapter 7
VOLUME
*
Chapter 4
OPEN INTEREST
*
Chapter 5
CASH
*
Chapter 5
BASIS
*
Chapter 5
ODDS
*
Chapter 5
50 % RETRACEMENT
*
Chapter 2
CHART FORMATIONS
*
Chapter 23
PERIOD OF TIME PRICE REVERSAL
*
pg. 501,503
2
30
SUPPORT AND RESISTANCE LEVELS *
see chapt. 7
CONTRARIAN OPINION *
In using the contrarian approach, the first effort, of
course is to observe U'reself and the majority from a disinterested
or unattached position. That step in itself is the most difficult
to accomplish. Remember, with this thought, everyone agrees .....
more profits are earned by those who can accept the emotional risk
of going against universal opinion. The public is not always right
and is usually wrong. ( Always wrong ! ) Who buys at the top
of the market and who sells at the bottom of the market ?
the greedy and follow the mass type of trader. That's who
When the general public learns about an opportunity, becum a
contrarian 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 and it is at these prices the market will end.
U will have a rally with a 20 % bullish factor, but it takes a 90 %
bullish factor to indicate a decline. And the reason for this is
that the public has normally a bullish cast to it. When the consensus
of professional advisors is the neighbourhood of 55 %, anything
can happen and contrarian opinion will not help.
If U do not really understand contrarian opinion, then by all
means talk it over with U're broker. He will explain it to U
- as it is a renowned technique of assessing when markets are
overbought and oversold.
Criticism : - points of extreme mass psychology of any
commodity are quite infrequent. Even the most
adept contrarian may have to wait a long time
between trades.
COMMITTMENT OF TRADERS REPORT *
The theory goes that since most losers are small traders, the
safest position is the opposite of the market.
The comrnittment of traders bulletin gives a pretty fair view
of the general tenure if a market. How much of the open interest
is hedging ? How does my position compare with that of the large
traders? What are the small traders doing ?
METHODS 31
are more likely to exit the market if prices move
against them than are hedgers who are making money on their
cash positions when the price moves against their futures position.
The committment bulletin, altho' lackina in Predictive value.
orovides a timelv and honest view of who is usina the market and
at a Particular time.
See page 98.
NEWS *
News is published in the newspapers. But, experienced traders
act on it when it is initially transmitted by the wire services.
Information available to everyone has little or no value. The
futures market has an uncanny ability to "discount" future events
well before they are recognized by the very many. Someone,somewhere,
of course, must know something and have acted on that knowledge.
( This does not mean to say someone can control a market - impossible
-but they take advantage of news via price trend expectations ) .
Futures reflect their actions. By the time the majority learns a
piece of news it is already too late. It is after the fact. The
majority is always wrong. Considering the enormous amount of news
and information that is recieved, - one can place very little trust
if any, in this and these data.
Big money in the commodity market is almost always made by astute
persons who take the information available to all, make their own
interpretation of it, commit themselves to the market and sit back
until the market curns to the moment of truth they have foreseen
which is their moment to take profit.
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 the speculator is able to accurnmulate, the
more likely it is known to large numbers of people and the more
information he requests in rendering a trade decision, the lower
the potential profit from a current decision. Generally, the
investor's goal shud be to achieve a workable approximation of
truthfulness. Don't listen to tips. Always look for rather unusual
pressures on the market.
2
32 METHODS
The underlying principle affirms that the public is usually wrong
ir. assessment of They are one of the last to be
aware of the news and react slowly to it and they are reluctant to
the necessary resources to do proper research. The public
tends to buy and sell with the news rather than against it.
( The astute trader considers " buying rumour - selling news " )
As the public becurns more and more fascinated with well-publicized
bullish events, they equally buy on the first reaction, or topping
formation - it's cheaper.
Give some consideration to news or rumours, recognizing them as
factors that may affect the movement of prices. But the trader
must not risk money because of a news item alone. The astute trader
will take note whether there are some other factors, such as
seasonal odds, basis etc. which might drive prices in the same
direction.
To be a successful trader, U must outguess the market. To-morrow's
price changes depend on to-morrow's news or anticipated news. -
the change is the weather, the released crop estimate, unforeseen
strike, the release of trader committment report, registered
warehouse receipts. From the standpoint of most traders, it is a
matter of pure chance whether to-morrow's news will be bullish or
bearish. Since futures respond to such news, price changes have
an important random effect.
The trader might list hard news items such as registered warehouse
receipts and committment traders report to his trading program.
The use of hard news data is one of my secret tools, in that,
I sniff around to find out if perhaps copper or soybeans, or silver,
or cotton or whatever, are likely to explode next year or the
year after. 1 spend a lot of time sniffing around for hard data
which will portray potential for an upcoming major bull or
bear move.
POINT AND FIGURE
Many successful traders are both bar chartists and point and figure
chartists, using one to confirm the other. About 90 % of the
exotic formations of bar charting are automatically eliminated
with point and figure charting. To a great many chartists, point
and figure charting makes no sense at all. To take this view is
absolutely ridiculous as it is for many point and figure chartists
to feel that volume or time has no importance at all, either.
METHODS 33
The t=ader must, if he wishes, choose approaches which he deems
appropriate for the market conditions in which he is trading.
For e.g. this finds point and figure charting incredibly
valuable, sometimes in analyzing
l) market topping formation
2) an emergence from a bottom congestion area
( particularily a saucer )
3) how far prices will emerge from a congestion
area
4) for scalping in a fairly narrow but well
dilineated channel ( which is fun and profitable )
However, some traders may feel that if they're using other
methods_of approach, that the use of point and figure charting
involves too much of their time and/or confuses their capability
in coping with all the technical approaches which are available
to him. For e.g. the following are an example of the myriads of
pattens of P&F charting.
Tops
...... u
II.:.!.

,--

.. 'lol Inverse I ulcrum
::.,,
uruu,
J
::,u :1 . '
. f-"
.. :

I i ..
i , ..
Inverse compound I ulcrum
I' I
t: I
I
::! ' ...... I
.. r=
..
.... ,.,,,
_ .. ,
1 :: .
m. I 'I Deloyed encllnQ
I
I
I I I
tt:!tU, ;.
l
I
. .-1-41" I I
one sroouldersl'jh ..
I

I
'.
I


I


.. I

I Inverted v
. . ,, ..,
llv
I
'1
.ti.!l'n.' I
I . l\t
1
I
J =v I tu '
n:;..,
Inverted v extended
'l
:t""'''l"l
I
jl .. i
....
I j:
I
jn horizontol
11'1.=
.'bt
1
I
:
I
'i .. t.t.:,. ::.t: .. r.='
, ir I I
It::.
II i'i' Inverse soucer
::: ..
! I l
-c:oP'rRIG'"'T MORGAN, ROGERS a"" ROBERTS, INC. J
t!>O BROADWAY, NEW YQRI(., N.Y. 10038
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 and quite an art, this
author respectfully suggests that the reader, if he is interested
talk to his broker for an explanation or search out ( the library?
the books, which are available on the 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.
METHODS 35
"'''"' ...... ,,
MATHEMATICAL TREND
... , ........... __________
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
described in introductory 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.
)'v\ck.\,[ uV! r-..,\..,O'r\.;o 1 l-
0


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

gone over
2
36
A computer can be programmed to carry out this operation every
day, every week, or whenever we deem it appropriate. The mathema-
tical =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 trend-
line 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
is more likely to endure if its slope is high and its 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.
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.
METHODS 37
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.
2
3 8 MARKET PLACE
CHAPTER THREE
I WANT U TO MEET THE MJ\RKET PLACE
:the c.ommocU:ty maJtlz.e;t - oppott.tu.rU.:ty lz.noc.fu
why inveo.t in c.ommocii;tieo
.o.toc.fu c.ommocii;tieo
.o pe.c.l.U.a:tiv e ac..tivi:ty
c.oY!..6pinac.y
bu.Qineo.o pe.op.te.
.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.).
MARKET PLACE 3 9
The value of the commodities traded in 1973, in contract value
reached 500 b-i...t.t-<..c 11 dcUa..rV-J, and in 1977, on.e. po-i..nt f-i..ve.
TRILLION ,,,,,which was in I973 approximately one third
of the entire gross national product of the United States, and
more than the value of all securities traded on the New York
Stock Exchange.
Now, ain't that sumthi'n
Yet, commodity futures have not touched ten percent of the number
of traders who participate on the American Securities market.
It is estimated there is a minimum - I repeat - a minimum -
( maybe I shu d publish this book ) - of 500, 000 active
commodity traders in the U.S. alone, and that there are as many
as 2,000,000 Americans who actively and inactively i_nvest in
the futures market. Half is contracted on the Chicago Board of
Trade ( C.B.O.T. ) - between I/4 & I/3 on the Chicago Mercantile
( C.B.O.T is 25 yrs. old, Mere. is 54 ) - and the eleven other
remaining commodity exchanges absorb the remainder. Commodity
trading has been around since 1848.
Nowadays, the over-all average transaction probably spans no
more than ten days. If all traders are taken into account,
approxiamately 98 % of contracts are offset prior to the time
when delivery is to be made.
The commodity market can elevate the trader to a high financial
status , but it also possesses the power to humble the mightiest.
The humbling power of the market can make U tremble and demands
respect, even from the most successful trader.
v:i th all this fancy information U have just recieved, I suppose
the question cums
11
Why bother trading in commodities ?
11
Wellllllllllll
3
40 HAPJ\.ET PLACE
Midamrr1CI
Commodtry
Eachanqoe
a 1 .:zos
Silwer eo.eoo----
cotn\ 09:? ______ _
-----------,
12.2"79=-----
---2:132 __ _
totol 2J5,3si- ----

Grarn Exchnge pork beUtes 2.294 ____ _
total 119.168
..

Coco Exchanj!CJO!_ ___ ___:t:::otal __________ .;.:
New York no.11 87S:i7e
Coffee & Sugar domentc sugr. no. 10
bchanqe coffee 7 .u60
total 902.48:;:2 ____ _
New York Cotton :65.372
Exch1n9e.
Citrus Anoctates. ;uic_e _________
Woof Auocates.
lPG AI\OCIIIts, Popane 925
tnd Tomato !..0"'110
Producn As.::oc::::::;:::.____ _________ ____ _
New York ma1nt
MercOJntilt plunum 1S9.272
Exchange siher col"'t
plywood .020
imported frozen
bonolou beef 954
idaho potatoes 489
apples 0
total
P.ciftc Commodrt1es oil 1 .812
Exchan9l.lnc. toul 1,812

,Soybean a
Sliver
Com
Canlt
WI\U.t
lntemauona Money

Pork Bellies
Soybean Meal
Coopo
Uve Hogs
Co non
Su;ar
Eggs
Cocoa
Broders
Colt ..
Silver Cotns
Lumtter
Potatoet
Plywood
Frozen Con. Orng Jca
Piabnum
Oall
Prooane
Cocomll 011
Stud Lumoer
Frozen Bone 8eef
Wool
Grn Soronu,..
Plllllchum
Sktnrwte H11r11
Butler
Mercury

1973
5113.14&.&59.000
ss.ua.s 1 .eoo
5 ,, . 039.500
a.5t1 .00.562
1.077.600.200
36.830.000.000
25.Q60.600.00C
23.805., c. 190
11.53.300,000
13.558.' 18,630
13.388.728.997
12.198.000.000
11 .617,398.530
8.266.058.247
7.221.251.865
5.071.500.000
. 50.106,025
3.558.292.60
2,753,502.815
2.85S.037 ,470
UH.700.000
1 .MO.oco.ooc
1,210,188,t40
1.144.251,000
250.000.000
118. t22.000
101.500.000
74.8'72.914
15.000.000
44.111.052
1.365.250
268,118
263.114
7.100
1520.131 $6.071
Ea .... ..,.
ChcaOC iloatcl d T,_ !CST!
O>cagc a,w,....,... ICME)
---......._... ___,---..- .-c
Comtnoany E.achanoe ICatnel
-.c. ec.mn-y (MocWnJ
- \'on: ConOft (NYCE)
- \'- CoiiM anC Supat
- '1'- Metc.t- (NYME)
KaNU c.y iloatO Ill l.- (KCBT)
.......,.._ Gr..., acllange (MGE)
- .,._ c- Eact>anoe CNYC:OEl
T-IU.$.aa--t
1117
Z3.018.W
7,871,247
U26,0112
2.066.115
1204.&20
1.215.162

117,137
111\,13-1
307.1111
C,II0,211
1171
27.365.51111
15. 171.3&C
U73.5oll
2.121,118

1,202.&07
127,052
755,148
2&e.:n3
222.732
11,477,111
Cha"ff
ts.r
+82.1%
+St.s.-
2.7%
+18.1%
- 1.5%
+35.4%
+22.5%
..... h.
-27.ft.
+MA%
----The "'iop 10"' commodities traded ----
Aa
1171
I
2


5

7
I

10
Aa'*
1117
1
2

'
5

6
1
I
10
Total ..,.._ Total "'OuuM
1177 1t71
1.100,102 11.472.21
5.812,130 &.161.0115
1.110t,78t &.8&1,151
5.3C2,CS &.383. !21
2.131.517 5,&57,428
2,7110,40 3,801.124
2,535,(146 2.1011.2&-c
2.313.453 U13,085
1,457,036 1,153,5&1
1.351,130
CMnr
.. 4.1%
.. 11.7%
+241.h.
+ 20.4%
+114..5
.. 36.4%
.. 14.1%
.. 5.1%
33.2%
+ 1.2%
Commoafty
1978's big volume gainers: Gold, currencies, cattle, Interest rates
......... "',......... ..
,.77 1171 a..,.. ,.77 1171
Gralft&.ol-.sa ..... ..
-tCBT) 1,120,7ecl 2,5$&,11)1 40 . ,., Gold (CBT) 13,151 56.470
Wt>eaotKCBT) 617,122 7Ss.tfi .. 22.5% Gold- 1 Kg) 2.&50 3.214
Wt>eao IMociMI) 151.433 20S.&28 .. 35.1"4 GoiCI CMICIAin. 33.2 a:.) 41,138
-IMGE) 111.134 2114.313 + e.s-.. Gold (IMM) 1101,1110 2.114,$72
ComCCBT) 5.021,1127 &.127,019 .. 22.oo.;. GoiCI (NYME. 1 Kg) 1,017 624
GomCMICIAtft) 2110.25a 256.022
-
a.n. GoiCI(NYME. 400 a:.) 2.633 2.746
Om (CST) 10U170 215,17 +116.2"4 Gold (Comax) 881.5$1 3,742.0111
Oats (MociA.m) 1,172 1,423 .. 21.4'10 5-.!CBT) 2.551.133
S.O,.O.ano (CST) 7,1111&,138 1,417.277 .. 6.0".0 . s-(lollcWft)
3&6.SSS
S.O,.O..na IMociA.m) 1,\04,7:! !1194.832 - 10.0'10 Silwer (Conwl) 3.513.301 3.122.08S
So., OiiiCBT) 2.90t.2fo< .. 14.1% U.S._,- (CUE) 371 m
S.O,.O.an meal tCBT) 2,373,.453 2.413,086 .. 5.nr. U.S ..... , ...,,. (NYME) 1$,514 1.123
LhreiiDQ. proo-. P-tNYMEJ 118.1171 45.227
L.NacaNe(CI.IE) 2.831.5'7 $.603.375 1122"4 Plalftlm (NYME) 122:124 405.552
LNa carua IMociA.ml !iof.Q5ot 1.070.210. 1,4011,188
"-CoiN& !CME) 133.274 561.181 326.3% Zinc (Comax)
- : ..
677
I.NaiiOQSICMEJ 1.307,712 1,767.&34 .. FI""IICial lnctrvtnltfllt
I.Ne ,_ (MocWII) 1511.32 115,827 .. 6.2% GNMA COR ICBT) 422,421 153,181
Peon< coetooes ICME) 1.351,130 1.442.3&2 .. &.2"4 GNhiA CO ICBT) &.532
Bonelas.s -1 INYME) 2.&80 5.170 +111.2"4 CorM>eroao- (CST) 3.553 18,7&7
....,-..s!CBT) &f,W 74.&&oc .. 15.0"4 32.101 555.350
Ftash ews ICMEJ 130,042 73.210
_.,..,.
T-Dills CCME, 13-) 321,103 7&&,352
I- ,. T-llilta ICME. !.,.at) 5.512
eon .. C (NYC&SE) 214,202 '1&3,11511 -Z3.5'lfo :J-1 inanciaJ
s..pat 11 INYC&SEl 1 .055.11&0 1,016,773
-
3.1'10
-""
'7711.771 2.305.1174
Supar 12 INYC&SE) 15.&76 2U7S .. 311.5%
c-(NYCGE) 307.&28 222.732 - 27.1%
.__
71.701 243,337
"'-(NYCoE) 53 Canacloan oouar 1111,13f 20t,ll03
IC:IIIlo ...,._. (CME) 4,727 80 o. . 134,3&1 400.$oll
Rooond- o..tl DUIIcfer 2;112' 3.515
..-a-(HYME) 478.558 4!io4,11S
-
5.1% l'reriCIItranc 3,150 ......
CoiSOftCNYCE) 826.3115 1.155,1101 .. 311.11%
..._,..,
82.261 3&2.100
FC or-... ;..a (NYCE) 317.821 215,405 - 24.5% ...._"_ 1'7.o211 17.127
w- Sooiu 105.11611 321.338
Sla.770 281.483 - 21.1% 'fDiallloAI- 5U.428 1.5&3.De\
"'-ICMEl .a&,llll1 560,3158 .. 15.1%
Si..o-ICMEJ 1187 U72
Source: Commodities Magazine
219 Parkade
Cedar Falls 1A 50613
3
Clwoeo
31o.5%
.. 2\.3%
ZCA
-38.1%
.. (,3%
+211.2%
+1'1..1\0
.. 3.1%
.. 7.0".0
- 25.,.
- 36.ho
+126.5'10
Z28.t'lio
.. 31.5%
'='
... 120.0"4
134.2'1oo
1115.1"4_......
+2C.2%
.. 2ll.t'lio
1111.1'10
.. 27.5%
.. 41.2%
+3oiOA
... 6.3%
200.4'lr.
118.5%
4 2 PLACE
,gn Echah9f ConlYIICII
Futures Chicll90 Board tor beam 4.043.474
Tradins of Trade cortl 1.942.120
volume IOYben oif 1.110.776
....... 8!1!:1.813
silwer 813 . .192
mbean tnaal 630.916
P'V"""""'
217.63!
-
36.282
iced broilen 23.264
nud lumber 411
...... 9.67 . 179
Cbicavo Morun1ilt froten bellies
bchonvo Oftd liYe cantt 1.370.471
lrnemat.onal li hop
MDMtoiY Morket ''""tORS
47,.948
Junat.r 66.539
iaca.antM vn 4:3.989
cat\adtan dollar 33.807
di'U'Dcht tnartr: 12.320
IWIII frMC 17.722
brrtisll oound
meaac.n oeso 9.717
iiwe feeDer cattit 7.423
idMo CtOtltoes 6.137
tri" aorvhums 1 .35<1
italian !:92
frozert eops 85
2
tDUI .67%.218
eo ...... odoty siher 81!:.166
E-ltfO.IIOC. copper 251.219
......... ..., 1!:5
fOUl 1.066.502
tnnl'ftlttOf\al clutch ouildtr 8.751
Comrnorcaat iuhan hn 8.027
Exchan;t fisttmeal 5.700
beltiaf'l irene 5.184
;..,.,.._veft 2.451
I>OOPtr 696
tWill franc 70
dtu'IICI>t merit 25
canadian dO&t11 12
british DOUftd 10
conon ... ctojJ 4
pork bellies 2
frtiiCit mnc 1
IOta! 30.133
"-City
....... 292.921
Boaftl of Trotlt rain aorthufftt 2
total 29Z.9Z3
MARKET PLACE 4 3
WHY INVEST IN COMMODITIES
One reason is that ..... governmentintervention in our lives
presents a strong case and only thru the market can u
get ahead of ( let alone keep up to ) inflation and many other
detrimental affects that government may have on U're life;
without tying U'reself down to capital assets, like real estate,
with the concomitant lack of liquidity and less potential for
return on U're hard earned dollars. Being aware of government
intervention in our economy makes U a more intelligent and
perceptive investor. After a shot or government intervention -
markets energetically re-assert themselves. They always do, and
thru the futures market U can go along for the ride.
Also, for those of U who do not have the capital to purchase
real estate, but may have - say, $5,000 - there is a chance -
just a chance, that with judicious application of technique,
effort, discipline, and patience, knowledge, experience, U cud
have one million dollars in five years. And, at all times U are
liquid and u are U're own man. ( U can't do that with real
estate.) ( Am I wrong-Ureal estate people out there ? ) .
The amount of money required to earn substantial profits from
futures trading, by necessity, in my opinion is minimal. I personally
feel if U cannot turn $I,OOO into millions in U're lifetime then
U do not have an effective plan. There is no reason for U to have
a lot of money invested in the markets. To start with, a maximum
$5,000 is all U need.
When U are trading in the stock market U are working with 40,000
stocks and more choices. In commodities U're choices
are usually fewer than twenty. With commodities U are dealing with
real things, real prices, real supply and demand forces. There is
always a buyer for commoditites. The same can not be said for some
stocks.
I like the flexible nature of commodity trading. U can trade long
u can trade short, commissions are low. With astutue trading U can
make money in any direction that the market takes. /
If U are a young person, in a hurry, - U'll find that no other
investment will return the profits in such a short period of time,
as in commodities, and the sky is the limit as to how much money
can be made. - huge sums in a week. - ( I have made $300,000
in one week. - in fact, I have day traded and made [lost] $90,000
in one day )
3
44 MARKET ?LACE
Satisfaction in trading commodities is incredible. ---- the
excitement, ( U shudn't let it get to U, tho' ) , the involvement,
( why else do U think I write this book?,) the freedom of
movement, the financial security that cums to those who are
successful, the identity which U will have within U'reself, that
Ure playing the game and winning, and shrewd enough to do so.
U're dealing, basically, with many honest people. U're dealing
with an honest thing. ---- the market price . - the harbinger
of supply and demand.
U get to know and understand people. ----- get to know and
understand U'reself. U will never have such an insite into human
nature as when U are successful. And, what characters inhabit a
commodity broker's office
U have statistics to work with. Historical stastistics with which
to compare existing day to day statistics. Commodity prices to a
considerable extent are predictable in their relation to cyclical
and seasonal patterns.
Commodities display distinct, general chart behaviour and-distinct
day to day momentum rationale, especially with point and line
charting.
Commodities will see U thru a market crash and depression, if U
are trading effectively and are in a net short position, and
flowing with general market forces, - upwards, downwards and
sideways, all with the potential of incredible profit. My
personal goal is to make one hundred millions dollars in
commodities futures trading and keep it. Why not join me
STOCKS VS, COMMODITIES
Commodities are different from stocks - because commodities /
usually return to a profitable price. What do we mean by that?
We mean that if U were to buy or sell short, in an active
commodity - sooner or later U wud make a profit on that trade
or its accrues successors. So remember, commodities usually
( not always ) return to a profitable price.
Commodities generally perform far, far better than most stocks.
So much so that in fact I am always befuddled by the lack of
public appreciation of the investment possibilities. It can be
stated that commodity prices do vibrate more rapidly than the
price of most other investment forms. But, this can be taken
only as an opportunity to make money, ( with an effective
trading plan ) .
!1..2iRKET PLACE 4 5
Here's some food for thought. - The commodity futures market is
a contrast to the American Stock Exchanges in that - is not going
long the futures trading contract tantamount to betting against
the productivity of the American farmer ? Think about that for a
moment. ( Not that one shud go short futures contracts just to
be patriotic, but one shud certainly not distain the short side
as to avoid the unjustified astigrna described to common stock short
sellers ; completely the reverse is true for stocks, of course. )
It has been said that the beginning trader always moves from the
stock market to commodities because I) he realizes that's where
the action is 2) he no longer has enough money to maintain a
stock account. And for this I say whoopeee ! All he/she needs is
$I,OOO_to $5,000 for commodity trading. -if he/she behaves
himself/herself.
When U trade in the stock market U're working with 40,000 choices.
In commodities, choices are usually fewer than 20.
Stock values are not real and tangible. They are arbitrary and
emotional. They are set values by the traders themselves and not
by outside supply and demand forces. Stock markets exists only
by investor's dream of rising prices. They're hoping to find a
greater fool who will buy their stock for a higher price than they
paid. In commodities, half the traders want the price to rise and
half want them to decline. They can make money either way.
The execution costs commissions ) of commodities ( which is less
than stocks gives U more flexibility in getting in and out of
the market.
The price of a commodity is set in a grocery store and not in an
accountant's earning report. There's no board of directors to
keep information to themselves and no watering of the stock.
It means that commodity trading is basically more honest and fair.
u have specific statistics to work with, in.predicting prices-
not things like price earning ratios or the past history of a/
given company, of the fact that it has just merged - big deal !
Profits are super-abundant. - sometimes overnite, in commodities.
Stocks, some of which I still have, - u hang on for years until
U break even. Commodity trading is more fair - some skill is
required to be on the right side of the market, at the right time,
but in common stock investing, everyone is in the same boat, and
all will sink or swim together.
3
Some other ways inwhich -:.:,e markets have been found to diffe!iagree
are as follows :
The walk model has been found to not hold
when considering price changes on the N.Y. stock
exchange, but this exception cannot be confirmed
by commodity prices.
Both markets are active overnite. Both markets
react to a flow of unexpected information which
continues throughout both day and nite.
It has been found that monthly price changes of
company stocks in the same or related industries
are clearly positively correlated. A similiar
result has been found for inter-related commodities.
The price for neither market seems to be
significantly related to the general economy,
except possibly in the very long run.
A rough measure of excess speculation is possible
for commodity markets, and an corresponding
measure is practically impossible for stock
markets.
In commodity markets, there are real forces for
supply/demand. Producers supply a real product
to the market. buy this product. Stock
markets differ in that the supply of shares
represents only a small proportion of total
volume of trading. What trading does take place
is of the supply/demand for existing shares and
these shares constantly alternate between buyer
and seller.
Whereas a clear relationship between the volume
transactions and price changes is found for
stock markets, no such relationship is found for
commodity markets.
The commodity market is almost a perfect auction.
While the stock market is less than a perfect
auction.
The commodity market features trade in cash as
well as in futures contracts, the former being
influenced by the latter. In contrast, the stock
market is traded primarily in stock certificates
with futures trading relatively unimportant.
So, remember. We're dealing with real things here, in commodities
- not pieces of paper and u can and shud make all the money U
ever dream about - but, I advise U to stop dreaming. Dreams are
what fools are made of. I wud rather U think of it in practical
terms of an eventuality, that will occur.
The futures market is not for dreamers. Success is to be
experienced, when U have that million dollars, two or three years
down the road. There will be no dreaming then.
WHAT THE MARKET PRICE IS LIKE
First of all, we've got things like - I) prices do not
rise for ever. - 2) U've got one ultimate market top and bottom for
a given contract life. 3) bull markets are similiar to most living
things - it consists of a slow start - a gradual acceleration in
growth that terminates at maturity.
A study of market action is an investigation of people inter-
reacting in the general market. Since we cannot insert people
into test-tubes to research their psychological behaviour, we
can only use proxies. - prices, which provide a means to measure
the results of people's reactions. It has been said that all of
this is like gambling. It has been said that people don't like to
admit the truth - that commodity trading is gambling. - taking
risks in the hope of making profits. As far as I'm concerned, U
take a risk the moment U get in U're car. - but, U know that if
U turn on the key and govern U'reself accordingly, the risk iS
minimized and ~ ~ e same with commodity trading. I do not see how
in any manner of speaking, commodity trading can be considered
gambling. If U drive recklessly, U will bomb out; if U drive
responsibly, u will be on the road forever.
All traders do not agree on the likely outcome of future events.
There are buyers and sellers - equaling each other - in the
commodity markets and the differences of opinion creates market
liquidity. Boom or bust doesn't matter - both furnish opportunities
to garner profits, as commodities are excellent vehicles to
operate in, during any economic condition. Every sale, except
3
48 MARKET ? ~ A C E
those where a physical commodity is delivered consists of a
buy order and a sell order at different times for the same
trader. Every position must be offset. It matters not which side
of the transaction is initiated first. For those who are squeamish
to going short, I shud point out to U, that U go short more
frequently than realized on many ordinary daily transactions.
Credit purchases mean u are short cash, - long merchandize.
Once we understand that either side of the transaction can be
originated first, we open ourselves to many profitable opportunities
and accordingly, recessions, depressions and booms offer many
opportunities to scoop up profits.
SPECULATIVE ACTIVITY
It has been said that it is debateable whether the amount of
speculation, with all the associate effort involved is a
worthwhile use of a nation's resources. It can certainly be
argued that a certain amount of speculation is of value, but
beyond a limit, speculation can be said to be excessive. However,
if excessive speculation exists, it will be restricted to
futures, not the cash product. Futures can influence cash, but
cash is the ultimate judicator.
While a rough measure of excess speculation is said to be possible
for commodity markets, a corresponding measure is practically
impossible for stock markets. So that the futures market offers
the astute investor the ultimate vehicle to take advantage
of a speculative fervor, when .it exists, which is not that often.
When futures are speculated out of whack with cash, then the top
or bottom of the speculative move is soon approaching, unless
there is a genuine shortage or surplus.
The word speculator has a nasty connotation these days. - that
speculators drive prices up ( critics of speculators never seem
to say anything how speculators drive prices down ) All I can
say to the critic of the speculator is "prove it" . - prove it,
and, not to me, but to all the experienced knowledgeable, honest
individuals in the commodity futures business. I am sure they
wud be willing to agree with U, if it can be proved. Usually, the
person who has this disquiet towards the speculator, will have the
personality traits, and characteristics of the persons portrayed
in the chapter on winners and losers.
MARKET PLACE 4 9
Remember, that it is the "cash" price, not the futures contract
which is the ultimate determinate of prices. If the speculators
have bid the futures out of context with cash, they will pay
dearly for it . This is something that those not associated with
futures do not understand.
CONSPIRACY THEORY
I am not a believer in the conspiracy theory, that e"ileryone is
out to get V. It is negative thinking, which is non-productive
thinking ( and is contrary to "Drummond's Law" - cuming up later.).
If U think that the brokers, hedgers, and large traders are out
to get U, U're probably right, because if U think that way, it
will probably happen. Whether it really happens or not is beside
the point. It's that U think it happens, that it happens.
Take U're "stops" for example .... U will eventually get U'reself
stopped out without their help if U put them in the wrong places.
It's up to U, to place stops where normal market forces e.g. random
walk, - won't grab U. ( Look in this book for suggestions on stops.
I am convinced that the commodity market trading is more open,
honest and above board than stock market investing; and that there
are far, far less crooks in the commodity empire, than in the
stock market and equity, capital markets. There are little devils
all over the place, of course. But, there's no need to be paranoic
about it. Just because u lose money, it's not these little devils
U know. It's U ! Maybe the floor brokers, possibly U're broker is
a little devil. Why don't U becum a little devil U'reself and find
out about them. In this book I will tell U a few things about
them and how to handle the situation.
DISHONEST FLOOR BROKERS
As a result. of Hutchinson, Leiter and Patton in the years before
the turn of the century, when they committed short term price
distortions, the effectiveness of " the market has
diminished.
" In the spring of !977, three C.B.O.T. soybean floor traders, a
broker and a customer, were charged with many offenses. The indict-
ment charges that under the scheme, the three traders exploited
public customers, executing orders to buy at the high
end of the market's opening and closing price range and executing
public sell orders at the low end of the opening, closing price
ranges. Sources in the United State's Attorney's office asserted
3
PLACE
that the three traders typically took their profits on the
positions established thru the bucketed orders, by reversing
them thru pre-arranged trades, at favourable prices that occured
earlier in the day. According to Board of Trade insiders, pre-
arranged trades are relatively easy for floor traders to pull
off. That's because trades for their own accounts aren't time
stamped and immediately reported as are those executed on behalf
of the customers and commercial hedgers. Also, commodity exchange
ticker-tapes report the price changes and not individual trades "
- Wall Street Journal,
Monday June 20th, I977.
Personally, I have seen the unprofessional attitude of some
floor brokers. I cud hardly see how some of them cud be considered
winners. Many are at best, YaHoo's. ( I'd better keep my identity
hidden, eh ? ) On one visit, to the C.B.O.T. floor, I commented
to a broker that I understood it was illegal for one floor broker
to examine another broker's order book. He approached the nearest
broker and asked for his book. The second broker reached in his
pocket and handed it to him. I am given to understand that this
practise is not that all uncommon. What these brokers can do is,
and how they can affect prices is presented elsewhere in this book.
But what the hell, why not ! These poor dears can have a bastard
of a time in there, in those pits, or whatever, and the more
power to them if they can add a little bit of advantage to themselves
because we know they cannot control market forces, they are just
a part of it. How many of U out there in this wonderful, wonderful
world have never done anything wrong. Personally, I luv it when I get
twenty-five dollars change back on a twenty dollar bill at the
bank. ( Actually it still bothers me that I didn't go back to the
teller.)
I personally feel that shady floor brokers are just a little drop
in the bucket. And, don't forget that floor brokers are on both sides
of every market. U do not have situations where everyone on the floor
is long or short and so ganged up against the unsuspecting
I do not accept any conclusion that there are more crooks on the
floor or elsewhere in commodities than there are in the stock
market or other investment activities. - and I hold firm to this
opinion, and that includes governments, in spite of what the
socialist says. ( I have yet to meet an honest real estate broker,
-pardon me, I just met one. ) ( For that matter, an honest
president of a country. )
BROKERAGE BUSINESS PEOPLE IN GENERAL
I have only one comment : - U will find that U're commodity
broker will never, never, never, never, never, thank U for
U're which U give to him .
THE MISH - MASH OF TRADERS
7 5 % to 9 5 % of a 11 commodity traders lose money. U will
hear this repeated tirne and time again - by the many
services and advertisements anq books and this book. It is true
The large successful speculators constitute less than 2 % of the
total futures trading population. I hope U becum one.
The average speculator, however, - the 98 % - is 45 years old,
earns S 35,000 per year, creates contracts in two's and three's
more than likely resides in California, Illinois, Texas, Iowa,
Ohio, New York, - two thirds are college graduates and therefore
experts, -5 % are female - one third are professional (doctors)
IS % are farmers, feeders and processors. I include farmers,
feeders, and processors because they are not of the 2 % who win
as speculators and are involved basically in hedging only. - whose
purpose is not to take advantage of speculative runs, but to
protect "cash"
A lot of the successful commodity traders go underground or
overseas to avoid taxation. It is sad to say that sorne of these
successful people are forced to leave our country, and take their
money with them ( it's called the Italian disease.) But that's
one of the outcomes of taxation isn't it ? - to punish - and on
a graduated scale, one way or another the harbinger of creativity,
- success. The Riveria now houses some successful commodity
plungers and their families.
/
All public traders, as a group, hold 46 % of the value of all
contracts, and their gross profits are zero. And, substantial
losses occur when commissions are included. On average then,
the small trader has the expectation of losing money, the losses
over a reasonable period to equal commissions. The small trader
usually will not require a history of profits in order to continue
3
32 !-!.:;RKE'!' ?:...;c:::
tracing. '!'he explanation of this phenomenon is that
!) the needs of the small trader appear to be
met by merely playing the game
2) they may continue to trade because they continue
to believe they can forecast prices.
3) the small trader may continue because his group
is amorphous and consists not of a crowd, but
of a parade.
4) a small trader is forced to withdraw and is
replaced by new blood.
And, a successful small trader becums a large trader as a result
of his competance, and in sticking to a well - conceived plan.
To get a further idea who U're fellow - traders are - wait 'till
U get to chapter I6
MARKET EMOTIONS
" M.en do not t:!:"ip over mountains ..... they trip over mole-hills "
- Confucious
What I wud like to put overy every page is " Keep Things Simple "
It is the small mole hills of managing our approach which causes
the most problems, by way of not keeping things simple. Most
technicians are not happy until they've cluttered their minds
with every technical tool available.
Comrnodi ty education is extremely worthwhile, since it enables one
to evaluate a great many things one reads, and also teaches
patience, perserverance and control over other human e m o t i o n ~
The difficulwis not really in obtaining, deciphering and analyzing
information. Many analysts do well here. The problem centres on
the trader's thinking processes, which are sometimes coloured and
dominated by motivational factors that may have their roots in
child-hood experiences. Thru self analysis U will discover the
nutritive source ( see chapt. 18 ) of these adversaries and when
U do, tea+ them out ruthlessly by their roots.
3
!1ARKET ?LACE 53
I' 11 tell U what nearly eve::::-y comrnodi ty trader does on a consistent
basis. His mind sort of goes numb. Something happens when he/she
has the slightest bit of success ---- seems to be a self-destructive
process that immediately takes over, bringing forth many of the
old, bad, behavioural patterns and bad approaches to the market,
which was alleviated when he/she had his moment of success. A trader
often gets into a market position and becums hypnotized by the
event.
U get sinking feelings. U feel the market is out to get u. U can't
believe U're making money. U can't believe that U won't lose
money. All of this is eliminated by an appropriate trading plan.
( see chapt. I3
The best advice I can give U is to take the care-free, easy-going
almost bored approach. When I am trading, I ask myself one
question.Are U bored? The next question I ask- "Are U trading
according to the plan I " I like to sit back and say to myself,
" Isn't this rather nice. " - " Now, how am I going to celebrate
when I make that one hundred million dollars ? " . I suppose
by the time that cums, I'll be bored with the one hundred million.
WHAT DOES THE FUTURE HOLD FOR COMMODITIES ?
I suggest U take a quick run back to pages 40 to 42.
Personally, I predict wider swings in market prices as they
take off on major trend runs. ( Unless of course, we shutter
down into a meaningless, protracted depression horror. )
This will occur over the next fifteen to twenty years, until
Mother Nature has done her thing with sun spots,oil, population
explosion, socialist debilitation - whatever. Chaotic times
are ahead. However, we must remember that we do not careif
markets are going up, downwards or sideways ! All we have to
be concerned with is making and keep in our money ! if it' 5""
money U want.
And, I predict that commodity futures trading will be recognized
as a superior investment model as the years pass by, partly as
a result of education of the public and the evolution in technical
analysis and education that is now taking place, which is what
we want- to increase liquidity. Unfortunately, however, I alse
predict that the brokerage firms will not be able to efficiently
handle the avalanche of business which will hit them, because
too many commodity firms are commodity oriented and do not have
sufficient ordinary business accumen in the higher ranks of their
organizations, and many will go bust. Too much of a good thing.
Stick with a large firm, and maybe spread U're business around,
in case any one of them displays their ineompetancy.
54
VOLUME
c..JvLt.i.qu.e
d.o.u,J.. Mca.:t<.o n
vol.u.me .<..n c.o ng v.. ti.o n
vol.u.me .<..n t:Jtend
vol.u.me J..n
J..nt:Jta. -
da.f! volume
CHAPTER FOUR
I respectfully give credit to Anthony M. Reinach, author of
"The Fastest Game in Town - Trading Commodities" I973,
Random House publishers, on whose work this section is based.
CRITIQUE
Altho' technicians seem to sense the significance of volume,
they have produced very little in the way of satisfactory
studies on the subject. Perhaps they wish to keep the secret
to themselves. Volume action can be vital in solving the market's
otherwise unfathomable mysteries. There is a reason for everything.
To locate a reason, one's best resource is his logic, and, this is
particularily true with volume action, because so little has been
VOLUME 55
"':d 'tten about i 't. Clues generated by volume action are especially
valuable to those who are alert to them, because so few do
perceive them when they occur. It is a rare head and shoulder that
is overlooked by the fraternity of technicians. In contrast,
volume action is seldom given more than casual notice by even the
most diligent technicians. The greater the following, the less
golden the opportunity. Conversely, the smaller the following the
more golden the opportunity. So it holds true with volume watching.
" The economic facts of life are many. The grandfather of them
all i:s the law of supply and demand. "
Anthony M. Reiuach, The First Lew of Economics, Essays on Liberty, Volume IV,
The Foundation for Economic Education, 1958, page 38.
This law is temporarily repealed during all the emotionally fueled
markets. What signals the law's repeal ? Volume action. What signals
the law of supply and demand as a potent market force ? Again,
volume action. On the surface, volume action, like the temporary
repeal of the law of supply anddemandmay seem ludicrous. It is not.
Successful traders are invariably humble, astute volume watchers,
especially those who scalp trade.
CLASSIFICATION
Volume may be classified as
I) attendant
.2) prognostic
attendant : is action that generally can be anticipated and
contains virtually no predictive value.
prognostic : constitutes a volume increase or decrease or
generally unanticiPated substance. Such volume
activity contains a decided predictive value. This
action wherein a volume increase or decrease is
expected but does not materialize, is
definitely prognostic.
56 VOLUME
VOLUME IN CONGESTION ANALYSIS
Volume generally figures most at the birth of a congestion area.
After a substantial rise [or decline] in prices, fluctuations
initially are apt to be wide and hectic in reflection of the
market's struggle to adjust to a new price level and then gradually
simmer down. The congestion areas are the terminal manifestations
of substantial price rises or declines and because high volume is
comitant of these wide hectic price fluctuations, volume accordingly
is greatest at a congestion area's concept and then gradually will
ebb towards the congestion area's potential breakout zone, as seen
in the apex of triangles, wedges, pennants, flags and platform
formations.
As well as in these formations, a sirniliar declining tendency of
volume is characteristic of multiple
11
v
11
shaped formations
because if the peaks or inverted peaks are exclusively to be
considered a top or bottom, there will be greater volume with the
first peak, than with the second peak.
In head and shoulder formations, the left shoulder will enjoy the
most volume and the right shoulder the least, the volume at the
head somewhere between the two. Volume between the peaks is
customarily light and meaningless.
The only exception to the declining volume rule are the saucer
and scallop, wherein volume reaches its low ebb at the apex, or
nader.
All of this action is attendant, because its' predictability wud
in no way help foresee the direction the market which will
eventually emerge. However, if heavier volume tends to occur
towards the lower level of a congestion area, in the latter stage
of the formation, the implication is that important b u y ~ n g support
is being given to the market and that the next trend will be up
and the volume action becums prognostic
For e.g. - visualize a commodity which is fluctuating between/
40 & 42 1 and every time prices reach 40 1 trading volume
increases. Every time prices approach 42 , volume slows down
considerably. The activity at the 40 constitutes an outward
expression of support, and a price below W.hich the commodity is
unlikely to go by reasoning of the buying support that exists.
The lack of activity at 42 is prompted ~ a concern that
aggressive buying will induce some ill-advised bears to grab
tighter to their positions.
Visualize the converse : - the commodity is fluctuating between
40 & 42 , but the activity accelerating each time 42 is
and a time 42 c zone is
at: c in-=.o that
co:mmodi ty is about to be launched into an upv.ard spiral '? Does that
slow activity at 40 c seerr. to a long position ? If
these are U're C are being in!luenced by emotions
than by logic ! That high activity at 42 represents
sellers ! "But," U ask, " How about all those 42 buyers ? " .
They or else the market wud not back
away from that price, after all that competitive activity. Also,
the bears' reluctance to sell as aggressively at 40 is prompted
by I) the price isn't rite.
2) they don't want to scare away the buyers by
chasing them as they retreat.
All that activity at 42 may seem that prices are about to spiral
upwards, and that the activity at 40 means that the selling
activity is weakened. All that activity at 42 means there are
more eager sellers whereupon as the buyers dry up, prices will
drop once again.
In :::ummary
I) volume is greatest at the birth of a
congestion area.
2) highest volume will occur at a congestion area's
perameter which is opposite to the eventual
breakout.
3) volume activity decreases as prices move to
the apex of the congestion.
except: saucer, and scallop
Clues generated by such action are especially valuable to those
who are alert to them. Because there are so few who do
then when they occur.
58 VOLUME
IN BREAKOUT ANALYSIS
Volume may generally figure most at the birth of a congestion
area, but as the chart unfolds and a moveout occurs from the
congestion, volume will run at a peak an the breakout. Volume
may generally ebb towards the area's termination, but
on breakout volume sharply increases.
congestion
area
. 1

vol.
on
outset
l
t
deer.
vol.
as
prices
move
to
apex
breakout - ( false ? because
volume is attendant ?
may be higher volume on breakout.
VOLU:t>'..E 59
Breakouts constitute one of the most deceptive phases in market
activity. One reason is that a breakout point cannot be objectively
determined. Another reason is that so many breakoutsend up as
being a trap -
11
the end-run
11
As a consequence, to be of
prognostic value ( and not attendant ) , at these junctures, volume
action shud be considered together with congestion area analysis,
( and include in this the commodity's location in its historical
price range. ) .
After a congestion area has prevailed long enough to be widely
recognized by large numbers of buyers and sellers, who usually
accummulate in one way or another in the wings, ready to jump
into the market every time the congestion area's upper and lower
limits are approached, either buying/selling using stops to
protect- losses or using stops to initiate positions. For a downside
breakout, many buyers will have to be satisfied in the lower limits
of a congestion area and for an upside breakout many sellers will
have to be satisfied on the upper limitof the congestion area. In
either case, the result will be marked pick-up in activity as
prices move thru the limit of the congestion area. This action
denotes protective stops and activity designated by buying/selling
new positions by the
11
stop method " outside the congestion area,
as new people jump on the bandwagon.
This volume action has no prognostic value and is labelled
attendant, as this is customary market action. Since it has no
prognostic value - ( it is expected on breakouts ) , the validity
of the breakout is weakened somewhat. Pick-up in trading activity
is part and parcel of breakouts. 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 most certainly be left in
doubt. If the trend materially penetrates the congestion area
from which it has just emerged, the trend is thus invalid - at
least for the time being.
breakout
congestion

r I r re-enters congestion
false?
4
60 VOLUME
On the other hand, if the trend reverses itself, smartly bouncing
off the outer range of the congestion, then the trend cud be
followed with enthusiasm
Please note this : - it is when the expected pick-up in volume does
not materialize on breakout that the action becurns immediately
prognostic. The volume shud be increasing on breakout and
accordingly attendant. But if volume is not picking up on breakout
the astute volume watcher will immediately label the activity as
prognostic. It means something special, something unusual is
happening. This infrequent circumstance occurs in a market which
has temporarily lost its speculative following, and means
something special. The "trade" is up to something ! Therefore, such
a breakout may be followed with confidence and enthusiasm.
I hope U understand by this time the difference between prognostic
and attendant volume. If not, then please review the previous
pages - it is a golden key to alert u to some of the golden
opportunities in commodity trading )
VOLUME 6!
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62 VOLU!lE
Summary
I) volume increases on breakout is attendant and
norrnal.If the trend is to continue then volume
shud subside. If volume remains high, and prices
reverse, then the emergent trend is aborting.
It may mean a trend is underway, or it may not
2) a breakout without good volume increases is
prognostic and indicative of a trend to be followed.
Special note : high volume with a breakaway gap is incredibly
significant (see sections on "gaps" )
VOLU!'..E 63
VOLUME IN TREND ANALYSIS
During trend action, volume is normally attendant. That is,
it can be predicted and is to be expected. Prices shud move
up or down witt fairly healthy volume. If the trend is up, and
new buyers are corning into the market, volume will be rising.
The market will advance then retreat a bit ( and volume dry up
it will advance to a new high( on good volume ) then retreat
again ( volume drying up ) . The market may decline on good
volume, then retraces part of the decline ( lighter volume )
and prices decline further into new territory, ( good volume ) ,
and then partially retraces itself again ( volume
Whatever the situation, the volume escorting the overall trend
will be greater than the volume escorting the counter-trend.
In the next section,we will delve more deeply into volume and
reversals. At this juncture, it is worth mentioning that if the
trend is up, and the volume is rising, new buyers are corning
into the market. Near a top, higher prices and higher volume
denote topping action. Higher volume is stimulated by those
buyers who finally cross the psychological threshold, convinced
that a bull market has at last been infull swing. They are
latecomers plus those who went short prematurely and are now
covering their short positions. With this high volume is the
concomitant wide price fluctuations, what I call the
"pumping action " of market tops. This is the blow-off and is
the final eruption for the death-knell. All aggressive bull
blow-offs terminate in high volume and big market swings,
on a day to day basis and a daily basis. So if prices have had
a good run, either for seve+al days or weeks ( even months )
and volume is suddenly becuming incredible ( often at record
levels ) and bullish news is cumig out of the woodwork, and
there are staggering price swings, the market top for the year
is fast approaching, probably within days.
Summary
I) volume goes with the trend and is thereby
attendant and predictable
2) volume escorting the overall trends will be
greater than the volume escorting the counter
trend.
3) high volume escorting a counter-trend is prognostic
of market topping action, and occurs in pumping fashion
on a day to day basis in market top formations.
4) any deviation from the above labels the volume action
as prognostic, and the opposite price acitivity is
to be expected.
4
VOLUME IN PRICE REVERSAL ANALYSIS
Within the context of overall trenc action there are four
categories o= rrUnor turning points, or simply stated, minor
reversals.
1. Overall uptrend reverts into counter downtrend.
2. Counter downtrend reverts back into overall uptrend.
3 Overall downtrend reverts into counter uptrend.
4 Counter uptrend reverts back into overall downtrend.
by itself in these minor reversals is of no prognostic
value. Rather it is attendant. Volume will dry up with these
reversals. However, if there is a noticeable increase or decrease
in volume at such a juncture, volume will have prognostic value.
On balance,_therefore, overall trend reversions into counter-
trends are attended by volume dry-ups, while counter-trend
back into the over-all trend are attended by volume
pick-ups. The reason is that buyers in an upmarket dominate and
are thereby more aggressive in over-all uptrends and duringaa
over-all down-trend sellers dominate and therefore more aggressive
during the downward move.
Consequently, when buyers temporarily shift from aggressiveness to
patience in the major uptrend, the volume will dry up as the
market recedes. Conversely, in a major downtrend, sellers
temporarily shift from aggressiveness to patience volume will
dry up and the market rallies. Consequently also, when buyers
recommence their aggressiveness in an over-all uptrend, volume will
pick-up and the market will then resume its advance, and conversely
when sellers re-commence their aggressiveness in an over-allpown
trend volume will pck up and the market will then resume its
decline.
There are two types or market reversals.
I) minor
2) major
VOLU!".E 65
The major reversal is the conversion of overall uptrend into
an overall downtrend or vica versa. A minor reversal may constitute
a part of an area of re-accummulation or an area of redistribution
or maybe neither. ( see chapter on congestions '7' )
A major reversal on the other hand is always a bottom or top.
The perception of volume action during major reversals is most
crucial to trading success. Volume during major reversals forecasts
two things.
I) that the prevailing overall trend is nearing
an end or has ended
2) that the next overall trend will be in the
opposite direction.
Because the duration of tops is normally so much briefer than
that of bottoms, it is easier to be trapped into the wrong side
of the market within a top region than within a bottom region.
It takes far greater agility to go short a market at its top
than to go long a market at its bottom. Market tops are potentially
more treacherous than market bottoms for quite another reason:
human nature is more bullish than bearishly inclined.
After a commodity has enjoyed an extended price advance, there
will be those who will be eager to get on the bandwagon before
the parade is entirely over. The result will be abnormally high
volume with wide hectic price fluctuations. The newly elevated
price level may linger for a while or even go higher. Volume
may stay high or gradually diminish. Regardless of the secondary
characteristics, the initial message remains crystal clear.
" The bull market is over. ". Abnormally high volume along "-'i th
wide and hectic swings after an extended price advance exudes a
bullish aura. This is diabolical. Remember that for each trade,
one half the trade constitutes a sale ...... seasoned traders
do not get fooled by such an aura : smart action is being
unobtrusively taken by astute bears.
High volume with large and hectic price fluctuations is k n o w ~
as an upside volume blow-off. A downside volume blow-off is
as common but not usually as pronounced nor as easy to identify.
By reason of the bullish inclination of human nature, downside
volume blow-offs are frequently imagined long before they occur.
Therefore, a series of alleged blow-offs will precede the valid
downside volume blow-off that signals the end of a bear market.
Volume blow-offs of less dramatic substance may also signal the
termination of counter - trends ( just to confuse U ) after a
counter down trend has run its course. There may cum for example,
a period of time when trend action is so quiet that a pall seems
to have settled on the market. Which means the selling pressure
is off and wud-be buyers are exerting restraint. such restraint
4
66 VOLUY..E
is prompted by the knowledge that the market is so thin that
bis bids will go largely unsatiated and aggressive competitive
bids will send the price spiralling.
An upside reversal within a bottom is virtually meaningless.
An upside reversal within a prevailing uptrend may foreshadow a
counter downtrend. An upside reversal within a counter uptrend
er an area of re-distribution likely foreshadows a
continuation of the prevailing over-all downtrend. An upside
reversal within a suspected top formation shud add confirmation
to one's suspicians. An upside reversal attended by unusually
high volume shud be taken more seriously than one attended by
normal volume. The converse wud be true for downside reversals.
U shud be thoroughly confused by now. Read it over
again - it ain't that bad. )
Summary
I) volume dries up in minor reversals and
is attendant.
2) volume increases, sometimes at record levels
in major reversals, and is accordingly attendant.
3) downside volume blow-offs are frequently
imagined long before they occur.
The intra-day volume action of a commodity often conforms
to a pattern for a commodity which has a sizeable
following. The common volume pattern is heavier volume during
the opening and closing minutes of trading with fairly uniform
activity inbetween. This pattern offers scalping opportunities
as well as opportune times for positioning in market trends.
Volume study on an intra-day basis requires dedicating
considerably more time and abtention to the market than most
traders can spare. However, being aware of high volume activity
on opening and closing and the market 's wandering characteristics
gives the trader who trades by telephone sum insite as to when
entering the market wud be more advantageous.
VOLm.1E 67
Hea opening volume is reflective of the accummulation of
overni te orders a generated by fac or nown.
If the market does open higher on pretty
market will settle back for a spell.
it opens lower on pretty heavy volume, intici_Eate that prices
will the mid-morning session for a while. Taking
into volume act!on pattern on basis,
and putting aside the accummulation of overnite news and
activity ( since markets never sleep ) , we shall consider the
act' n of the prices of the day before , considering the
an vo ume of thi a the kind
of

I) a) anticipating a higher opening.
r111
f
The price action during the day are beautifully
constructive and steady,
rite up to the close . It is strong, steady and
Prices may have been under heavy
atrile of the day's
range n thru the
cthr-f::!e rem a j n j ng c;zuartriles to cl 0
5
9
Certainly expect an
to higher opening the next day.
tpening
OR
next day
steady
progression
all
day
opening up
next day

here
.JnOSt of
the day
nri
good
volume or
activity.
spurted
up
during approx.
last hour of
trading.
4
market
trenc
up
a opening may be anticipated the
following cay o=: - prices to
=all right up to the close in a steady
erosion, - expect an unchanged to lower
opel'!ing.
anticipating lower prices on opening after a
rise in prices day before:-
after an up-day with prices stalled in pretty
heavy volume in the last half hour or so,
supply has caught up with demand. Prices have
been trading up on heavy volume. - they run into
resistance during the closing hour of trading -
prices falter. of sellers exists and have
even too' they may fluctuate
curing the last two minutes of trading. Reckon
on lower opening prices the next day.
wall
of
sellers
)
trading in
upper quatrile
last hour of
trading -vd th
good volume
lower
opening
next cay
quatrile
I
- --
2
3
- --
4
b) higher opening after a day of steady
decline : - after a downday of steady decline,
and prices holding in pretty heavy volume, in
lower guatrile of day's range, in last half hour
or so, demand has caught up supply, and
higher prices be anticipated the next day.
Prices have subsided on heavy volume, but the
downtrend is stalled the last hour or trading.
Buyers have crossed swords with sellers towards
the end of the trading session.
VOLC:!E 69
~ h e relationship between unusually high volume and normal
volume varies from commodity to commodity and varies from
time to time. It's actually quite a mish-mash. However, the
greater the continuous speculative following enjoyed by a
commodity, the less will be the differential between its
high and normal volume days. With pork belly contracts,
for example, high volume days generally run no more than 50 %
greater than normal days. With Hog contracts, however, which
do not enjoy a continuous speculative following, high volume
days will generally run at least IOO % greater than normal
volume days.
Relying exclusively on volume may at times be confusing and
misleading. Let us suppose that following a rally from
40 - 42 , a burst of 2,000 contracts within a day promptly
sends the price of the commodity back to 40 And, there
it stays for two weeks at a 300 contract per day pace. The
question is whether this action is bullish or bearish. The
2,000 contract burst at 42 is clearly bearish. The ability
of the market to absorb a 3,000 contracts at 40 , altho'
over a period of ten days must certainly be regarded as bullish
to some extent.
The study of volume action is best applied in a context of
I) whether it is attendant or prognostic *****
2) in determining the breakout of congestion areas
\\
3) an alarm signal of market tops with its attendantfj
high volume and wide swings
4) market bottom analysis
5) breakaway gaps and gaps with attendant high
volume
6) end-runs and/or breakaways from congestion
7) the study of intra-day action to determine the
opening of the following day.
Attendant volume is greatest at the birth of a congestion. Highest
volume occurs .in congestion perameter opposite to breakout. "
Volume decreases as prices move to congestion apex
Volume increases on valid breakout and subsides somewhat
Volume goes with the trend
Volume dries up escorting counter trend
Volume increases in major reversals.
4
7:) VOLUY.

?rosnostic volume:
e.g. Volume decreases at the birth of a congestion
'.'olume on breakout is light, or on high volume
breakout, volume remains high with
retraction in prices.
High volume with a breakaway gap is incredibly significant.
Volume decreases with trend
Counter trend volume is hi-gh.
GOOD LUCK
OPEN INTEREST
0.1. a.nd pJtice
tte:
unclw.ng e.d 0 . 1 .
of.d/ne.Lv buue!!../.6eil.VL6 a.6t)e.ct 0110.1.
gotde.n JtLLle
6WLthe.n in6otuna.tiOI'l
0. I . ..(..Y! tJte.nd a.lw.f.UI.:>i-6
0. I. in ccng eotion-
0. I. in ma.nk.e:t top a.na.f.y.oi-6
0. I. in ma.nk.et bottom a.nai.yr..i-6
.6 ea.r..ona.f. te.nde.nU.eo in 0. I.
O.I. a.nd vof.ume.
0. I. a.nd commi.ttme.nt o ttz.a.dVL6
IT IS
CHAPTER FIVE
Open interest ( O.I. ) is expressed as a numerical value and is
always equal to half of the number of " open " contracts. " Open "
contracts are bets ( contracts ) , both long and short, separate
and not connected with each other in any way, that have not as yet
been " closed " thru offsetting transactions or the making and
taking of delivery. When there is no betting, both long and short,
there are no open contracts, and the O.I. is of course, zero.
For every unit of O.I. there are therefore, two open contracts.
Let us say that "A" and "B" decide to bet on a particular contract's
worth. "A" will take the long side, and "B" will take the short.
We now have two contracts, one long and one short. Now we have "A"
and "B" in the market. If either one of them decides to add to
their number of contracts, then the 0.1. will increase accordingly.
5
7I
72 O.I.
Let's say that some nev: people enter the market - "C" and "D" .
"C" going long and "D" going short. These people will also
increase the 0.1 .. ( "A" and "B" are still holding on to their
positions - they're still in the ball game ) . But what happens
if "A" somehow gets around to selling to "B" The result: - they
have closed a contract. ( Each of their contracts was previously
"open" . ) . Accordingly, 0.1. will decrease when these characters
"A" & "B" , who are " old " longs sell to " old " shorts. ( "C" &
"D" entered the market after "A" & "B" did, so "A" and "B"
suddenly became " old " ) .
But, 0.1. will remain the same, unchanged, if one of these old
longs, say "A" decides to sell to a new guy who enters the picture.
( We will call him "E" - "E" has had no previous position in the
market.) ((having fun?)) Now, "A" and "C" are "old" and they
sell to a new long - perhaps "E" - so that the long open contract
is now passed on to "E" . so there is no increase or decrease in
O.I.
Getting the picture ?
Therefore, an open contract is one that has neither been liquidated
by an offsetting transaction nor filled by delivery. O.I. equals
all of these open committments, divided by two. That is, if at the
close of business each day there is O.I. of 3,000 , this means that
there are 3,000 longs and 3,000 shorts. It measures all the longs
and all the shorts whose positions have not been liquidated, by
new people entering the market.
Heraclitus ( c. 500 B.C. ) may have been referring to O.I. when he
wrote : " Men do not know how that which is drawn in different
directions harmonizes with itself. The harmonious structure of
the world depends upon opposite tension, like that of the ' bow
and the lyre' " . In modern lingo that means " for every buyer,
there is a seller." .
Bruce Goulc, in "Dow-Jones Irwin Guide to Commodity Trading"
put it very nicely with his ring method.
Tht Ring
Method
RULES
Suooose that a re:eoved a new oroer from a customer. Jones. to
buy fut.Hes The orok.er would execule rne ore.!!' anc'
h1s settternent Clerks record; wou1d >i'low that Jones bo"'g"t trom 1,1r
Later. Jones. real,z,ng a orof1t on a pr,ce 1ncrease. m'gl'lt de:,de
to llou,date oy se111ng 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 ana oougtll ov a man named
Lar$on. Suooose that Larson w1sned to uou1daie hs obugaczon two
oavs later be<:aus<.: of a pr,ce oec11ne ano tl'le oes"e to cut ,,s H1s
contracts wouio be in the market Let s aosume :hat they wece
bought by Sm1th. SuPPose that Smuh a flour m!IIP.r. wameo 10 rake
delivery of the wheat when the contract reached matunry H1s broker
would arrange for the delivery and payment between Sm1th and the
seller of :l'le cor:rac:s. Sran1ey Any ooilgdtJon had bee"
undertaken bY Jones or Larson hao s1nce oeen oifset. JJQuJOated bv
rhelf eoual ano oPPOSite futures transacuons tl'lJS I:Jnd of cl'lam
of buyers and sellers 1nvolved as many as 50 or more parr,es
0 I . and Price re Probabilities
It is usual for analysts to consider four alternatives and
their significance. These alternatives are:
O.I. 73
74 0.!.
IF price and open
interest change
as follows: '
THEN the main
market influence
is judged to be:
Price rises and
open interest rises.
New buying.
Price rises and Shan covering.
open interest declines.
Price declines and
open interest rises.
New selling.
Price declines and
open interest declines.
Long liquidation.
caution the rules regarding O.I. and price Qhanges do
not follow a simple and i n v ~ i a n t course. They
change at different stages of a market move.
See the following discussion on trends, tops,
congestion, bottoms, and "criticism" Also,
it must be considered in relation to other
factors, including an evaluation of prevailing
market psychology.
Probability of 0.!. and price
0.1. increasing with prices rising
82 % probability that prices will rise,
as new positions are being established.
0.1. decreasing with
78 \ probability that
as shorts are covering
market is weak.
prices rising
prices will decline
and no new buying,
O.I. increasing with prices falling
93 % probability that prices will decline,
as bears are in control, and buils not
strong enough, market is weak.
O.I. decreasing with prices falling
88 % probability that prices will rise,
as bulls are taking their profits or it is
margin calls. The bears are reluctant to make
additional sales at these lower prices. If
this pattern holds during the last phase in
a bear market, U can expect the formation of
a double bottom, or an "A" type bottom.
Market is technically strong.
0.1. is unchanged with prices rising
both bulls and bears are buying. Only thing
useful about this is that everyone is bullish
and sooner or later a correction will set in.
O.I. 75
The end of a bull market ends with great activity
and large 0.1. and considerable volume. Generally,
the quality of this O.I. will be poor and will
reside in weak hands who have cum to the market
late and will run with the first sign of trouble.
0.1. is unchanged with prices falling
the declining prices are due to the bulls and bears
selling. This is of little usefulness except that
it will lead to an oversold condition. Some help
in this area can be obtained from volume data.
A bear market usually begins or a bull market ~ i l l
top out on pretty good volume.
O.I. is unchanged under the following conditions:
old sellers purchase from new sellers
new sellers sell to old sellers
new buyers purchase from old buyers
old buyers sell to new buyers
( getting confused ?
5
76
Old/New Buyers/Sellers Affect on O.I.
"Ole" buyers are those who still have a "long" position in
the market, whereas "old" sellers are still short the market.
They're still there at the close of the market.
"New" buyers/sellers , on the other hand have just entered the
ball game. They've just entered, by the close of the market
for that day, to take a long or short
O.l. increases only when fresh new people enter the market,
when new purchases are offset by new sales.
O.l. decreases only when previous ( old ) purchases are sold
in the same trading day, a previous (old) sold contract is
bought, thereby eliminating all of the "old" positions. The
old long is gotten rid of, and the old short is gone too, and
by golly, since we've eliminate a long and short, whoopeee, the
numerical contract is offSet and cancelled.
Since it is the effect on O.I. that is reported and not the type
of transaction, the technician interested in this aspect of
market behaviour must infer the latter from the former.
further:
Golden Rule
Transaction
Purchases by old sellers from old buyers
Purchases by old sellers from new sellers
Purchases by new buyers from old buyers
Purchases by new buyers from new sellers
Sales by old buyers to new buyers
Sales by old buyers to old sellers
Sales by new sellers to old sellers
Sales by new sellers to new buyers
Effect on open intere't
Reduced
Unchanged
Unchanged
Increased
Unchanged
Reduced
Unchanged
Increased
When O.I. gets swollen, there is more potential for a
price change - in either direction.
o. r. 77
FURTHER EXPLANATION
When we explain the concept of O.I. in a more expanded manner,
especially the concept of when 0.1. gets swollen, there's more
potential for a price change, in either direction. The following
from" Making Money In Commodities", by Eugene Epst.ein,
Braeger Publ. Inc. is presented.
The Dftly ioowble COIIMCUOn betwnn this rise JD 011011 iiiiCn:ll llllllbr !11'01
aasis lila! !be pncc will coalitluc to nsc is !be lllca Ulat we lhaii u .. 11101'1 of
tile same.
10
That as. new loap will conlitluc to enter !be market, will COIIUIIUI
to be more awcum lllan ut will conunuc to bid ap !be pnc:c. lluas.
!be ,_llin& is, if you ro tonr tlOW, DC>tt wilt& you will be able to ICII your
uact to one of tile new lonp, wilo will pay you a premlllftl for n.
llut !be morc-oflbr- arrwneat is a"PDllcablc to aay 'IUI&IIt or c,., ifl.
tcmt lbeory. 'Take a cwauon where !II'ICCS art rissnr-and CI'PCflllllerat ,_
llnWtrf'*ti. If there u still some -.ol..,...-u then usually will be-lbr -=c
open coatractl arc IIJII'Ply tllmlll& ower. At least onc.of !be followiii&IWO lhillp

l. New lonp are l&ian& coaaacu away frDm lollp. Since prica an
ftlllll, it must mean Wt the aew lonp are bidclin& pncos 10 a bilb -.11
Inc! to mclucc old lonp to ftliDqllllh Uleu CODuactJ.
2. shorts an telinquiahillc thm conuacu 10 new shorts. SiN:a
nsift&. old shorts m111t be biddm& up !be pnc:c m order 10 iDGuct -
sboru "' co- il_lto 'tile lll&rkct.
Why caa't lbcrc be a b&ndwatOft effect m this puUcu1ar cue! Ntw loDp
are COfiWII mto the market bccaiiiC IIIey beline 'lllere u an 11!1UIII4 In tba otTIII&
from the lewcl at which IIIey tab tlleir lonr poaitiON. Old lborts are tetliDI out
or !be market bcca1110 they beline an UIIUCIId will oc:ur from the kMis at
which they make then offset!IDJ uansacuon1. Old l011p are scllinc out to the
new lonp pollibly because they feel they nupt u well rab Uleir 'PfOfiu.
Of covrsc. Dew lboru arc comin& into !be market bcca1110 they beliew !lriCOS
ue rome tO dedme from tile lncls at wnidt they ,.. .. made lilar sales. lut JO
far the new lonp and old lboru are in ClwJc. Why caa't IIIey to be'
I n. .. arruea Ulat an ll!'tn:nd mipt conwnac on nsmc opeD mtanst and 011
Stcaliy open tnterest. To CO!ft!'ICJC tht 'Uili\'CTIO or poaillilibcJ. wbat &boul-
firmsiiC an on cleclinlll& open illtercst' Our theory of dcdimD& opeD
rntcrcst bu to aaume WI the clll:imc will CWIIItuall}' SID!I: if It tlidtl't, lbelllhc
comrnDdtry will Cftlltll&lly lose aU bqui4lty.
llcanllc dus modilicau011 m mnc. our tlleOry wW to like this: Whea a r1JC in
11ncc OCCIIn on dccllnlllc open antcrnt, n meaN that both lonp and sbons arc
lrqwda!IDJ. lt also lbCalll Ulat mons arc more rcr to liqwdatc tlwllonp-
hCIIco buymr p.......,. iJ Cl!CICdm& scillllc prasurc. The cledme 111 CI'PCfl in'ICI'IIt
!lillY conuniiC for 1 wllilc, With lboru ,..., to place lUJhr and luJher bids m
onir. to set lonp to sell. Swentll&lly inc clecbnc wiU halt (altholllh the "!!U'Cftd
Ill 'tile llftCO will conunue) once lonp wiU> remam dr:cade they art 101111 10 hol4
on to !bear ccmtncu. Unclcr those CUCIImStaJICCS, olC lboru wlao -ftt 10 liqui-
date will ,.... to nand then conuaeu to new sborts; 111 order to attnel !hac
new lboru. 'IIIey will hi" to con'lltluc to bid Ull 'tile pnce. Soon moup OpeD
rnterest may nae baci: to tts old leooel, once newlbons ancl newlonp ODme 11110
Ulemarkct.
One or the IINqiiC features of a nsc m 11ncc ma awl by 1 clac:line m open
itlteresl is WI Jl .. clearly 0\IC to only oac factor-the burml - or
lboru offsct'lin& thear positiOIIJ. The lbons are looltmc to cet out became they
UJOCC' an Ulltrau1. 'This fact lw iftl!lu'ed one scbool or thoupt to .,... tbatan
Ulluencl is in fact CODfiJmecl by a dedltlc in open illterat. Tbc -ms soa
Ulat shorts tend to be tlleiiiWIIIIO!Ie,o-tht IIWCftlt, ilftOtmt apeculator llft{m
10 10 loos. So If tilt mons a!IICI an Ulluen4, it's lik.ely !bat they'll t11r11- to
be npL The ida il. ;1111 &II hypotbait-lnltlt makaa -a&t IIIDft- shaD
!be olber nypou.a. wc-.e beet! COillidailts-
'To 111111 Ull' upcl for the Miotic" of beliftlnl tb&t &D lqllftlll!ll-
lil<cly 10 conunue if it's accompuucc1 by l, a rue 111 open illterat. 2. no ciiDce
in open interest. and 3, a decline 111 opeD lntcrat. On tile bail of lolie. theas,
there is no w-rto cbOOK amonsmesc three ll.llmli!IWU.
JOI.o-... oM_.__ of I ..-wnllftaiiC_III_
-...,.,. m ca..._ Th ... _.., ......... a Utet..,.. lftt...,,.... .... cMI'It
(p.l%91.
78 0. I.
In some way we may state that
I) when price and O.I. move together, the market is considered
to be particularily strong and potentially bullish
2) when price and O.I. diverge, the market is considered to
be technically weak and either or actually potentially
bearish.
3) in an advancing market, rising O.I. seasonally adjusted on
high volume confirm the validity of anuptrend.
4) a declining market and rising O.I. on high volume confirm
the validity of a downtrend.
5) declining 0.1. in a rising market represents strength
primarily due to short-covering, but the market is considered
technically weak, as no new buyers are entering the market.
6) declining O.l. in a falling market represents price weakness,
primarily due to long liquidation. The market is considered
technically strengthening as the 0.!. is reduced.
CRITICISM
The use of O.I. in analyzing the market is disadvantageous to a
considerable extent. This analysis is replete with a number of
ill-defined terms : "low volume" increase in O.I." , " decrease
greater than seasonal expectations " and several others. To make
use of O.I. , the technician must quantify his terms to avoid
meaningless generalities. The general rules of O.I. are well
publicized. Many traders memorize some rules with repect to 0.!.
and then pretend they are rationalizing by parroting these /
routinely learned principles. Obviously, not every trader is
correct in his assessment. The application of these classical
principlesl.eads to the problem of the " self-fulfilling .prophesy"
which is one inherent disadvantage of using for example, another
analytic tool price patterns. 0.1. behaviour which is clearly
bullish or bearish can be discounted in any existing price level,
as easily as any other familiar supply/demand factor.
The validity of the standard principles of 0.1. rest on unproved
assertions. No publically available studies using O.I. decision
rules confirm their value in actual trading. The critics of the
0.1. theory point out that it has not been easy to validate it
r
0. I. 79
statistically. There is no available information on the study of
"stupid money"
This author feels that Q.I. becums prognostic, as apposed to
attendant ( see chapt. on volume ) only when a sudden change
in o.r. occurs, either up or down, especially in a congestion
area. I am always looking for something unusual, unexplainable
occuring in the market place on which to make an assertive market
committment, and any deviation from the normal pattern of O.I.
is one of them.
0. I. IN TREND ANALYSIS
In the early stages of an upmove, the combined rise of o. I.
( on high volume ) has bullish significance. But as the O.I.
further increases, the trend is such that the speculative public
assimilates all the bullish factors that fueled the advance, the
bullish significance diminishes.
In an advancing market, rising O.I. seasonally adjusted and
good volume confirms the validity of the trend.
In an declining market, rising o.r. and good volume confirm the
validity of the downtrend. Therefore, rising O.I. and heavy trading
volume appear to be more significant in confirming a trend in its
emergent stage and of more doubtful meaning later on.
In particular, when an uptrend is at a more mature stage, sharply
diminished rate of O.I. expansion may be a harbinger of a bear
crack.
In an uptrend, the buyers enter the market at different points
during the trend according to their psychological bias.
Rising O.I. communicates that new positions are being initiated.
When prices thrive, these conditions advertise that the
all the money and represent the aggressive group. At a market top,
these conditions advertise that the shorts are in control - the
market is about to crack.
Sometimes, during a market rise, there will be a sudden reduction
in O.I .. Under these circumstances, one may conclude that the
market is generally considered technically weak, at least for the
time being. The only exception I find to this rule, is during a
congestion of some duration, and a sudden reduction in O.I. signals
short covering by the trade, and fortells an explosive market.
( see congestion & o.r. cuming up. )
5
80 0. I.
0,!, IN CONGESTION ANALYSIS
a price rise a congestion area may be either an area of
re-accummulation or a top. If the O.I. continues to shoot up while
prices go sideways a top shud be suspected. The bulls are being
effec-tively challenged by new sellers.
After a price decline, a congestion area cud be an area of
re-distribution or a bottom.
If O.I. continues to slide while prices are levelling off, a
bottom is possible , - the bear's domination is successfully being
challenged by new buying.
In a congestion area, an inordinate decrease of 0.1. in a congestion
area denotes an unusual happening. O.I. declines, if and only if,
in congestion areas, short sellers are covering their shorts.
( Markets will rise, if and only if, short sellers, in congestion
areas, are increasing their shorts - or new longs are entering the
market ) . Since we know that the commercials are responsible for
most of short selling ( re: hedging and spreading ) , a decrease
of 0.1. indicates an attitude of bullishness on the part of the
commercials. ( An increase of 0.!. indicates an attitude of
bearishness on the part of commercials, when there's a congestion ) .
During a price consolidation or congestion ( trading range ) , if
the O.I. declines, we are being told that the commercials feel that
prices will break out of the congestion on the upside.
By the same token, a price consolidation during which 0.1. increases,
tells us that commercials are shorting and are looking for prices
to out of the consolidation on the downside.
Notice how in the following examples, the big price move came
the second arrow. Yet in the build-up period between the
first and second arrow, O.I. rose significantly. This increase in
O.I. during a sideways or moderately advancing market foreshadowed
the path for a further price advance after the second arrow.
I
I
t
l .
/

o...n. ?r-
COOIOD%2'1' c:KU:r
of
C:OO.CCU7 UJU:MJ, D1:.
One Uloerey Plau ,.. 11.1'.JOOOi
5
C.!. SI
82 0.!.
-'- -
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I U I
- --. -;-; .'. ' J.! -l--U-+-!-+J-..:.-!-!-++-4-i
- ---. ' I -+..:...+-+-'::.... ,;,_ 1,_ -+-' +++-+-i
. ' -+!-'-, -+, ++++i
I
Of,
' I
.. - -- -- _ ..... ... ..... -i--+-+-+--+-+-i
' I '
:-:-:.:.==:_ [Ill. '' '
--- . . ' . ' . --:- H++ L
------- -- .-ii--.- --. -. '
..... :-:. -.::-:.:. .. t- ' ,
1
I , I
=t=

' ' ' ' I ' '

------- -- - HrJ!t- I j_ >
... -- - --- --- __,.- ._ l!l!'r.7'" --.--"--.-, T'"'t:'-
---- -- .. -.;..-----:-+-......... H--i
.. - -- .. . : ' : _,__._ __ .;...r-, ....... ,,.... ......
: : :: -:: :..:-::: _-
u
NOV.
. D
:rr ..
co-.K:>D::-r niiiYla:
.t. "U7 l"W>lic:au ... of
DC..
10... Pl.o:u "'" 11!.1'.::1:0006
Pr-
C:::OV.OD1TJ' 01.uc: srJrncz
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XJC.
0... Ul...n7 PJ&a.a .\'.
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4 .J
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J. J.:: . ..,.;-3 i- ....... . - _:_, __
-'-: _;f--i -
l I --.,.,.
... ; .. .3.,"'-11--.;
. r-........... ....... ..,.....;. .....
5
o. I. 83
84
look at the following live cattle and rye contracts,
O.I. rose substantially between the two arrows, YET,
HAPPENED ? The price declined significantly after
second arrow,
.... , .
....
nn
E&--

..
- -
i .
'I
..
NOV.
; J-: . RY JuLr"1S77-WPG. -
. U.C .. M0ll%00o11AL LIN! ON 00li..Al
I
.. -- '
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. I
.
: .
77 "'
APR. MAV
Owart. P.--
CDVtOI21T1' cxu::r SJ:JrlllCZ
a of
CDOtOI:Iln DC.
One Pla&& M.Y. X.Y.20006
O.I. 85
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 signifi-
cantly, 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.
5
86
Also be consideration in a top formation
is , with up and O.I. down, means that the price rise
is being supported by new buying, but by short covering. This
adds to the technical weakness of a market. In this circumstance,
the is only rising because, sooner or later, shorts admit
errors and o=fset 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
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
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
financial muscle and aggressively crowd the trend. How 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 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
is needed to validate the bear signal. Similiar reasoning
will apply to the market reversal from the downtrend to the uptrend
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. build-
up, 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
5
88 0.!.
seasonally. However, 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[

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 ? 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 advant-
ages which many people thought
existed.
r
o. I. 89
The fcllowing g:aphs p:esent the seasonal trend characteristics
o= 0.!. from 1955 to !964
120
110
------,-- ----- ,_..,
--
- --=:;.==:::t::=:-=.:===1==...:.-:-.-:=..: . ..;
- r--:-=;==:-:i-
; . .. ; -
90
-------
;..;. - .... ""' 50
.......................... ,.
c......,.CMn ........ -,....., ....... -
9(1 0.1.
COTION TRENDS OF OPEN INTEREST a VOL.
At N.Y. COTTON EXCH. (10 YEAR 19 55-64
110
.1)0
eo
oR__,......, .
H --'-+ ..,..--.. :::;:::::::;::+
- -
.... ,..,.. --.
.............. --......
..... .. .......
............ '"" ...........
I !
1

d
CPEN-1 I : : )._;_ -4--
INTRST

- .,_,.,. r-
'FA
..
..
.. -
VOL.Uiol OF SO
TRADING -!- -i-,_
_ .... ! .. - ' --. - ,,
. . . .,..... . -:_:,-:-:f:!::i=: I :- HtF
:-
0
...... <144'f .. .,.. ect. ..... ....
......... ., .. ,,. ..... .
.....
-I-.
-- .. -.:so
...-t. ea. _.,, .c.
.............. .. 9 ..... ,
------....
! l
I '
r==
.10
I I
.. l
100
i
ao;
i
60'
40
t ......
......- ;..:- .... ....
............. ., .............. ,.
O.I. 9!
--------
. ..
........ ..:Yo ......
............ .... _.........
--------
~ ~ ~ ~ - ~ ~ ~ ~ L ~ - - ~ ~ ~ - - ~ - ~ - - ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - ~ . ~ ~ ~ ~ . ~ ~ - ~ ~ ~ ~ ~ ~ - J ,
................ ~ ................. _... .. ,,
c-.wCiMII...,....c-.w.....,......., --..
5
92 0. I.
. so
tfjoo

..... ,.,. - ,._ ..,.,a..ct'a , .. ,. ., wat;t'
This is for the ten period of 1955 to 1964, in order t?
portray the "normal" seasonal patterns during a period wherein
inflation and present day sporadic speculation did not alter
this pattern as significantly as it does to-day.
Commodity Research Bureau, one Liberty Plaza, New York, has a
chart service which includes in its service an update of
seasonal O.I. patterns to which u can compare the above graphs.
0 I I I AND VOLUt'iE
I am not a great believer in spending much time in fooling
around comparing volume to O.I. But, I will look at anything
if I think I can make a buck from it in the market place.
So, let's get to the fundamental rules of volume, plus 0.1.
Rules:
if prices are up and,
!) volume and O.I. is up - the market is strong
2) volume and O.I. are down - the market is weak.
if prices are down,
l) volume and O.I. are up - the market is weak
2) volume and 0. I. are down - the is
o.r. 93
So, under the well known rules of volume and O.I. , when prices
are up and volume and O.I. are up, the market is strong and shud
go further. So, taking all this into consideration, it is suggested
that in general, the combined rise of price and O.I. on high volume
has bullish significance, particularily in the early stage of an
upmove. But the bullish significance diminishes as the O.I. further
increases and the speculative public assimmilates all the bullish
factors that fueled the advance.
A great many major bull markets start out where volume and 0.!.
start building up and price moves up gradually- the " creeper".
- volume creeping up, and O.I. creeping up, price creeping up.
If the market has a nice base formation, prepare for a very
successful trade. A great many bull markets occur when U have this
type of situation
- - --- - tD
--.CD
In the advancing market from the base formation rising O.I.
seasonally adjusted, on high volume confirm the validity of the
uptrend, and the market is considered technically strong, due
to the high volume and O.I.
94 0.!.
( A declining market and rising O.I. and high volume confirm
the validity of the downtrend, and the market is considered
technically v.eak. ) Bull markets usually top out on usually
pretty good volume. Bear markets end in dullness as the price
range becums small. 0.1. declines, and volume is at low ebb.
When o.r. seasonally adjusted, stands at a particularily high
level, after an extended upward price move, a penetration of
the established uptrend, especially on high volume shud be
regarded as a possible warning of an impending price reversal.
This warning is not infallible, :Cut as experience suggests,
it is significant.
Two special notes
I) an increase in O.I. wud mean that increased volume for that
day wud be considered normal.
2) it is sometimes advisable to appraise volume action, as it
relates to 0.1. for instance, let us suppose that volume in
a commodity with O.I. of 10,000 contracts normally runs
2,000 contracts a day. A 4,000 contract volume day wud then
be considered a high volume day, but where the O.I. of that
commodity were to climb to 2o, 000 cont.racts over a period
of time, then a 4,000 contract volume day wud be considered
just normal.
When there is more volume than usual, any, all, or two out of
three of the following things are happening :
1. There is more liquidation than usual: Longs and shorts are settling their
contracts (which leads to a decline in open interest).
2. There is more "turnover" than usual: Old longs are handing their contracts
to new longs; old shorts are handing their contracts to new shorts (which
brings no change in open interest).
3. There are more new contracts created than usual: New longs and new shorts
are coming into the market (which leads to a rise in open i;terest).
In further explanation of the above, the following exerpt
from "Making Money in Commodities" by Eugene Epstein,
Braeger Publ. Inc. is noteworthy :-
" The rise in volume we are concerned with is accompanied by a rise in open
interest. Therefore, the third tendency is dominating. Suppose we take the case
where a rise in volume occurs simultaneously with a rise in price. lt must mean
that new longs and liquidating shorts (buyers) are exerting more pressure than
new shorts and liquidating longs (sellers), When Cox speaks of the trend catching
on, he appears to be assuming that buying pressure will continue to exceed selling
pressure.
But as with open interest, there is no more reason to believe a trend will con
tinue if it is accompanied by rising volume than there is to believe it will eon
tinue if it is accompanied by either steady or declining volume. For example, if
is steady, there is the ''usual" level of liquidation, turnover, and addi
tion to open interest. Not only can an uptrend happen on steady volume, it can
continue on steady volume; all that is needed is for buying pressure to continue
to exceed selling pressure. A similar argument can be made for declining volume.
Say. that volume is declining but open interest is rising. Under these circumstances,
there are less liquidation and less turnover than usual-longs are buying and hold
ing; shorts are selling and holding. Hence there is little or no volume from that
quarter. What is happening is that new longs and new shorts are coming into the
market, thereby creating the rise in open interest. Because there is a rise in the
price, buying pressure of the longs must be exceeding the selling pressure of the
shorts. Once again, there is a new bandwagon from which to extrapolate. "
O.I, AND CONTRARIAN OPINION
0 .I. 95
When a bull is topping out on pretty good volume
concomitant high 0.1. , the contrarian opinion theory shud then
be employed. It will be the harbinger of the eventuality of a
bear crack. A bull market cannot continue unless new bulls can
be attracted to the market and at higher and higher prices.
some point during a bull market, there will be no more new bulls
to be found. And, it is at these prices that a market will end.
It takes a 90 % bullish factor to indicate a decline.
In cases of little 0.1. changes, contrarian opinion shud also
be employed. Particularily when the volume is at low level and
the 0.!. is low. At the end of a bear move, the contracts are
normally considered to be moving into strong hands and of high
quality when the bullish factor is 20 % , and O.I. is low.
96
I 1 AND COMMITTMENT OF TRADERS REPORT
An o-=.:. e r way to measu:::-e what
1
s going 0::1 i.n is 't:.he
p:::-oposa:. maae by many technical analysts that ci::erentiates
" sma:::-t money
11
:rom
11
stupid money
11
; - re; Trader's Cornmi tt."nent
Report.
Every month, the government ( at least at times it can be help:!:'..:.l
provides a breakdown of the 0.!. of all regulated commodities.
Both long and short positions are tabulated into three groups:
bona fide hedgers, large traders ..,,.i th legally
11
reportable
11
positions ( talk to U're broker ) and the remaining portion of
0.1. belo::1ging to the small trader who does not have to report
his position to exchange. When large t:::-aders have short
positions that a:::-e
11
lo"''
11
on 0 .I. analysis, it might be ussumed
that
11
smart money
11
is strongly biased to the bullish side and
prices therefore shud rise. When the
11
smart money
11
0. I. is high
an important degree of pessimism wud be indicated and lower prices
are soon to follow. It is to play the large traders off
against small traders and isolate marked dichotomies of opinion
when analyzing 0.1. and determining activities of large and
small traders. A ratio of various large traders' positions to
comparable small trader positions wud clearly pinpoint times of
sharp cisagreement between the two groups.
v70W. POW ! This is a key tool in assessing where
11
smart
11
money
lies
However, one word of caution: there is a disadvantage
( sorry to do this to U ) , of using 0.!. to reveal
activities of large and small traders.
Small traders, rather than acting
consistently on the wrong side, are bette:::- describec
as operating haphazardly. Large traders are consisten't:.
winners, but are short term orientec as a group. Also,
not all hedgers are truly hedgers. Many operators are
sometime hedger, sometime speculator. Additionally,
not all small traders lose. Finally, the report is
involved with the eleventh of each month. By time
the report appears, trades may already have S\o.'i 't:.ched
positions.
Nevertheless, one can find some extremely significant use for
these figures, particularily to confirming wherein a bottom or topping
activity has some validity. U wish at all times to be with
11
smart " money. If during an extended :market rise, the cornmitt:Inent
report cums out showing large traders, smart money short position
as high - watch out ! Market is topping pretty soon ( days to
weeks - or prices may already have cracked. )
If U wish to read more about O.I. read on
Fint, tair.e the between a nsc 111 ooer. Interest anc! a nst m the
;tncc. A.J we have notecL when mtcrest nses.
1
it means that nf'lt snons
anc new arc coftun& tnto tile market. If tlus IWIIWWieously wath
a nse tn the !>nee, 11 means tilat buytnE pressure oi tl\e new lonp has ex=eQed
sellinc pressure of tlte nnr sham. In ot/ler worci1, new lonp were wtll:nc
10 place thetr betS at a and 1\tJher pncc 1n order 10 eel new altoru 10 bet
au.anst them.
Whzt can we ptlttr from tltJS Sltuauon that woulc! uulicate that the uptfftld
u likely to The advocates of IISIIIJ open mtcrcst II\'C us 'OCry few
dues. For new lone there IS a new alton. At !be current level to wllidl
tltc pncc has nscn. there ts as muclt of a commianau to a clownll'enc! u there
as to an u!>trend.. It is l.nlc to say that the ftCW shoru mtcltl not llaYC beet\
willinc 10 enter the market w1tltout a nse m pncc. llut of what relc
vance is that? It u all iJ> the put. It would hnt been nice to eaaohalt a lana
penman pnor 10 the pncc n10, but !be pnce wu not "-blc m adftllee.
The qucsuon is whether to cssabhsh a lone poauon - at a lcftl where the
shons willlnC to enter the market.
So aU we havo arc more snons titan usual wilJin& to bet on a pncc clechnc
and more lonp than usual will inc to bet on a price lise.' The fact that there
more beu on both 11lles of !be marltet docs dwtre !be lltuauon. but no:
m sllclt a way as to mcllcatc the cluec:-.10n 111 11'111Cb the pncc will so. AI: it
rnuns IS (I) if. for whatever fCUOII, the lltlii.DOII tums bcansh, there will
probably be more lonp titan usual looltinc to relinqUISh tlteit conuacu. or
(2) 1f for wl\atewr reason the snuauon \llms bllllish. there will probably be
more shoru than USIW loolUnr to rellnowsh tltCJ1 conuaeu.
COIISlcler thc IICanalt tum of In ordor to offset tltcu pcmDon&. Iones
will baYC to sell. llecausc there are more cf them titan ll&ual. the scllinr
will be srcatcr than USU&I. Th111. the cleollne 111 pncn lillY co fuur ad farther
titan 1! there had been no pnor buildup of open mterest. On !be other lw>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, In
fC"Cn&. Shoru wu 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& pres-
sure 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.
'II- Co1. c-a.., hoflrr 111 c-_,. F,.,.. ,..,_.-.
1912.
I 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 A I&UOMJiy achun.C rut llftUN o..r "'' n.t
IS mort U..ft aorma.!.
'Of courK. '".,., t:oUid sun be uu "'c """'..., or ,....., Utrt ll\llfll
M" c-.panoed thctr ftOtCbnp..
Source: Making Money In Commodities
Epstein Publ. Braeger Publ. Inc.
0.!.
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 o p ~ n ~ o n 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
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 traders
SHALL TRADERS
Speculative anJ heuging
TOTAL OPEN INTEREST
Percent held by: Large traders

l..ARGE TRADERS
Speculative
Long or short only
Long and short (sprertdlng)
Total
Hedging
Total reported by large traJers
SHALL TRADERS
and hedging
TOTAL OPEN INTEREST
Percent held by: Large traders
SmalJ traders
LARGE TRADERS
SpeculDtivc
Long or short only
Long and short (spreading)
Total
Hedging
Total rep6rted by large traders
SZ.1ALL TRADERS
Speculative and hedginA
TOTAL OPEN INTEREST
Percent held by: LDrge traders
Sruall traders
:
(In thousand bushels)
18,375 20,865
:ns 66,195
84,690 87,060
172,370 155,040
257,060 2'2,100
54,570 69,.530
-
3ll 1630 311,630
82.5 77.7
17.5 22.3
SOYBEAN OIL
(rn c.ars of
10,532
9.,-!13 9,113
17, 19,645
15,819 22,&76
33,753 42,521
13,493 4,725
47,246 47,246
71.4 90.0
28.6 10.0
SOYBEAN MEAL
(In hundTcd tons)
5,080
3 t :.48
8,528
14,20:>
22,7J3
5,090
3,448
8,538

22,979
__ 4...:., :'!_2.2.__..!!.LQ:.B-..;;.3 __
27,06:
84-0
16.0
t I ) 062
84.9
15.1
99
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.
( ( ( What happened to the last ten pages. Don't ask
I don't know. - Chas. Drummond ) )
CASt.< I!l
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 t h ~ following illustrations:
Ll\'E nr::J:'!'" CJ\'M'Lt::
Sc:pt
Jnn
June
1\pr
Nov
ICED BRCiiLr:;>_c;
July
Nov
Dec:
- - - - - - - - ~ - - - - - - - - - - - - - - - - - - ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /
S<-pl
::::2 CASH
They will s h o ~ U which direction cash prices shud be trending, and
any deviation from this is subject to analysis. When the cash price
of a commodity fluctuates, the futures price will also fluctuate.
(see also" seasonal patterns" , in appendix).
Nov Sept
Dec
Apr.
/'
Oct
SOYJ1J.)\.'Il OIL
.Jul 11ug
. ~ ~ /Pee
Jan "'-....__/
Jnn Apr /\ ~ c
~ \//
Oct
Sept
BASIS II3
cash and futures is
that only about IO % of the total volume of futures transactions
is settled by delivery. Another difference is that in cash
transactions, the precise grade and quality of the commodity,
as specified in the transaction, the seller has the option
of delivering any one of several tenderable grades. Commodity
exchanges establish a base grade which is deliverable at contract
price. Other grades of commodities may be delivered but at a
specified premium or discount to the contract price.
THE II BASIS II
At any given tilne, there exists various " basis " for each
commodity, reflecting the following factors.
I. cash price for the particular grade of
actual commodity
2. price of the commodity future
3. time of shipment of delivery at commodity
destination.
It is quoted _as the number of points or cents which the actual
cash commodity is trading above or below the price of a corres-
future and this price is determined by the above factors,
as well as what U can derive from the following illustration.
J'U'IMG nit Baryo""' lhr BeMJ ...
-aasrs.. F.-rahltsh an c:cr-rvWt
or ti!ICftUftt tor
tN ,..,,en... of tpeet.
r...! r<koloctuals.
Srlf Oft ller a..su ....
bahliVI an
pt"eel'tigm or tOt"
lh<cak of
r<kol-aab.
AD.IUS'ft ... C z,.....,llf
._ ... y
C"CDatWNG , ..
... aTIC"'\ti.AI. 11."" AMtlf'irrr C,..,.,..,
OP TMl!. wcn
I liPft:IIU....., I
A chnet'llae Mtv1 Cihau ftiCGI fOr Dtc:eMbef ddr.ct'y. at JOO poinu
Or,.., ,...._,I.,... 11>< O.C:C..."'' '"'- Whefo "'Cllllliden 11>< ,.._ ..,.,..,._
tht menulacntrer .,ill De=t'I'IM!' futures. thus fl-.inJ: ttn CID'It &.::1M for Gharl
- '"' olthc - "'"' )0(1,..,.....
/
A CIICIDa Oc.aler lis a manufaun:r ac1ua1 COCDI for Dec:nnber tldMry at 200 fiDims
ahttw the [)ccemt.er lutar&. hehewinJ thll. JWior to Dc:cemba. he will be
abk to f'Qrc.h.-. the Gh .... coc:o. tar left tb.ft 20(\,......... D"'Cf Dec:elllihEr.
A looeir:n _, _, IMkl to 11;. _.,.,ill_..,- ltn-"" a -lc-
t.M Mr. lhe ,....._. is hftos lC fler ......,..S
A chocolate" m'"'faeur,tf. wt.o tub ur- hft ea1:01 buta ;........,_,. ,nca
'""' aclll lVI- ._- lhis ;,_,. - lhc -kco - - - I'Cf
-; irtdlen. _, ltiiiiCI--.
source: Commodity Futures Market Guide -Kroll,Shishko.
Publ. Harper & Row Copyright I973 by Stanley Kroll
& Irwin Shishko. Reprinted by permission of
Harper & Row, Publishers, Inc.
5
II4 ODDS
One o: the more useful charts which can be used as a commodity
trader is the basis chart. Few traders know what a basis chart
is. Some traders follow basis charts more closely than they do
actual price charts, because a change in the basis of a
commodity will indicate much, much more.
Keeping a basis chart is easy. First, record the cash price for
any given commodity . ( Ask U're broker, or use the "Wall Street
Journal" ) . Then take the contract price of the nearest expiring
futures contract and compare that price with the cash price. If
cash is above the futures, one plots on the positive side of a
zero line. If the cash price is below the futures, U plot that
on the negative side of the zero line. Some traders feel that it
is unwise to take a long position unless the basis chart shows
a strong positive and to take a short position unless the basis
chart is strongly negative. The basis chart is often a key signal
to an upcoming trend reversal. At the birth of a bull market,
the basis often switches from a negative to a positive and a
bear it often swings from a positive to a negative. Any sharp
movement in basis *******--* - remember this, ( as well as in
volume, O.I. or anything else that is sharply unusual as a market
force ---- that suddenly hits the market ) indicates a dramatic
change in upcoming futures prices.
THE II ODDS "
By having an idea of where cash prices will go in terms of odds,
U will know where futures prices shud go, because the cash price
of a commodity and the futures price of the commodity move in the
same general direction. In the use of odds, we are asking questions,
like - " How many times has the price of Dec. Silver advanced from
July and December. How many times has it declined during the same
period ? " On the following pages are tables showing monthly cash
price odds. Each month's cash price is compared with the previOus
month's price. For example, the odds of pork bellies being higher
in January than in December is 75 % and a 50-50 chance of prices
being higher or lower in February than in January. For heavy
positioning, this author prefers odds of at least 65 % or higher
in favour of a long or short position, after taking into consideration
all other fundamental and technical factors, especially those
brought forward in this chapter, and using my " flow " knowledge
of trends, and congestions, and using P&L charting for a day by day
ongoing blow by blow portrayal of market activity, ( maybe for the
occasional scalping and trend bucking and pyramiding processes. ) .
ODDS IIS
CMHI l'lHCr: onn!:.
n!':r.J cr.rrLI:

llighcr Lower llighcr Lower
Jnnu;::; 7lt. 2H J:mu;::-y 7St 1S'
FcL1.:::ry 1.2\ SBt :F'<'bnl:;ry SOt
!larch 7lt 2!:'1. l-lil!"C'h .(5:.
l'.pril 116':. 1\pr.il 20'1.
tlay -<2'1. SBt liay SS'l. 30t
JU.."'C SOt SOt June BOt 20'1.
63t July 7St 2St
llugu::\: o;. 3St tiO'i
SH ll6t fit'!t'tcmbcr t.O!:.
Octc..!c:::- 29t 7l\ October Ot
3Ct. 30t 70t
Da:CC!l:,':"tc:-
, ...
..... 75t
!.!2
ICJ:D n no nr.r.s
lli9hc:-r LO".,Cr
l!ighcr Lower
Janunry 77t Jnnuary 0\
72t 2llt Februi't;'
l ....
..
Mnrc-.ll 49; 49':. Milrch SOt
l'.pril t.l\ 59t 1'.prl.l 13':.
SH li4\ Hl'l)'
June 4H 75\
July 69t 3lt .lu)r 8"/\ l3t
61,\
36' August 13\ 07\
Sep\:c,rocr 4Jit 56\. .. ;r.!l;r 2S\ 7S\
Ocl;cl>c-r 23t 77t oci.obc:r 0\ lOOt
lOt No,cln.?cr 37\ 63t
Ht 54\ SOt SOt
I:C:GS PO'I'1'.
lii9hcr Higher
Ja.nu:uy 75t 3H SH
February sc-:. Fcb:r.unt; 6H 23\
Hilrc.h G3t Mnrc-.l'l G""

J.p:i: 2H 7H AprH G91i 31'1.
HOly 41.\ 96t
1r
"'"
Juuc 25\ June !);it, 46\
July 9Gt H. July lSO. est
Aucn:!'l: "19\ 21:; 1ugm:t 3l\ GH
CJ,, 13t. Scj:;..c;r.1'cT lSt; G9\
October 29; 7lt 54\\
38t ..'lbQ:r 3l\
lOt set 3Ct G2l
Each month's cash price is compared with the previous month's
price. The figures are not always balanced because some years
are 'tied'
5
II6 O::>DS

HiCJh<.:r Lcwcr nigher Lo\.Jcr
Gilt Janunry 63t
37;. rcl.>ru<'.:o.")' 21'- 7Jt.
(3t l 1-.;:,;n:h 42t.
J,f>ril 7lt lS'.. J\pril 39t Ot
Muy 7-H lH SOt
,,unc 39t 47 .. 32t. SC't
Jul)'

July l C\: ft4!t
]\UQU!:t .(2t 47t JI.UCJ\lSt
ScptC::".bC'T 37'i 45'6 SEOJ:"ter .ber 6Ct 26\.
Octobm o; !l2t October 7H 26':.
Novcr.1hrr 5!>t tlovmnbc:r en.
64 DCCC'It.l.JI'!r 68'0 26'.

lli g!lcr LOI'l'Or lligher La..ier
January 66';. 2\lt .1 Oln\1ll%')' GGt 2lt
February 55\ J"cl:l::-:m:;.:y 61; 36\.
Mllrch SO\ 42'6 50'6 39t
7\pril 39\. S3t S7i 3Gt
!'.ay 3:.! .. C,H !'1ay 46>.
June 1St 7-1':. June 46t SO>.
.Ju)y

SSt July S1t ..
!>t. -'2\ }\UC)\l!':t 36\
GGt 26\ r Ht
October 74t 21'. Cictober 3.6\ 54\
NOVP.ml>cr ll\ No"cn:b c:r 86\ lH.
Peccmbc': ll\ Pccmr,!)e:::- 75\ 25\
SOYTJ!:71H OIL so:mrAN l';'Ci.J.,
llighcr Lc.c.r l!iCJhCT I.oo.er
Januury 32t "1i:ln\1f:l"J' !iS\ 3n
Fcbruury 50". 42 .. 37t 62\
so .. )'lzu:ch 4-H. 51':.
llpril 3tl'1. 11r>ril 62'1. 37t.
He)'
.f) (it;,
42':. Hay 516 H._
June GSt. .June 66t 33t
July July 70'1. 25;.
1\ugu::<; 19'! 7\ugu!;t 40\
3H Sept.cm..c::- 37;. S!lt.
Octol.Jl'l' SOt 4Gt OctO'bC!r 18\ 77t
NOVC:liU.>Cl'" SOt Novembc-::.: S9t. 37t
Dcc:cr.lbc-r 3St Sl.t 70t
ODDS I!7
01:1\::r.;: .1tllCI':

lli!)hcr l .. rn!CT 'fiN: !I) .,her 1/.'>wcr Ti(e
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reo 36! 27; reb 0:2t 46t l2t.
9t
srr
...
J.;ar '.2\. 46':. 1;-t
Apr H':. 36':. <1<.':. lpr 29\ l7t
N::l)' 27':. 3Gt 36!. J.ll')' ol!)'. 29; 22':.
.Jun )'!. 9t 73t .Jun SG':. ?.!l .. l!it
Jul. lOt 36t 4Gt .Jul o1H
Aug 27'!. 0'; 73t
'""J
32':. 19\
lB':. Ot 82t Srp SG':. 2!1'l.
35t 9t. SSt Oct Glt l7t
NO'\' let lBt Gt.t Nov 37-.


Dec 20':. lOt 70t 37':. l<l\

Jlighct La\cr Tied Hitther Lower 'l'ieci
Jan SH 4lt 7\ Jnn S4t. l2t
Feb 3Gt S2t 12" :reb sn l2t

.,g;
39t. 12; Hnr l2t
Apr H'l. 44t Apr 3.3\\ 55':. 12 ..
Ht 4G'I. 12t tilly 4'Gt l2t.
Jun 56; l2t Jun
.,!),
39';
Jul GH
2.,.
Jul .04\ Ht l2t
Aug
., ....
39\ 17'1. 1mt;? sc;;, 32t 12\
Scp 46'0 41\ l2t Scp 46t
oct o16t 39t. 1!;':. Oct Ht 1n
Nov H'. Ht 12";. Nuv 51':. 3"/'; 12t
Dec 46t 41':. l2t r>cc 39t Slt. lO\

Bighc:- '!'ice
J;:m 3(1';. 2t.
Feb 38";. 2;
J.l:lr 77: 21':. 2t
llpl
30":. 2\.

G.3: 37';.
Jun
40t
Jul 2t
Aug ?.7'1. 73t.
Scp
30t 70':.
Oct.
sn-;.
Nov l,(i';.
42t. lOt.
Dec
:::rs
ch.Mactell.M ti..cA
tlte.n.d actio t
type. 0 r) tJt e.n.do
t!te.n.d .U.n.e.
tlte.n.d chan.ndo
.t/'te.n.d valicU.:ty
tlte.nd and 0.7. , vo.tume
and tlte.n.d
U6ing tlte.nd action
bJz.eak.a.r oay .6
gap-6
.6 :tr .. a.,i_g h:taway .o
when a bz.e.nd .o:t.il. hM .6tlte.ngth
tlte.n.d we.ak.e.n.ing
bz.e.nd bu.c.k..ing
ta.k..ing
wha..:t .OtJ.6teJnJ.J woJLk. be.:t in :t/z.end.ing mcvz.k.eto
CHAPTER SIX
TRENDS
TREN'DS !!9
CHARACTERISTICS
There are three types of trend.
I. downtrend
2. uptrend
3. sideways believe it or not )
On a price chart, a trend may be considered to exist between any
two points on essentially different planes. A trend may also be
considered to exist between any two points on essentially different
planes, even when interupted by one or more congestion areas.
Direction is the initial way of identifying trends. As can be
expected, there are trends within trends. Contained within a maxi-
term trend are one or ~ o r e long-term trends, ( of month's duration
which in turn may contain one or more medium term trends of days
to weeks to months, which in turn may contain one or more short
term trends on a daily to week basis, which in turn may contain
one or more mini-term trends on a intra-day to day basis.
Trends are constantly being broken, either by counter-trends or
by congestion areas. The shorter the trend, the less significant
its termination to the over-all price structure. The point to
remember is the possibility of being confronted with trends of such
combinative characteristics as major, medium term and minor,
maxi-term.
Nominal price moves or trends are occuring all the time and can be
found anywhere. Essentially, nominal trends constitute an area
where congestions are made. Minor trends are sometimes found in
congestion areas, and often connect them. Intermediate trends are
almost always found in bottom or tops with consolidation areas, or
directly connecting bottoms with tops. Major trends are nearly
always found connecting bottoms with tops. A major trend usually
emerges from a bottom, wherein the price has been unduly depressed
for an extended period of time or in a top wherein the price has
been unduly elevated, and not necessarily for an extended period
of time. The steeper a trend's angle of ascent or descent, the
sooner that trend will reach its ultimate price objective. A n ~ ,
correspondingly, the shorter will be that trend's life. Just as
there have been spectacular commodity price moves within brief
periods of time, there have also been modest price moves over long
term or maxi-term length.
The basic tenant of the chartist is ..... "a trend continues until
it stops. " Once a trend has commenced it tends to endure at
least until a significant counter force intervenes. One important
characteristic nature of price trends is that once established,
they tend to persist for long periods of time. Prices tend to exhibit
more sustained price trends than wud be expected on the basis of
pure chance.
6
I20 TRENDS
It is difficult at times to determine the trend direction of
a given market.
A study of markets clearly indicates that all bull markets are
periodically interupted by minor downward reactions and that
minor rallies are standard elements of bear markets. The extent
of the minor counter-trend depends on the magnitude of the
steepness of the existing major trend, and the price level and
current technical condition of the market. The chartist must be
aware of both the major and intermediate and minor trends and
must at all times be able to distinguish between them. It is
primarily the major market trend that provides the basis for an
extended price move and this shud concern the serious market
student.
Some trends are straight, some are curved or irregular or poorly
defined, as others are quite orderly and amazingly uniform. A
trend's simple characteristic consists of highs and lows attaining
levels above and below the previous highs and lows.
Any major trend, up or down tends to start slowly and then accelerate
sharply as the momentum of buying or selling accelerates. Trends
almost invariably exceed one's wildest dreams or any chart prediction.
However, there is one little factor, that must always be kept in
mind and that is that some cursory studies ( Commodities Futures
Game, Tewels, Harlow, Stone, HcGraw Hill publ. ) have indicated
that commodities are without important trending characteristics as
much as 85 % of the time, and this will be the subject of our
next chapter, on congestions.
TREND ACTION
A trend is a kind of stable disequilibrium, which has a
stability of its own, which restricts the movements of the prrce
within the boundaries of what's sometimes called a trend channel.
Clearly, prices are unlikely to move in the same direction every
day, day after day. There are always profit takers - or whatever -
which is why U get minor reactions. Long and maxi-term trends
without congestive interuptions of major importance are virtually
non-existent. ( Most traders sooner or later becum serious congestion
area students - and U shud too . )
This chapter is on the various aspects of trend action and it
behooves the student to becum fully aware of all the ramifications
of the different trend activities. We are involved with I) trend
:2!
channels, 2) trend lines , 3) run-away markets , 4) normal
corrections e.g. 50 % retracernents , 5) trends ,
6) maxi, major, medium, short, and mini-term trends, and,
7) trend
What is very difficult is tc decide whether the uptrend, down-
trend has stopped. It is by no means unusual for a major trend
to be interupted by a substantial pause, as a new
equilibrium is established. This pause is quite likely to break
the first steep uptrend line. But, until a new confirmed downtrend
is established it is rash to assume that the previous trend is
reversed, altho' it cud be prudent to adopt a neutral stance at
any rate, until the equilibrium has been upset & a new trend has
been confirmed. Confirmation of a major uptrend consists in a
rise to point "a"in the following diagram, and a fall which is
smaller than the preceding rise and a new rise to a point
above "a" .
T
There are trends within trends. Contained within a maxi-trend
may be one or more long term trends, which in turn may contain
one or more medium term trends, which in turn may contain one or
more short term trends, which in turn may contain one or more
mini-term trends. Trends are constantly being broken, either by
counter trend or by congestion areas. The shorter the trend, the
less significant its termination to the over-all price structure.
trend liJle
I22 TREKJS
Some seasoned, veteran chartists will usually not oppose a
trend unless it has gone thru three separate stages.
First - an uptrend - the initial thrust, - then a period
of consolidation, - second, - a second upthrust and another
of consolidation and then finally the third upward
movement which often marks the culmination of a major move.
( the Elliott Wave. ) This rule of three usually works better
in bull markets than in bear markets. ( Bull markets actually
ap_t>eaz. in this manner ..... a manner which is similiar to the
pattern followed by nature for most living things. - it consists
of a slow start - a gradual acceleration in growth that terminates
at maturity. )
Following a very steep move, a normal correction may only serve
to alert the sharp into a more moderate trend in the same direction.
As a general rule, prices have a tendency to cruck 50 % foilowing
an extended price move. A correction of less than 50 % is evidence
of a powerful trend while a greater than 50 % correction is a
possible form of a reversal. Furthermore, a 50 % correction from
a steep move corresponds frequently to a strong important support
area ( see congestions. )
and, it is very likely that the
correction will be altered at
that level.
A run-away market and a high market will differ from
the action that occurs in a trend channel, by its nature of
consisting of multiple consecutive days in the same direction,
occasionally broken in the opposite direction of the trend. /
Because of the strong pressure of a run-away, two consecutive
days in the opposite direction is rare. Therefore, two consecutive
days closes in the opposite direction is U're first signal that
the run-away is potentially over.
/
/
\
TYPES OF TRENDS
There are three types I. uptrend
2. downtrend
3. sideways trend
There are three kinds of trend movement
I. trend channel
2. run-away, breakaway market
3. congestion movement trends
The classification of trend movements are
The definition of an
/(I
'
I. maxi-move
2. major move
major counter-trend
3. medium ( intermediate ) trend
medium counter-trend
4. minor trend
minor counter trend.
5. mini-trend
mini-counter trend
upward trend wud be : - successive
highs are higher and
successive isolated lows
are higher.
isolated
--:'isolated lows
The reverse is true for a downward trend .
.. --- ------
--- ------. ..
e.g. isolated low e.g. isolated high
6
!24 TRENDS
A must be in existence for at least two months to signal
a maJor trend. A trend can last from days to weeks, minor
trend a day or 2 or 3, and a mini-trend day to day. A maxi-move
lasts months on end.
Determining trend : - a trend's simple characteristics is
successive highs and lows obtaining levels above and below previous
highs and lows. When two or more lows, for example in an uptrend,
can be connected by a straight line,
I I

a trend is said to exist.
This ideal trend action is rare. More typically, trend action will
assimilate the irregular spurts and set-backs. Stated very simply,
the market can move in only three possible directions - up - down-
sideways. Altho' this may sound obvious, the fact remains that it
is actually difficult at times to determine the trend direction of
a given market. A study of past markets clearly indicates that all
bull markets are periodically interupted by minor downward reactions
and that minor rallies are standard elements of bear markets. The
extent of the counter minor trend depends on the magnitude of the
existing major trend. The price level and the technical condition
of the market can be taken into consideration. The chartist must
be aware of all the trend types, and must at all times be able to
distinguish between them.
It is primarily the major market trend of a minimum of two month's
duration, which provides the basis for the extended price moves,
and which shud concern the serious market student, and be part of
his/her trend analysis. ( Cursory studies reveal that markets are
without significant trending action 85 % of the time and that the
market is in congestion of one sort or another during that time.)
In anticipating a major trend, one can only assume its
and make use of break-aways, dead-runs ( next chapter ) , broken
trendlines and modus operandi involved with trend reversal analysis.
Experience will dictate the likelihood of a major trend evolution.
Obviously, if prices have been presumably depressed a considerable
length of time and bottoming formation appears evident, and
fundamental factors attend an upward move, any movement away from
the bottoming congestion is to be anticipated as a commencement
of a major uptrend, and will remain so until validated or invalidated.
Bull trends are always arrested in a significant pattern and this
is dealt with in the chapter on trend reversal. So, inbetween the
I25
top and bottom of the price of a commodity for a given year, we
have a trend, either going up or down, and inbetween those two
prices we have various congestions and trends. In viewing prices
on the broader spectrum enables the trader to assume the evolution
of a major trend, taking into consideration and recognizing the
characteristics of action and being familiar with all of
the factors offered in this chapter. For example, a combined rise
of price, O.I. on high volume has bullish significance in the
early stages of a bull move. Each time a market finds unyielding
support, an uptrend is gaining strength. Each time a market finds
unyielding resistance, we have a downtrend. Support and resistance
exists by varying degrees and each by itself provides the reality
of maxi-major-medium-minor-and mini term trends and countertrends.
The biggest problem for traders is when to buy and sell. It is not
that difficult to predict the direction of a current trend, or that
it may reverse in the near future. Riding a trend is relatively
easy and one method this author respectfully suggests is the
utilization of P&L charting.
TREND LINES
When three or more isolated lows during an uptrend can be
roughly connected by a straight line, an uptrend is said to exist.
Such an ideal trend action is not too common. More typically, trend
action will assimilate irregular spurts and set-backs. Internal
trenc lines can be useful when trend action is so irregular. To
draw a trend line requires concatenating at least two points. This
shud be considered a provisional trend, then as the chart pattern
develops, the technician shud be alert for either a confirmation
or a rejection of the original trend projection. The interesting
feature of this method is that the line drawn with the straight
edge defines the support level of
/ /
/ prices as they make upward headway.
An ideal way is to extend the trend
line one week forward, until they
are technically justified.
6
!26 ':'RENDS
,. .. .. - .. --- ...... ------- ---- ---. t
-: .. -: ot
. --... ----- ------ ------ . ----- CDIIIODlTr DC. -
---- - -- --------------:-- One Ul>eny Plau. K.'J.JOOOE .....
--- ... --- . --------------l-- ------------
------f------- SILVER MAY 1971-N.Y. '
EACI-f HORIZON1AL LINE= 200 ,OINT$
-- -- --------. --- ""7 - - -- - . --------r-------------;--. - ---
-- ----------; --- ----- I -- --;----

!----- --! ------ ---- -- ---- r --- ----------2to
__ : . ----

---------..... ---- _______ ,L_ ___ -- ..... -- ...
-- -----
-- ------- ! ----- ---- ______ __J.._ ---- -- ----------
: I
--------- ----t ---- .. --- .. - ....... ---------
- _-_: ::
-- - _:=-=l=-::=:rJFM :- ----
- : = t .= ... -----....;.......
-- .. -- - 1 - ------ -- --
-. -- ----1
I
.,.....--
----=lf------==::1970 .. -;-1, __ , ---;---..-
- ' : I J I i
I
, ' .z, :to I ' 20 I 3
1
,,. I' 15 ,.
1
12 261 10 24 7 21 I
1
11 I 2 16
.JAN. FES. MAR. Af>R. MAY I .JUNE I .JUI...Y AUG. SEPT. I OCT.
.
I ' o
SUiiAR liD. 11 SEI'T. 1971.JI.Y.

' ' '

/
I ' ' : ' I ; I 1 . ' :
., .. .., .. 10 , .. 1 , ,, 1 .. l, 1 u 21 u a
.U. Y I .IUNE I .JULY AUG. SiE". oc;T. I NOV. I DEC:.
r
/
/.
_t
)0 13
I NOV .
=r
t
I
t
u
0
-
T
TP.=:NDS I27
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. 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.
i , : I n;.;
. ' ' I litO
. :

t\:" 1 1 t I ' _,.-
,, , ;II , i I --,..!.
-.- ....,__-. -.,...!!;.- J :r .. , - -- .. - _._ .. _ -
1,-:f..JUu;::::,.:.:_;_ --'-t11 . ' '
; , w ., , mrrrllr--\' li. b _..,. SO
. t " :1:: 1.".' .
-

\
\
There are three tests of trend line validity.
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
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
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
~ R E N D S !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). (if 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
6
I30 TRENDS
a serious penetration of the upper wall also has a serious
implication as it constitutes a trend and signals
the final stage of the move.
-
--
--
-
-
Sometimes, lines connecting isolated highs and lows, -;if 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.
IS 79
A"R. I
ll 271
t.IAY
':'RENDS !3!
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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.
6
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 a n d ~ i s 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.
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
TP.ENDS :: 3 3
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.
6
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
TRENDS 135
for ?rice reversal than for p ~ i c e 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,
6
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.
~ ~ ~ ) { ~ t e r trend
r 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,
I37
as the overall trends. To sum up, a "v" or
inverted "v" will tenninate in ::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 if 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
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 f

trend
/-bucking
support

6
: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
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
/
\_ don't short
~ # J \ M M A here !
during a technical
reaction following
a major upside
breakout.
6
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 consol-
idation 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 subsequ-
ently filled, it may still prove to be significant, altho' somewhat
more caution is necessary in attempting to evaluate the
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.
T P Z N ~ 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.
6
I 4 2
TREND 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
also consider
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
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.
CHAPTER SEVEN
CONGEST IONS
Mgume.nt , pJU.l..o.oophy
a.dva.11-t.a.g e1.>
:tJ..CA on
c.a.-t. e.g 0 tU. el.>
a.c.tion
a.na.ty zing c.o ng e1.> :tJ..o no
0.1. and volume.
rn-i.d-wa.y c.ong 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.
5 0 % 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 a.nd :Otend
d.a.y c.o ng e1.> tio n
145
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,
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.
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
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'
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 ~ n t i r e approach is
based on the assumption that certain repetitive patterns of price
and action will often occur before significant price movement.
7
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 ~ ~ e current
status of the market.
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.
I49
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

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
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 by closing prices and are both
immediately followed by two consecutive closing prices in the
opposite direction, a commodity is in congestion.

days
low
market
is now
in
congestion
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 )
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
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
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 the congestion area evolves and
I
.... J
CONGESTIONS 153
most of the activity 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

to
i
II resting
area

I I
I I I I
I I
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 ~ i l l
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
With #I
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
find a chart somewhere and talk about the specific chart
can U find in the following chart
..-. -

c..ft ,.,...
CDIICIDZ,. CIWI:r SEJ!nCZ
A "'ekl:r ot
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Ht.runn tlJ
HI
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I 111

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11!1
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23 I 20 13 '' 13 " 31 1 21 12 ' 161 ' 23 ,- 7 21 I 16 I' 1$ 79 13 "I 10 2 I
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With clue #2
tops and bottoms always take longer to form than
consolidation areas. ( except island tops ) . Bottoms usually
take longer to form than tops. Consolidation areas rarely last
more than a month - usually 5 - 20 days. Tops generally linger
from one month to six months. However, tops such as island
I56
reversals and inverted "v"'s may last only 3 - 4 days. Bottoms
may form from one month to several years. If the duration of
the area approaches patience testing proportions, a
trader shud be prepared for the emergence of a major price trend
- this patience testing is the hallmark of tops and
bottoms.
With clue #3
in the initial stage of the congestion area, after a substantial
rise or decline , fluctuations are apt to be wide and hectic, in
reflection of the market's struggle to adapt to a new price level.
Later, price fluctuations will assume more normal characteristics.
If price activity tends to occur towards the lower level of the
congestion, the implication is that important buying support is
being given the market and that the next trend will be up.
Conversely, if price activity is towards the upper level of the
congestion area, the implication is that important selling pressure
is being exerted on the market, and that the next trend will thus
be down.
With clue #4
altho' price volume and price change activity seldom supply
clues concomitantly, there is a strong correlation in what their
clues indicate and imply. Therefore, if a higher volume tends to
occur towards the lower level of the congestion are in the latter
stage of formation, the implication is that important buying
support is being given the market and that the next trend will be
up. If heavy volume occurs on the upper level, the implication is
that important sellingpressure is being exerted on the market
and that the next trend will be down.
Special note: -because after a substantial rise or decline,
price.fluctuations are apt to be wide and hectic in reflection
of the market's struggle to adjust to the new price level, then
will gradually simmer down,,,, triangular formations will occur
with great frequency. In fact, the triangle is the only pattern
that customarily turns up both as consolidation and price reversal
patterns a symmetrical, equilateral triangle does not
indicate the direction that is ultimately to be taken by the
ultimately trend. An ascending or descending triangle
does ( see chapters 8 & 23 )
With clue #5
the use of P&L charting in resting area analysis re: chapter 9
I
_J
CONGESTIONS !57
CONGESTION, O,I, AND VOLUME
After a price rise,a congestion area may be either an area
of re-accummulation or a top. If O.I. continues to climb while
prices start levelling off, a top shud be suspected.
After a price decline, a congestion area either can be an area
of re-distribution or a bottom. If O.I. continues to be liquidated
while prices are levelling off, a bottom shud be suspected. In the
first instance, the bulls' domination is being effectively challenged
by new sellers. Sometimes, in a topping formation, a falling O.I.
as prices increase, signifies that there is weak buying and that
the effective rise in price is occuring as a result of short covering.
This is the final stage of a bull and usually exists prior to the
top formation. If O.I. continues to rise and prices go sideways,
within a congestion area, then a top shud be suspected. In this
second instance, the bear's domination is effectively being
challenged by new buying, for the moment.
Because congestion areas are assumed to provide support and
resistance, usually as a result of action taken by traders who
initiated positions within the.area, it follows that the volume
of activity within the congestion zone is an important indicator
of the support and resistance of the congestion area. The more
traders that have an invested interest in prices within the zone,
the greater will be the expected buying or selling power shud a
move occur out of the congestion or return move into the congestion.
Congestion areas also give the trader the opportunity to analyze
what commercial interests are doing in the markets. The commercials
are always in the markets, spreading and hedging their actual
They are the largest short sellers in any market. It
is possible to keep track of how much short selling is taking
place thru the use of O.I. within the context of short sellers.
The O.I. figures will decline if, and only if, these short sellers
are covering their shorts. It will rise if and only if short
sellers are increasing their ahorts. Since we know that the
commercials are responsible for the short selling, we can correctly
say that an increase in O.I. implicates an attitude of
on the part of commercials if prices are in a congestion period.
A decrease indicates an attitude of bullishness on the part of
commercials. The only exception to this rule is during a bonified
bottom formation, wherein very few shorts existed by the commercials
to start with and volume is light and an increase in o.r. is due
to the commercials actually going net long, which is an unusual
move, because commercials generally speaking are net short.
During price consolidation or resting areas, one wud make use of
O.I. to see what the shorts are doing - what the commercials are
doing re: their short positions, as they hedge against their
7
ISS CONGESTIONS
'actuals' , - one wud analyze the and O.I. activity
the resting especially one of longer duration.
if during a resting area, 0.!. suddenly declines, we
are being told that commercials are buying back their short
positions and that they feel that prices will break out of the
consolidation on the upside. By the same token, if are in
a trading period and o.I. increases, it tells us that the
commercials are adding to their charts and hedging their actuals
and that they are looking for prices to break out of the consolidation
on the downside.
The following is an example of O.I. increasing, as Cotton was
consolidating, giving every indication that the commercials
were going short and cotton was forming a top and that
prices wud break out on the downside which is what happened.
"

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!

.
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-------- -.. --- ----- ------- -
1171
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CCIOalnT c:HAJC' suncz
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A "klr Pw.al11cau of
CCICIICIDUT aESJ:UOI SliC.
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CONGESTIONS I59
This is a heavy, heavy chapter. - keep up the good work,
if U're still with me.
MID-WAY PATTERNS
After prices have travelled a considerable distance, a general
feeling can develop that prices have gone up or down far enough.
Call this a psychological quirk of traders if U wish but this
type of thinking becums an important market factor with new
buying and short covering, with new selling and with long
liquidation developing on this assumption. During an up market
and the prior trend is up, it favors the emergence of the trend
in the same direction after the resting area has completed itself.
A most common mid-way pattern are the flag/pennant, which form
after rapid vertical moves. Note, however, that if after a gentle
market move as opposed to a precipitous market move if what
appears to be forming is as a pennant or flag, the orthodox
technician shud obediently try to visualize another pattern.
Flags and pennants usually occur after a rapid price move. The
pennant and flag usually slope in the direction opposite the
preceding fast move and they seldom persist longer than two
weeks. Pullbacks and consolidations usually last from 5 - 20
days. Volume shud be smaller during the formation of the pennant
or flag than during the move that preceded it. The fact that
flags and pennants ( and wedges ) customarily slope against the
prevailing trend makes sense when realized that a consolidation
area is often simply an area of price corrective action caused by
a market sprint which overran a price level that cud then be
supported by the law of supply and demand. Corrective action is
by implication trend countering.
The next mid-way pattern to be considered are the triangles w ~ i c h
by the way can be either continuation pattern or a price reversal
pattern. In the context of triangles being a continuation pattern
one wud assess the development of what is called as ascending or
descending triangle. ( see chapt. 23 ) . The ascending triangle
is the most reliable to follow in an uptrend and conversely, the
descending triangle is the most reliable to follow in a downtrend.
Triangles more often than not are continuation patterns.
The ascending triangle, for instance conveys a simple picture of
what happens when a growing demand encounters a large offering at
a particular price. The demand persists and the offering will
i
160 CONGESTIONS
eventually be absorbed by buyers. After complete absorption of
the offering, prices advance rapidly, but before this happens,
old shorts and new shorts are lured into the picture. The shorts
will have triggered a series of brief declines which will then
have attracted new demand and which in turn stimulate the succession
of rallies back up to where a large but gradually diminishing
supply existed.Since the bullish forces pre-dominated each decline,
it will be met with new demand at progressively higher prices. They
appear when there are simultaneous short term uptrend and downtrend
lines which intercept.
large offering gradually diminishes
The conventional chart interpretation holds that triangles signal
an impending large move, with the direction of the move likely to
be in the direction of the steeper trend line. Volume will
decrease near the apex.
Triangles appear to be fairly reliable indicators as mid-way
patterns, especially when no more than 3 or 4 oscillations occur
before the breakout. ( Price reversal triangles can consist of
ten to twenty oscillations. )
Another form of triangle that will occur as mid-way pattern is the
symmetrical - equilateral triangle.
This mid-way pattern does
not indicate the directipn
to be taken by the ultimately
emerging trend. However, if
the prior trend is up, this
favors the emergence of the
trend in the same direction.
A second weighty clue is the
fact that there is not sufficient broadening in equilateral
triangles to suggest a price reversal. U shud have a broadening of
scope in symmetrical, equilateral triangles, ( ditto for ascending,
descending ) , before taking seriously the of a price
CONGESTIONS I6I
reversal.
Triangular formations occur with great frequency, since it reflects
the market's struggle to adjust to the new price level, as it
gradually simmers down. In fact, the triangle is the only formation
that customarily turns up as both continuation and price reversal
patterns. Also, it must be remembered that consolidation patterns
far outnumber price reversal patterns. Take a look at any chart,
if U will, to see this.
In analyzing a mid-way pattern, use the general rules of SO %
retracement. It follows that, after an extended price move, any
correction-of less than 50% is evidence of a powerful trend and that
the emergence of a trend shud be the same as the previous trend
that exists prior to the mid-way pattern. A greater than 50 %
correction cud possibly form a triangle and this greater than
SO % correction is a possible form of price reversal.
Note also that during the formation of flags, pennants of triangles
as mid-way patterns, that if the correction corresponds to a
previous support or resistance area re: former congestion area, a
discussion of which is to follow, that the use of this support and
resistance enhances the interpretation of the mid-way pattern as
actually being a mid-way pattern and a continuation pattern format.
In appreciating the emergence of a mid-way pattern, one must be
aware of the phenomen known as volume blow-offs. As the prices
enter the congestion area, these volume blow-offs signal the
commencement of the flag, or pennant or triangle. Before one can
have a price reversal, one will usually see a series of alleged
volume blow-offs, and these precede the valid .volume blow-off
as a signal to the end of a bull or bear market. Also, it is not
uncommon to see in triangles, a volume blow-off of moderate substance
which signals the termination of a lengthy counter-trend.
A splendid opportunity to buy a market is a market wherein there
is volume drie - up during the consolidation pattern at which times
signal the termination of the countertrend.
Being aware of the activity that occurs in mid-way patterns, one
can assess the validity of the pattern as it signals an ensuing
move or as the development of a reversal patterns.
7
Reviev.' o:: mid-way patterns
mid-way patterns prices that have travelled far enough
if prior trend is up or down, it favors similiar emergent trend
mid-way patterns occur after rapid vertical moves
a gentle market move negates mid-way pattern validity
pennants,flags,wedges, slope opposite to the preceding fast move
mid-ways seldom persist 2 weeks - usually 5 - 20 days
an ascending triangle in up market denotes uptrend continuing
a descending triangle in down market denotes downtrend continuing
a symmetrical triangle may signal upmove in an up market or it
may be a reversal of an up market ( reverse for down market )
triangles indicate mid-way action with 3 Or 4 oscillations
IO - 20 oscillations signal potential reversal of triangles
a broadening of scope is essential in determining all triangles
as potential reversals
triangles occur with great frequency
consolidation far outnumber price reversal patterns
validity of ned-way patterns is assessed by analyzing 50 %
correction rules and their relation to nearby support/resistance
a series of alleged volume blow-offs usually precede valid volume
blow-off
Now, what U shud do, is do the above for every section in this
book, and create U're own manual, appropriately labelled, page
and topic for easy reference to this book and to U're manual )
How about it ? Afraid of a little work ?? )
Come on ! ! !
U want that 12 million dolla:s in eight years, don't u ?
CONGESTIONS I63
END - RUNS
An end-run is a sudden trend reversal which soon fully pierces
the congestion area from which the prior trend recently emerged.
back to congestion
A congestion area is a
stand-off between buyers
and sellers which may last a short
time or for several years. Congestion
areas have been submitted to considerably more
exhaustive study than any other aspect 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. The longer the sideways
movements last the more we can assume that old positions are being
liquidated and new positions being established within the constricted
price range. Therefore, when prices finally do break out of a
congestion area and establish a new price trend, those who are on
the wrong side of the market will be anxious to get out of their
positions. Consequently, we have a continuation of the development
of a new trend.
In the case of an end-run, it is that prices sometimes have
advanced or retreated out of the congestion too rapidly for
its own good. This phenomenon is known as an end-run.
The longer the congestion area has developed, the greater will be
the number of traders with new positions who wud have losses in
the development of prices against them out of the congestion, and
the greater the number of orders will be placed in the market to
cover, just outside the congestion area and the greater shud be
the emphasis to-the price move. Accordingly, end-runs can be rather
dramatic. Actually an end-run can occur at any point. An end -run
which occurs subsequent to break-outs from a congestion area that
contains no top or bottom characteristics is fairly easy to foresee.
End-runs occuring just above or just below top or bottom formations
are more difficult to anticipate. When prices stall shortly
following a breakout and congests, a trader is warned that a prior
relationship between buyers and sellers may in fact be in the
process of major alteration. Therefore, good action tends to
develop out of long periods of congestion.
7
!64 CONGESTIONS
However, durin; a re-accurnmulation or re-distribution,
traders sometime expect prices to continue their ascendant or
descendant course, but are deceived by the sudden trend reversal,
which is the end-run. These are really traps. The market may
adjust and suddenly turn again in the direction previously
anticipated.
For example, the market is re-adjusting to re-accummulation and
prices suddenly flutter down briefly. The movement stalls,
further congestion occurs. The price action will likely revert
to follow the major trend.
ANTICIPATING THE DIRECTION OF THE BREAKOUT
To start:
I. Study the major market trend - if the major market trend
is up then congestion areas at 50 % retracement in
areas above or below previous congestion areas, andthe
pattern of the congestion denotes that the congestion
is but a pause or not a reversal in the major market
trend, then the next trend will be up.
** ( Major trends are identified by fundamentals,
major trend lines, market momentum, market
psychology, and all other technical applications
in this book ) . ( This author uses a high/low/close
monthly bar chart) .+weekly.
2.Study of the medium term trend - the same approach is taken
as in the analysis of the major market trend.
** ( This author uses a high/low/close weekly bar
chart and applies the same technical rationale
as if it were a daily high/low/close chart ) .
3. Look at the price level of the congestion area.- once again
is it 50\ has it anything to do with
old congestions,, are the fundamentals still bullish
bearish,,, what is the support/resistance and old
support/resistance ( less effective ) and how are
prices reacting to 'news', .odds, seasonal,probabilities.
Do U're research.
CONGESTIONS I65
~ . Hhen the preponderance of trading occurs near the bottom
of a congestion area it indicates that offerings
are being well absorbed and the market is likely
to break on the upside and conversely, a market in
which thepreponderance of trading activity appears
near the upper level of the congestion area, prices
are more likely to break out on the downside.
5. Breadth of congestion area
- the wider the congestion area after an extended
price move the more the likelihood of a price
reversal
6. The pattern that evolves on the chart from the congestion
- is it flag, pennant, wedges, triangle ?
The biggest danger in boarding a trend during its period of
consolidation - resting area - in anticipation of the continuance
of the trend is when the anticipated consolidation areas does not
turn out to be one and evolves as a top or bottom instead.
A long term consolidation area is a rarity, therefore, sideways
action that extends beyond three months shud be regarded with
suspicion. Tops and bottoms always take longer to form ( except
islands and "V"'s ) than continuation- consolidation- resting
areas. If the duration of resting areas reaches patience testing
proportions, we shud be prepared for the emergence of a major
price reversal. In the latter stage of a resting area, if a. hi.gher
volume tends to occur towards the lower level of the congestion
area, tO repeat, the implication is that important buying support
is being given the market and that the next trend will be up. If
very heavy volume occurs at the upper level towards the latter
stage of the formation, the implication is that important selling
pressure is exerted on the market and that the next trend will be
down. Because after a substantial rise or decline, price fluctuations
are apt to be wide and hectic in reflection of the market's
struggle to adjust to the new market price level, then will /
gradually simmer down.
Triangular formations occur with great frequency. In fact, the
triangle is the only formation that customarily turns up as both
consolidation and price reversals. Of all consolidation patterns,
the ascending triangle is the most reliable to follow in an
uptrend and conversely, the descending triangle is the most
reliable to follow in a downtrend. The wedge ( chapt. 23 ) is even
more u s e ~ u l when spotted. It is frequently the final consolidation
area prior to the formation of a major price reversal. Flags,
pennants are by nature corrective action and by implication trend
I66 CONGESTIONS
countering, and accordingly, one can expect that with formation
of these patterns that the breakout from the pennant/flag will be
in accordance with the prevailing trend which developed the
pattern. The prior trend enhances the emergence of the trend in
the same direction. ( In anticipation of a major breakout from
a top or bottom formation, with regards to the pattern of head
and shoulders, refer to chapts. 8 & 23 )
If the market still has basic strength, the bottom of a new
congestion area will often just be about on par with the top of
an old one. This is usually a sign that the market is still
basically strong and that prices will break out of the congestion
area to the upside.
If the congestion area has prevailed long enough to be widely
recognized, a large number of buyers and sellers will have
accummulated in the wings, ready to jump in the market every time
the congestion area's upper and lower limits are approached.
Consequently, for example, a downside breakout, many buyers will
have to be satisfied , but of course as soon as the buyers are
satisfied the market will breakout towards the downside.
area of the activity
congestion area
quiet area
finally satiated

Most resting area trend aborting is done by those traders, who
already enjoy sizeable profits in the market. New position takers
tend to be scarce or are apt to view the market as one in which
they have already missed the boat. Many seasoned traders avoid
positioning markets in of breakouts. They claim traders
are better off waiting for the markets to tell them what to do.
There are some seasoned traders, however, who position markets in
CONGESTIONS I67
anticipation of market breakouts, but profits in this type of
positioning are of only minor attraction to these tBaders. What
they consider important is the added confidence enjoyed in markets
they have operationally anticipated. Most of these seasoned traders
are trend following traders. This author feels that one shud be a
seasoned trend following trader and a seasoned congestion area
trader and a seasoned trend reversal trader .. there's just
the three ..... and enjoy the marriage of the three.
Special note - "gaps" , the rule here is that prices move out
of trading areas in the direction
of the most or largest gaps. ( Chapt. 23 )
There's more on this in chapt.9 re: P&L!
ANTICIPATING THE EXTENT OF THE BREAKOUT MOVE
The longer the sideways movement lasts the more we can assume
that old positions are being liquidated and new positions
established within the constricted price range. Therefore,
when prices finally do break out of the resting area and the
new price trend is established, those who were on the wrong
side of the market are anxious to get out of their positions.
The longer the area, the greater shud be the number
of orders placed in the markets to cover and the greater shud
be the emphasis to the renewed price move.
If after a breakout, the volume subsides and the trend proceeds
on its way, then the breakout was indeed valid. But if the volume
remains high, or close to what occured on the breakout itself,
and the trend promptly reverses itself, the breakout's validity
will be left in doubt
If in an uptrend consolidation area, the price of the commodity
is on the rise but is currently stalled, some old longs will
replaced by new longs for a variety of reasons. Essentially, the
new longs enjoy more confidence in the further market rise. Is it
not logical to presume that the more such replacement activity
goes on the higher will be that market rise ? In considering a
bottoming formation, when the price of a commodity has gone thru,
let's say, an extended decline, and is currently congested, this
time the old longs were premature in taking their positions and
are now saddled with paper losses. Most of those who perservered
will be eagerly liquidating their positions as their get even
points are approached, if the market shud rise. For this reason,
I68 CONGESTIONS
these longs will be exerting a sobering influence on any subsequent
market rise. During the formation of a bottom however, impatience,
disenchantment, disgust and other factors will gradually prompt
many of these to give up the market, and as with either
formations, is it not logical to presume the more such replacement
activity goes on the higher will be the ultimate market rise ?
The same holds for a topping formation. The top constitutes a
price level which will ultimately prove to be unduly inflated.
Unduly inflated or deflated prices exert a crucially powerful
impact on producers and consumers alike. The longer such prices
persist, the greater will be the resultant impact. See page 256
to get an idea how far market will go.
SUPPORT AND RESISTANCE
If during an upside breakout, for example prices clearly
establish that the trend is upwards, any subsequent reaction
back into the trading area, wud be an opportunity for many short
1\ (\ (\ t2ing, 1Ti
f V V
covering
to cover where they sold , possibly
at a small loss and for many former
longs to re-establish or add to
positions that had proved profitable.
This combined buying pressure both
from bulls and former bears may often
stop the break in the previous
congestion region. It is a typical
effect of horizontal support areas.
The more traders that have a vested interest at prices within
the zone the greater will be the expected buying or selling
power shud a return move occur. A related idea is that the recent
congestion areas are more significant than older ones.
Support and resistance are areas in which prices are expected to
have difficulty moving beyond and they therefore deserve especially
careful attention and in chart analysis. Support and
resistance levels can be divided into three basic categories:
I) congestion areas,
resistance
support
CONGESTIONS I69
2) areas at which previous advances or declines
were turned back
3) 'transformed' support or resistance levels
a) e.g. former highs that have been
penetrated and thereby turned into
support levels ( see 'T.R.' chapt. 9
P&L charting )
high rrr
l t
reverse cud hold
for an isolated
low )
b) old resistance becums new support
old
old support becums new resistance
resistance
The basic idea behind support and resistance is simply that price
levels that were significant in the past will have significant
impact on price action in the future.
!70 CONGESTIONS
suooort area
area
( This author wishes to point out that when we speak of resistance
and support, we generally talk of this price effect outside of the
confines of a congestion area. However, certainly the price confines
of a resting area and/or trend lines denotes that the confines of
the congestion or trend line is by itself denoting resistance and
support. However, for the purpose of our discussion on resistance
and support, we exclude the support and resistance related to the
identity of a congestion and trend lines from our discussion. We
talk here of resistance and support occuring after the confines of
the congestion or trend line are broken. )
The argument on behalf of the congestion area is that the market
is fairly happy with prices within a narrowly defined range. A
price at rest exhibits an established floor or ceiling for itself
which is merely the graphic representation of supply and demand
conditions which actually are too complex to be understood. But,
the new information here is that on a breakout, that this congestion
area which was really a resistance area, that this resistance region
becums a support plateau, if the breakout is on the upside.
T
resistance
support
If the breakout
is on the downside
the support layer of the
congestion area now becums a
belt of resistance., shud prices
cum back up to it.
CONGESTIONS I7I
resistance
+ + J.
support
\
e.g. in an upside move from a congestion area, the
support area at the bottom becums a resistance and the resistance
at the top becums a support area. And, if prices eventually cum
back down to the old support area, it will act as a resistance and
be able to withhold price declines. If prices cum back down to the
old resistance , it will act as a support. ( This is part B of
'transformed' support and resistance. )
Markets have a tendency to respect the previous congestion level,
particularily one most recently formed. Traders who took action
in the congestion area have a memory awareness of that activity
at the time. And, if the market returns before too much introduction
of new factors exert an influence on the market, then they are
liable to act once again at support and resistance levels, increasing
their validity.
Also, be aware of the fact that if congestion area is at a target,pg.256
area, that the congestion area may be a trend reversal developing.
In an up market, an old congestion area is usually a price level
at which resistance to any decline will occur. Also, remember
that sooner or later, nearly every congestion area is fated to
have one of its' boundaries sundered. /
Another concept of transformed resistance areas ( per part A of
'transformed' support and resistance ) is in the context of any
given isolated high or low. It is not unusual for an isolated
hi h/low, once penetrated ~ o ~ n effect at that time, to develop
~ s ance, respective y.
I72
/---..
('a'. is an isolated high that is
\...._./
penetrated and becurns a support
price
is a hidden, phantom high,
( see P&L charting, chapt. 9 )
that also cud becum a support
price
This is a phenomenon that occurs with such frequency, that I am
amazed not to have seen this concept yet to be committed to ink.
This concept is articularily effective when appreciated in the
contex of a) T.R's as expressed in e chapter n eon P&L
and b) strong y rending markets, wherein an isolated
high/low becums a support/resistance once penetrated.
isolated high 'a' becums support
'b' in a strongly trending market.
A related idea is that recent congestion areas are
more significant than older ones since the potential
buying or selling pressure will have had a lesser
chance to dissipate. The prices within the zone will
have fresh significance in the traders' minds.
Remember that support and resistance may exist at a particular
price level whether for technical reasons ( that is, because heavy
volume of trading occured at a particular level at some significant
time in the past ) or for fundamental reasons ( i.e. a prescribed
government support or price level ) . In this way, resistance/may
be anticipated at a particular price level for fundamental or
technical reasons.
50 % RETRACEMENTS
Markets are continually retracing 50 % U can trace a 50 %
CONGESTIONS I73
move almost on a day to day basis. This author feels that being
a good '50 %man' is like being a good 'gap man' or 'resistance
or suooort level man '. U can make a lot of money just by using
50 % retracement patterns. Why prices retrace 50 % I wilJ neyer
know, but are continually so at all times.
/f
using the SO % retracement gives the trader an indication of the f
'market's momentum. For example, if prices do not retrace 50 %,
then, in an upmarket, this wud lend credence that the market is
still quite strong : however, if it retraces more than SO %, this
is one of the first signals that it is weakening.
Congestion area resistance/support areas all develop added
significance if the retracement to that area represents a SO %
retracement.
This author uses as a tool isolated highs [a) as in the following
illustration ,and lows, for calculation
of price retracements
so %
b
Prices, as a general
rule, have a tendency
to correct about 50 %
following an extended
price move.
If u don't believe what I say that markets are continually retracing
50 %, take apy chart U wish and take the nearest isolated high and
low and see how often are continually retracing 50 %. ;ven
areas, Rrices will often retrace 50 %, which is

a signal that strong. ( Another gem assessing
breakouts and extent of anticipated breakout. Put it on U're list
of supplementary tools ) . (This use of 50 % within congestions is
an indication of the direction of price breakouts and is presented
here as a little surprise for the reader.)
I74 CONGESTIONS
USING CONGESTION ACTION
1\hereas a trend is an opportunity to realize one enormous profit,
essentially by sitting sight, a congestion area is an opportunity
to realize many small profits by alert activity over the congestion
area's life. In well defined congestion areas, each decline to its
lower limit constitutes a buy point, and each rise to its' ,upper
limits consti tute a sell point.
In a congestion area that lasts several lengths of time, sometimes
years, dozens of clear-cut buying and selling opportunities present
themselves. Using the confines of the congestion areas as support
or resistance against which one wud execute a position or utilizing
P&L charting, these three approaches enable the trader to scalp in
congestion areas with considerable confidence. Trend bucking
constitutes mainly scalping, mostly employed by taking profits
from nominal price swings within the congestion area and trend
channels.
By virtue of the customary narrowness of congestion areas and trend
channels, lucrative trading therein requires a great deal of trend
bucking. Also the trader must be reminded that risk is easier to
calculate since one places a loss just outside the congestion area.
However, as the congestion evolves, one wud becum more cautious in
placing positions against the prior trend, because, utilizing the
rules of interpretation, one shud have an idea by the time the
congestion reaches its terminal, of the direction of the ensuing
breakout, and one wud certainly not wish to go against this when
one feels that it is about to occur. In this context, by taking a
position at the top or bottom of a congestion area in anticipation
of the breakout, by doing so, the trader will have his feet wet
by the time the trend finally emerges and will be encouraged to
add to his positions. Certainly, bucking the counter trend wud be
more lucrative before the trend emerges.
buy 'scalps'
buying the counter trend
accummulation in anticipation
of breakout to upside
CONGESTIONS I75
If market is not in a major trend such as in bottoms, investors
shud try to sell on strength and buy on weakness. Experience will
show v:hether the market is in a true trend or merely a trading range.
Certainly, a sharp trader is not likely to short a market during
a technical reaction during a major upside breakout.
1/\ I
tU

\
1 never short here if U feel
is just a counter trend.
Buy instead.
this
( and, don't forget our little friend- 2/3 days up,2/3 days down.)pg.I53
One of the best utilizations of a congestion is in the bottom of
a commodity contract. The longer the sideways movement lasts the
more we can anticipate an extended price up-move. During this
congestion, one can either scalp in it or take the easier route
by buying andquietiy waiting and sitting back. Most big markets
start this way. They develop very quietly. Some seasoned traders
prefer to trade quiet markets, which are starting their moves
than the widely fluctuating markets, wherein very few people
know what will happen. Above all, the trader shud be aware of
whether the resting area is a bottom, continuation pattern or a
topping pattern and govern accordingly.
Certainly, the manifestations of trend and congestion analysis as
presented in this and thenext chapter shud be judiciously a part
and parcel and framework of a trader's kit of tools. And,
trader can only succinctly add that utilizing these tools will
enable the trader to make money in the commodities futures market,
....... and lots of it.
PRICE REVERSAL CONGESTIONS
The trader must be aware of the fact that if a congestion is
at a target area ( see chapt. 9 ) then that congestion area may
be a trend reversal developing. Finally, after prices have reacted
for a considerable distance, a general feeling can develop that
prices have gone far enough. Call this a psychological quirk of
!76 CONGESTIONS
traders if U will, but this type of thinking becums an important
m a r k e ~ factor. After a substantial rise or decline, price
fluctuations are initially apt to be wild and hectic in relection
of the market's struggle to adjust to the new price level and
will gradually simmer down. The biggest danger in boarding a
trend during its period of consolidation in anticipation of the
continuance of the trend is that the anticipated consolidation
area does not turn out to be one but evolves as a top or bottom.
A long term consolidation continuation area, as opposed to a
reversal area, is a rarity. A sideways action that exceeds beyond
three months certainly must be regarded with suspicion.
The following patterns are concomitant with price reversals:
triangles, platform formations, 'v's , head & shoulder
and saucers.
Special note shud be made concerning wedges ( chapt. 23 ) . It is
that the wedge is very useful when spotted because it is frequently
the final consolidation prior to the formation of a major price
reversal.
In analyzing the potential for price reversal, of course, the
trader will becum a student of volume, O.I. and contrarian opinion,
as well as being a serious student of trend analysis.
For the student of price reversal bottoms and tops, this author
respectfully refers the reader to the next chapter on 'trend
reversal' wherein great detail is given towards the evolution
of tops and bottoms, in price reversals, within the context of
congestions and non-congestions.
CONGESTION AND TREND
1 t may seem contradictory that wedges, pennants, flags, ____
customaril:' slope against the prevailing trend. lt makes sense
however, when realized that a consolidation area is often simply
an area of price corrective action caused by a market sprint which
over-ran the price level which cud then be supported by the law
of supply and demand. Corrective action is by implication trend
countering.
Major trend reversal patterns fall into four general categories.
I) triangles
2) saucer
3) "v" shape
4) platform
CONGF.STlO!\S 177
DAY CONGESTION ( NOISE )
In a random walk market refered to in chapter eleven, price will
fluctuate daily in a narrow range as long as no new information or
expectation of new information applies to the judgment of traders.
This movement cud accurately be duplicated by the simple flip of
a coin and is significant to many traders. These small random
fluctuations are called "noise" . Any series of up-ticks wud give
the trader no more information on a daily basis about his next
position than wud a series of heads to the better on a coin flip.
In large and efficient markets, such noise has been known to account
for 75 % of all new prices corning across the ticker. It is a
meaningles5 fluctuation that characterizes a market at rest.
In a theoretically perfect market, all traders receive information
at the same time and are equally talented in interpretation. Thus
the price moves quickly and smoothly to its new level. There ought
to be very little disagreement about the direction dictated by
the new information. Unfortunately, no such thing exists. News
is filtered to traders at different times, and all,acting according
to their own idiosyncracies, bedevils the market into a very
ragged, jagged course, as it shatters and shimmies its way to its
new level.
( I am sorry to have made this chapter so long. The only chapters
to exceed it, word-wise, are the chapters on P&L charting,
(nine) and on planning (thirteen) wherein we attempt to
tie everything in together,and make lots of money.
1 U think U' re exhausted in reading it, can U
think how exhausted I am in writing it . But, I wanted to
do it for u. I want u to have almost everything u need to
know about the basic principles of congestion areas. The
same holds for trends,and trend reversals, cuming up next.
If U understand trend, congestions and trend reversals, U've
got it made. Maybe U don't even need P&L charting - but it
will help. /
Anyways, above and beyond all this I wish U good
l u ~ k , and enjoy U'reself, there's lots cuming up. But, remember,
to me, the most important part of this book is section ' C ' .
Take a look.,) .
I73
CHAPTER EIGHT
TREND REVERSAl
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ANTICIPATING A TREND REVERSAL
The chartist is always concerned with his ability to recognize
the commencement of either a congestion area or a trend reversal,
once a trend has commenced and is of some duration. /
So long as the trend line remains valid, the market continues to
trade in a succession of isolated highs/lows and the prevailing
trend is assumed to be in tact. Prices may penetrate the trend
line during this period, and then close back within it or may
even penetrate the line for a day or two. The penetration of the
trend line shud raise the possibility of a reversal. A downside
penetration of an uptrend line., for example, wud carry a bearish
implication, especially if the most recent ( 'c' in following
illustration)
isolated high failed
to surpass the
previous high 'a',
and if the current
reaction is
carried below the
former trading
low 'b'.
rtEVERSALS I79
The other delivery months
within the same crop year, where applicable shud exhibit the
same trend line breaking action.
The presence of unusually high volume accompanied by significant
increase in total O.I. irian uptrend adds credance to an impending
trend reversal.
A particularily steep down trend line when encountered may have
a penetration to the upside. This is a normal correction in
following a very steep move. ( Same holds true for a steep uptrend
line ) , and may only serve to alter a sharp into a more moderate
trend direction.
To further explain the importance of trendlines for the assumption
of potential trend reversal, is that it is interesting to observe
the validity of a long run trend line, and the frequency with
which the intervening price swings approach to a point of tangency
and then pary without penetrating it. This phenomenon appears so
often that a correctly enscribed trend line is an extremely valuable
technical tool. The more often the bottoms re-occur along a long
run uptrend line, for example, the greater is its' technical
importance. If the trend line is tested repeatedly, the more rikely
the direction has permanently reversed after this trend line is
ultimately penetrated. If a trend line'is drawn rather steeply, one
must be sceptical of its validity and be aware of the fact that
penetration of this steep trend line may manifest only a temporary
market reversal and only a possible 50 % retracement. And, the
steeper the trend line, more easily sideways movement can honey-
comb it. Hopefully, the following illustration gives u sum idea.
IBO
Also, the placing of stop-loss orders at identical points, by
hundreds of traders who attempt to predicate every action on chart
rules, self-creates price fluctuations which destroy much of the
validity of some chart patterns. Many penetrations of trend lines
and other formations are false, because of this factor.
In anticipating a trend reversal, we have one ultimate dictum
prices do not rise forever or fall forever. Most traders forget
this. Most traders riding a booming bull have the sensation that
the prices-will continue upwards for ever. They fail to even
attempt to analyze the potential for the evolution of a trend
reversal.
Material manifestations which anticipate a trend reversal are
explained in the following pages, which include the above and
the following:
I) trend lines
2) chart patterns
3) fundamentals
4) volume, O.I. contrarian opinion, committment
of traders
5) 50 % retracements
6) analysis of bottom and tops
7) other commodities in the group
8) I-2-3 's
9) T.R. 's ( P&L charting )
REVE?..SALS I8I
IO) cash analysis
II) basis analysis
I2) seasonal odds
I3) seasonal price and O.I.
I4) P&L charting ( chapt. nine
Of course, in chapter nine, re: the application of P&L charting
to the anticipation of a trend reversal, we will illustrate the
phenomenal capability of this approach to quite often pick a
top within a day or two.
Another tool which is useful re: anticipating a trend reversal is
the comparison of one commodity to others within a group. For
example, let's say soybeans and soybean meal have "topped" , but
soybean oil has not. The oil will be 'cracking' fairly soon. Hogs
have cracked, bellies may be soon to follow.
It is easier to anticipate a trend reversal from a bottom formation
since bottoming action is usually of longer duration. Even with
tops, U usually have plenty of time before the reversal actually
comes. There will be a great deal of dancing around as the prices
are topping. u usually have 2-3 days, perhaps 2-3 weeks, before
prices commence a significant downtrend move. One of the more
easily identifiable medium term identification tools to anticipate
a trend reversal is the following :
I
'basis' ,
-point '3' represents a challenge to a
previous high , 'I' , and a fall-off
from this area cud be the top price
for the commodity for that year.
Remember that U only have one top price
per year for each commodity c o n t r ~ c t .
One must be aware of the entire picture
of a given commodity to assess whether
this I-2-3 top is in effect a good time
for the topping formation to occur. ( How about 'odds',
'O.I.' , 'contrarian opinion' etc ? )
The I-2-3 formation is an excellent tool in anticipating and/or
verifying a trend reversal from a downtrend. If U just waited for
one of these I-2-3's , especially off a bottoming formation, U wud
reap enormous profits perhaps twice a year. from each commodity,
one from the bottom, one from the top.
8
IS2 ?.EVE?..SALS
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Charts from: IBEX Chart Services Box 693 2420 Ist Ave. Seattle,Wash.98I2I
COTTON
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9712l 1971
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Cont:.lnuoi:.ion
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REVERSAI..S I83
COMMENTS
the du,..ation of toos is nonnally so much hrj efer than
the of bottoms, it is far easier to be trapped into
wrong side of a market within its top region than within its'
region. For this reason, it is easier to trade in bottoming
congestion areas than in areas. It takes far
greater mental agility to shorta market at top than to go long
a market at its' bottom. Market tops are potentially more treacherous
than market bottoms because human nature is more bullish than
bearishly inclined, and bull markets never seem to give up until
they have their last final gasp and then they expire abruptly. At
this point, a market - top - picker is a winner - a real winner.
Bucking any trend usually implies the anticipation of market
tennina tion j n a 'v' or inverted 'v' ..f-ashion
Such sudden reversals rarely occur with major trends, sometimes
occur with intermediate trends, and more often occur with minor
trends, and frequently occur with nominal trends. Also, sudden
reversals terminate counter-trends slightly more often than they
terminate trends heading in the same direction as the over-all
trend. To wum up, a 'v' or inverted 'v' formation will tenninate
in this order of frequency :
nominal counter trend
nominal trend
minor counter trend
minor trend
intermediate counter trend
intermediate trend
major trend
An upside reversal within a bottom is virtually meaningless.
v-forget it !
8
I 84 REVERSALS
An reversal within a prevailing uptrend may foreshadow a
counter downtrend.
r-O.K.
An upside reversal within a counter uptrend, quite likely
foreshadows a continuation of the prevailing overall downtrend.
An uoside reversal within a suspected top formation shud add
confirmation to one's suspicions.

Lastly, most importantly, an upside revers 1 attended bv
unusually high vo ume shud be taken very seriously as a topping
formation.
,._______...
Buying in a bottomarea can tie up one's money for a considerable
length of time. Positioning in a top area is also apt to tie up
one's money not for as long a time. There are two principle
advantages to positioning in a bottom and/or top area. First, one's
risk is easier to calculate and limit. Taking a position after
a trend emerges runs the risk of a nast- 1 s owf:ng a
failure ora s fr
the time the trend finally emerges,
his initial position will give

Most fortunes appear to be lost at the top of swings primarily,
and secondarily at the bottom of a trend. While patterns are being
formed, previously accummulated funds tend to dissipate as the
trader fails to recognize that the ride is over. Most models and
systems work well in a strongly trending market. Signals are mixed
or false at the end of a major move, when patterns are incompletely
moulded. Long term charts can be useful in these matters.
PATTERNS OF TREND REYERSAL
Basically , there are two types of reversal patterns.
I) 'spearhead'
the 'v' or inverted 'v'
the island tops and bottoms
the I-2-3 's
the double tops, bottoms
the triple tops, bottoms
2) formal patterns
SPEARHEAD
the rounded tops, rounded, scallop,saucer bottoms
the head and shoulder formation
the triangle
the wedge
the flag, pennant
the diamond
the rectangle
the box, platform
the low sloping trend channel
A spearhead is abruptly reversed in one day, whereas formal
patterns tend to occur in equilibrium situations. By spearhead
we mean the situation wherein a previous trend, which probably
had been steepening as the trend evolved is abruptly reversed on
one day. Often this is accompanied by a gap ( sometimes large on
e i ~ h e r side of the reversal day ) - the day's trading did not
overlap at any point the previous day's trading, as enthusiasm
turned to hectic speculation and was followed by determined profit
taking turning to panic. Spearhead bottoms are also seen in
spectacular form. ( see chapt. 23 for some illustrations )
/
Of all the major price reversals, the 'v' pattern is by far the
most hazardous for traders because it constitutes an irrevocable
about face with virtually no warning. Also, a presumed trend
emerging from a 'v' is the most difficult to board since the spectre
of a double pattern remains a distinct
possibility until the new trend has
been in existence long enough to justify
? ~ ? ? . . the intermediate and perhaps important
price correction. The 'v' is characteristic
of prices that have been emotionally
fueled far beyond the bounds of reason.
Since sellers are habitually more
I 36 REVERSALS
impatient than buyers and optimism is limited only by the sky,
pessimism is necessa::::-yily exhausted somewhere along the line and
the 'v' formation occurs more often as a top than as a bottom.
The double and triple patterns alsc occur more often a ~ tops. The
intra-day actj.vity implicit at the apices of such patterns are
customarily characterized by hectic activity. Being able to identify
potential top formation on the basis of the spearhead enables the
trader to be aware that a potential price reversal is in the making.
Do not forget that the spearhead apex itself is an expression of
total exhaustion of bulls and just the beginning of the bears
taking control. In the case of the formal patterns which herein
follow, the bears provide resistance to the bulls and the resistance
is formidable and the bears in this case actually wear out the
bulls. \ I j
\ \ .Y t j ~ - resistance of the bears
)c. / e.g. scallop
Whereas in the spearhead formation the bull simply becums
exhausted in one gulping gasp and can never regain their
ground to effectively
assault the spearhead
itself.
P&L charting will enable u to pin-point these exhaustion apices,
whereas in formal patterns u will find that P&L charting is more
dubious and expresses only a manifestation of the bears gaining
control of the market.
Spearhead formations which I like for identification of an
uptrend reversal are : the 'v', island top, and I-2-3 's .
Double, triple tops can be rather trying as they wave their way
thru the parameters of everyone's psychic. By the same token, I
prefer inverted 'v' bottoms, I-2-3 bottoms, and double, triple
bottoms for determining bottoming formation.
FORMAL PATTERNS
The round top, saucer top, scallop top is illustated on the next page.
This formation,
as the name suggests
is a gradual reversal
of a trend. The upward price
movement gradually reverses as
selling pressure gradually overcums
new buying and prices slowly work into
a downward trend. Just turn the pattern
upside down and it is a picture of a rounded
R:."'"VERSALS I87
saucer, scallop bottom - i.e. a gradual reversal from a downtrend
to an uptrend. This type of formation is occasionally accompanied
by minor price swings creating the scalloped effect. One advantage
to this formation is that the rounded top, bottom becums obvious
before the pattern is complete. Traders often use the establishment
of new positions close enough to the fulcrum to utilize it as a
stop-loss point. A rounded top is usually formed by a commodity
whose daily range is rather small. With this type of chart, the
picture is usually followed by a major move. Large saucers consti-
tute a gentle major price reversal action. Consequently, they occur
far more frequently as bottoms than tops. Sideways action immediately
upon breakout from a major saucer is a common patience - testing
occurence, per 'a' and 'b' in}
Sometimes, small saucer
consolidations punctuate the
trend emerging from a saucer
price reversal. Of all major price
reversal patterns, the saucer is the
most reliable to follow.
The formation cud be categorized as a spearhead
pattern. However, because of it's formidable ability, the length of
time required for its evolvement,it is placed as a recognized
formal pattern ( ditto for the I-2-3 above ) . I refer u to chapter
23 for detailed explanation of the head and shoulders pattern.
However, of all the major price reversal patterns, the most renowned
is the head and shoulder. - a top when uprite and a bottom when
inverted. A H&S can almost always be envisioned when the high point
8
of a broad top or a low point of a broad bottom occurs somewhere
near the middle of a formation. In other words, more H&S are products
of imagination than reality. ( Someone even came up with 32
different H&S formation ! )
- see chapt. 23 for a formal discussion.
In an upmarket, a descending triangles is normally bearish.
Watch volume activity.
A sym."Tlet.rical triangle,
REVE ?..SJ..:...S :: 8 9
the equilateral triangle is not
conducive to any analysis of price
reversal, nor wud an ascending
triangle appear to be a precursor
of a price reversal in an
up market.
t
In a down market, a descending triangle wud not be indicative of
a price reversal,
but, an ascending wud.
I90 REVERSALS
Because consolidation areas far outnumber price reversals, a
dominating clue that shud forstall an error to prediction is the
prior trend. If the prior trend is up, this by itself favors the
emergence of a trend in the same direction. With the use of
symmetrical and equilateral triangles re: above, it is usually the
case that they have not broadened sufficiently to suggest a major
price reversal. Altho' it cud not be known in advance, that this
wud not occur, a broadening of scope shud be allowed to evolve
before taking seriously the possibility of a major price reversal
in analyzing symmetrical and equilateral triangles. This broadening
concept evolves itself more effectively in the ascending or
descending triangles.
broadening
Pennant
Flag
These are not unnaturally, at the end of poles. This is supposed
to ~ e a n that they occur only after precipitous market moves. When
they occur after a gentle market advance or decline, the technician
shudtry to visualize another pattern f o ~ identification purposes.
Note that the pennant is nothing more than a form of triangle. To
qualify as a pennent, a triangle must not only be masted, it must
R....'MJERSALS I9 I
have two of sides slanting in the same direction.
Normally, flags and pennants are continuation patterns and not
reversal patterns.
-:----....
descending

I
The wedge is perhaps even more useful when spotted than the
pennant or flag, for it is frequently the final consolidation area
prior to the formation of a major price reversal.
The fact that pennants, wedges, flags customarily slope against
the prevailing trend makes sense when realized that a consolidation
is often simply an area of price corrective action, caused by a
market sprint which over-ran a price level that cud then be supported
by the law of supply and demand. Plainly speaking, corrective action
is by implication trend countering.
The Diamond
-----
see chapt. 23.
This is a
classic
consolidation
reversal
pattern,
which occurs
infrequently.

) 11- 72 CDI'P!R MU tm .l.t. _:.. !
I

'
I
t-r.!:",,-:-: ...... _______
}' i 'tl !


r
: ! i ! ..
, ;l ' l:
1
'1;.... I
:"1 i',li' lo.: !1 ............ ; .. ' . J I
. ..
.......
. ..
. ..,
,, , .
... .,.
.. ,. " ,,
occ: . .,..,..
I92 REVERSALS
see chapter 23
The Box
----
r
It is smaller than the rectangle.
The Platform
------
c
- is small
saucer
- 'B' is a platform or a saucer-handle.
Sideways action immediately upon the breakout of a major saucer
is a common patience testing occurence. Whereas tops are customarily
characterized by hectic activity, bottoms are customarily characterized
by moderating activity. For this reason, platform major price
reversals are more often located at the terminals of downtrends.
e.g.'s
simple platform bottom
\'-------.J!
compound platform bottom
delayed ending platform bottom
duplex horizontal platform bottom
REVERSALS !93
rallies of are a common feature of complex
platform patterns. The saucer - handle major price reversal, where
the handle resembles a platform, might be said to be a hybrid
pattern - a pattern that is merely the combination of a saucer and
simple platform It is also a delayed 'v' ending platform,
and, the
All of these obviously are a combination of
extended
bottom.
a simple platform and in some cases,
the 'v' spearhead.
Are we getting too detailed for U ?
Are U getting bored ? )
Herein, a major trend channel and trend line is finally evacuated
and in the case of an upchannel, a major bear move commences. In
the case of a low sloping down channel, a handle away from it, or
In the case of a high sloping trend channel,
some other form of
consolidation cud
be expected.
an evacuation from it, altho' rapid, cud be considered a
8
I94 REVERSALS
technical correction to possibly 50 % retracement. These prices
cannot,on exit be considered a valid trend reversal, at least
for the time being.
FUNDAMENTALS AND TREND REVERSAL
The fundamental economic factors play their most important roles
at the tops and bottoms of market swings. A top constitutes
a price level which will ultimately prove to be unduly inflated.
A bottom constitutes a price level which will ultimately prove to
be unduly deflated. Unduly inflated and deflated prices exert a
powerful impact on producers and consumers alike. The longer such
prices persist, the greater the entrance into the economy of
facilities to produce that commodity and the greater the exit from
the economy of consumer preference for that commodity. The longer
an unduly inflated commodity price persists the further will be its
ultimate decline. The longer an unduly deflated commodity price
persists, the further will be its ultimate rise. This is supported
by fundamental economic factors as well as by technical ones.
Deflated prices usually stay down longer than inflated prices stay
up, as it usually takes longer to absorb an oversupply than it
takes to sate an over-demand.
When an inverted 'v' or a 'v' bottom occurs at an immensely inflated
or an immensely deflated price level, the ensuing price move may
logically be expected to be far greater than it wud have been if
price halted at less an level.
__ : __
' INFLATED
1---.;__.;_..__IMMEN!>EL V -
!DEFLATED G
: I
K
I
F.EVERSl;LS I 9 5
Source: - The Fastest Game in Town
Trading Commodity Futures
I973 Anthony M. Reinach
Random House
VOLUME DURING TREND REVERSAL PLUS 0.1. CONTRARIAN
OPINION) COMMITTMENT OF TRADERS
For further information on other factors used to anticipate
trend reversal, I refer U to :
volume chapt. 4
0. I. chapt. 5
t
o?inion chapt. 5
commi ttment of traders -:hapt. 5
action during major reversals forecasts two things:
I) that the prevailing over-all trend is nearing
an end or has ended.
2) that the next overall trend will be in the
opposite direction.
/
After a commodity has enjoyed an extended price advance, with
steady or steadily increasing volume, a point of time will cum
when a final contingent of obstinate shorts will rush to the
exits at a panic rate of intensity. They will be joined by others
eager to get on the long side. The result will be an abnormally
high volume along with wide and hectic price swings. The newly
elevated price level may linger for a while or may even qo higher.

_ _,o
REVERSALS
Volu.'Tle may stay high or may gradually diminish. Regardless of
secondary the message remains crystal clear.
The bull market is over.
The phenomenon is known as an upside volume blow-off. Downside
volume blow-offs are as common, but not as usually pronounced, or
as easily identified. A series of alleged downside volume blow-offs
will precede the final volume blow-off that signals the end of a
bear market. Volume blow-offs of less dramatic substance may also
signal the termination of lengthy counter-trends. As well, however,
volume dry-ups at times signals the termination of counter trends,
but of shorter counter-trends. When the volume action is so quiet
that a pall seems to settle over the market - such restraint is
usually prompted by the knowledge of offerings so thin that big bids
cud send prices spiralling.
Therefore, it is a proper hypothesis that after a sustained price
advance, a period of exceptionally high volume, accompanied by an
inability to advance, followed soon afterwards by a price reverse
with high volume will often portend a significant trend reversal.
U must relate O.I. to volume. Most O.I. decreases or increases
are nominal. When O.I. climbs or falls sharply, however, then it
becurns prognostic, as opposed to attendant, and important to
consider it a clue by itself. If during a bull there is an inordinate
increase in O.I. , then the end of that bull market may well be at
hand. If O.I. continues to climb, and the price level starts
levelling off, a top shud be suspected. If after, a price decline
a congestion area is entered and if the O.I. continues to be
liquidated and prices are levelling off, a bottom shud be suspected.
Sometimes during a market rise, there will be a sudden reduction
in O.I .. Under the circumstances, one may conclude that the market
is being dominated by short covering. Such a market is generally
considered as technically weak, at least for the time being.
Taking all this into consideration, it is now suggested that in
general, a combined rise of price and O.I. on high volume has
bullish significance in the early stage of an upmove, but the/
bullish significance diminishes the O.I. further increases and
the speculative public assimilates all the bullish factors that
fueled the advance. Rising O.I. and heavy trading volume appear
to be more significant when confirming a trend at its emergent
stage and more of doubtful meaning later on : - in particular, when
an uptrend is at a more mature stage.
In particular, if during the mature stage, there is a sharply
diminished rate of O.I. occuring, expansion of prices may be a
harbinger of market reversal. ( short covering)
REVE?$ALS 197
TREND REVERSALS AND 50 % RETRACEMENTS
For example, if price shud pass thru a steep down 'trend line',
to the upside, this is a normal correction in following a very
steep move, and may 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 extensive price uprnove. A correction of-less than
50% is evident of a powerful trend or a greater than a 50%
correction is a possible reversal. Furthermore, if a 50% correction
from a steep move corresponds to a strong support or
area, it is a likelihood that the correction will be arrested
at that level.
BOTTOMS
Bottoms are customarily characterized by moderating activity. For
this reason, pla:tform major price reversals and rounded-, scallop
major reversals are more often located at the terminals of down
trends than uptrends. This includes the H&S formation.
In the consideration of a bottom, the price of a commodity has
suffered an extended decline and is currently congesting in
preparation for major reversal. This time the old longs were
premature in taking their positions and are now saddled with paper
losses. Most of those who persevere will be eagerly liquidating
their positions as their get-even points are approached or reached,
shud prices rise. For this reason, these longs will be exerting a
sobering influence on a subsequent market rise. During the formation
of the bottom, however, impatience, disenchantment, disgust and
other factors will gradually prompt many of these longs to give up
in the market and give up their positions. Their replacements will
be longs who do not only enjoy greater confidence, but who are also
unbroiled by disheartening paper losses. It is not logical to
presume that the more such replacement activity goes on, the higher
will be the ultimate market rise ?
The biggest danger in buying during the formation of a bottom is
that the anticipated bottom evolves instead as a consolidation area.
Also, even barring such an unpleasant event, buying at a bottom
area can tie up one's money for a considerable length of time.
8
I93 REVERSALS
However, one's risk is easier to calculate and limit, and, many
traders believe it advantageous to take modest positions in bottom
formations and as a result will have their feet wet by the time
the trend finally emerges. Meaning, that the paper profit from
his initial position will enable him to more aggressively increase
that position as the uptrend emerges.
When u think of bottoming formations, think of also, and please
scout thru this book for pertinent commentaries, for,
a) volume and bottom formation and potential
for rising prices
b) O.I. and bottom and potential for rising prices
c) analysis of a potential day re: intra-day time
reversal of prices, in that the downtrend is stalled
in the last hour of trading as buyers cross swords
with sellers and the market possibly at that very
moment formed the penultimate bottom or at least
close to it.
A discussion of bottoming patterns has been amply discussed in the
preceding pages. Bottoming formations can be categorized
to three sections
I) short term
- spearheads
2) medi urn term
- I-2-3's
3) long term
- rounded bottoms
Inherent in bottoming formations is the concept of congestion,
( except spearhead ) and the commodity may stay in category "2"
or "3" above for weeks to months to years. Many a breakout from
the medium to long term formations to the upside will prove to be
abortive. There will be many platform formations. Above all, we
must be aware that, ( except in the case of the spearhead which by
itself cud only be a correction to the upside ) that most bottoming
formations after an extended bear market, usually takes a long, long,
time for the fundamentals to change s.ufficiently to warrant a strong
new trend to the upside. Much of this book is involved with bottom-
ing formations and one shud be aware of all the parameters that
are involved in order to either trade in congestion, accummulating
capital and/or getting a fair start on the emergentstage of a long
term uptrend.
Personally, I like bottom formations because they are in congestions
so often, and on this U can rely. It is an excellent area to take
a few bites out of the market, possibly week after week, as the
commodity slithers here and there, but in a confined range.
RevERSALS I 9 9
And, don't forqet ~ ~ a t ~ h e twO-day reversal pattern arises at
the end of a trend. Prices finish at the low end of the range in
TOPS
a two-day reversal. During
the next day's trading, 'b'
the highest price is tested
again and the prices close
up_at the opposite of the
range. In a two-day reversal,
the second day's closing price
will be at the top of the
range. ( more on this in
chapter 23 )
A top constitutes a price level which will ultimately prove to
have been unduly inflated. Unduly inflated prices exert a crucially
powerful impact on producers and consumers. The longer such prices
persist the greater the resultant impact.The chartist is always
concerned with his ability to recognize the commencement of a trend
reversal. What always occurs at market tops is that there are no
longer any buyers and prices collapse ; when all the bulls decide
concurrently to take profits and suddenly sellers are without buyers.
Because the duration of tops is normally so much briefer than the
duration of bottoms, it is far easier to be trapped into the wrong
side of the market within its top region than within its bottom
region.
Market tops are potentially more treacherous than market bottoms
because human nature is more bullishly than bearishly inclined and,
sometimes it takes an extended price advance for the bulls to/be
satiated. The point of time will cum during the bull rise when a
final contingent of obstinate shorts will hasten towards the exit
at a panic rate of intensity and they will be joined by others
getting on the long side of the bandwagon before the parade is over.
The result is abnormally high volume and wide hectic price swings.
The volume may stay high or may diminish. The price level may linger
or may go higher. Regardless of the secondary characteristics, -
the message is clear. "The bull market is over " .
This high volume with wide price fluctuations is known as an upside
volume blow-off. However, it is by no means unusual for a major
trend to be interupted by a substantial pause as a new temporary
equilibrium is established. This pause is quite likely to break
c
200 R E V E R S ~ S
the first steep up-trend. But, until a new downtrend is established,
it is rash to assume that the previous trend is reversed. By the
same token, shud a trend channel with moderate upward momentum
experience a price trend change of greater momentum, and breaking
the northern confines of the moderate trend channel, that the
increasing channel momentum that
accelerated the market, that this
action may also be a blow-off. However,
shud an uptrend channel have a serious
penetration of the lower wall, this
has obvious bearish implications. But
a serious penetration of the upper
wall also has a bearish implication
as it constitutes a trend acceleration
that often signals the final stage of
the move.
It is a proper hypothesis that after a sustained price advance,
a period of exceptionally high volume marked by an inability to
advance, followed soon afterwards by a price reversal with high
volume will often portend a significant trend reversal.
There is one principle to be kept in mind and it is that once a
market starts to make its' move, it continues to move for some
time in that direction and if U are long, U do not have to
panic about a sharp reversal in price. When a reversal cums, there
will be a great deal of dancing around before it is all over,
( even with an island reversal ) and during the dancing period,
U can start considering whether U wish to take profits and/or look
for a short position.
All markets have only one top per year. In looking for the top,
give the market plenty of time to do its dancing or possibly
look for a sharp break in an uptrend line, followed by a rise so
that we get a I-2-3 consolidation top pattern.
I
#I cud be a spearhead
~ 2 is the reaction
#3 is the last rally
N.B. re #I - see chapt. on
P&L charting re: reversals.
It must be kept in mind that the more prices rise the more likely
they are to continue to rise. One must be aware that once markets
move, there's usually plenty of time to get out and a trader does
not have to panic about a sudden decline unless, of course, he/she
bought in the topping formation. Markets do not simply rise over
20I
nite or collapse over-nite. Time is required for the initial move
and to repeat, time is required for prices to reverse their direction.
If u play U're hand correctly with a plan, U are more likely to end
up with more profits than U anticipated. So long as the trend line
remains valid, the market will continue to trade in the uptrend
channel in a succession of isolated highs and lows and the prevailing
trend is assumed to be intact. Prices may penetrate the trend line
in a session and then close back for a day or two. However, the
penetration of the trend line shud raise the possibility of a trend
reversal.
The downside penetration of an uptrend line cud carry
a bearish implication if the most recent isolated high 'b', in
a the I-2-3 configuration,

b ( on a medium term basis )
t
11
failed to pass the previous
high 'a' and if the current
reaction is carried below
the former trading low 'c'.
Broader spectrum formations to be on the lookout for are the:
descending triangle
wedge
flag
pennant
island reversal
inverted 'v'
trend lines that are broken.
In assessing an inverted 'v' , recognition of the two-day reversal
pattern ( chapt. 23 ) which arises at the end of a trend must be
taken. This is different from the one day reversal - which is also
a 'v' .

L closes down
c
202 REVERSALS
The two-day reversal originates as a key reversal, wherein, instead
of closing near the bottom end of the range for the day ( per one
day reversal ) , prices settle at the high of the range in a two-day
reversal top. a
r ~ l }
During the next day's trading
'b' , the highest price is
tested again in a top, but
prices close at the opposite
end of the range for the day. That is,
in a two-day reversal top, the second
day's concluding price will be at the bottom of the range. Often
it will be found that during the closing hour of trading, prices
will falter at the 'v' apices of day 'a' and the following day
is possibly a lower opening, with a rally that day but the two-
day reversal pattern states that the closing on the second day
will be lower. Under these conditions, one can't anticipate the
day a two-day reversal pattern will evolve.
Remember also that during a bull market, there is an inordinate
increase in O.I. and the end of that bull market may well be at
hand. If O.I. continues to climb while the price level starts
levelling off, a top shud be suspected. Sometimes, during a market
rise there will be a sudden reduction in O.I. Under the circumstances,
we conclude that the market is being dominated by short covering.
Such a market is generally considered technically weak, at least
for the time being.
Here is a list of some of the elements in the reversal of an
uptrend.
I. the uptrend itself is broad and not very steep.
2. the final stage of the upmove is created by a reduction
in O.I. ,indicating that the market's strength may be /
attribitable to short covering.
3. O.I. is running high and volume activity expands, with
wide, hectic market swings and on the decline volume is
high.
4. final stage of the uptrend occurs when the parameters of
either side of the uptrend channel is broken. A break-out
on the upside is the last dying gasps of the bull and if
the major uptrend line is broken on the downside, the trend
can be considered as almost over.
REVEP.SALS 203
S. a high which occurs after a broken trend line or inverted
'v' has formed, fails to top the preceding one, the market
top is forming and we have a I-2-3 .
6. the decline penetrates the recent support levels
7. contrarian opinion is over 85%
8. cornmittment of traders show large traders predominantly short.
Most fortunes appear to be lost at the top of market swings.
While the topping pattern is being formed, previously accummulated
funds tend to dissipate as the trader fails to recognize that the
ride is over. Don't forget that most models and systems work well
in a strongly trending market and that signals becum mixed or
false towards the end of a major move, where patterns are incompletely
moulded. In perspective, topping patterns are easily recognized
and if U understand the parameters of what is involved in market
topping, it shud be the rare occasion when U are caught off guard.
Our only concern is that u becum confused as the market is topping.
If anything, stand aside. - possibly go short - but under no
circumstances if U suspect a top is forming, do U go long. The
bear crack can be brutal. I strongly suggest that U make U'reself
familiar with all the aspects of market momentum, trends, congestions,
and reversal patterns, using all conventional analytic tools as
well as what will be taught to U in P&L charting, coming up next.
What a powerhouse that last sentence was! If U were ever able to
do that and employ a good trading plan, do U realize the amount
of money U can make ?
To review: -
1. volume. c.ha.p:t. 4
2. 0. I. c.ha.p:t. 5
3. c..o w ~ n op-<.ru..on c.ha.p:t. 5
4. c.ommatme.n:t on aa.de!L6 c.ha.p:t. 5
5. c.Mh c.ha.p:t. 5
6. ba.o-U c.ha.p:t. 5
7. odd6 c.ha.pt. 5
8
204 REVERS&..S
8 :tJi.. e..nd!J
9 . c.o 1ta C-!> :tic n
I o. -0'l.e.nd -:.e.ve-..... !Jw
11. pa:t.:teJtYL6
I 2 ,!J e.M o nal:. a.nd c.y c..Uc.a..t

c.lta.pt. 6
c.ha.pt. 7
tlvi..-6 c.ha.pt.
c.ha.pt. 23
cJta.pt. 2 4
6-i..nd U 'tte6 e...6 a. te.c.hnJ..c.a..t too.. tha;t U lik.e.. [ how a.bo!Lt P&L )
a.nd, now, U emp.toy
a.6teJt,
a.) money ma.na.ge..me..nt
b) e.fi6e..c.t-i..ve pta.nnJ..ng
U ha.ve.. ..e..a.ttne..d what J..o J..nvo.tve..d wUh
I) e..t)t)o!tt a.nd dMup.Une..
2) e...6 -
wUh,
the.. 6/tJ..ng e. b e.ne.6-i..U o 6 k.nowJ..ng
a.) who w-i..YL6, who e6
a.bo!Lt
b) pe.Mona..Utlj
6ott 6u.. :tn.a.cU.ng
c.) who t!ta.de6 a.nd how
a.nd,
c.ha.pt. 14
c.ha.pt. 13
c.ha:pt. 17
c.ha.pt. 18
c.ha.pt. 16
c.ha.pt. 19
c.ha.pt. 20
or.. e. o6 u who like. 6ood 6oJt thought, theJte. r .6 c.ha.pte.M
1 , 2 , 3 , 1 0 , 11 , I 2 , 1 5 , 2 7 , 2 2 , 2 5 , to tto und o 6 6
a. bd,
a.nd,
the..n,
the. p e..nui.;t.,i,ma.t e.,
' Po-int a.nd L-ine.. ( P&L ) c.ha.Jt.ti.ng,
ne..xt c.ha.pteJt.
'10 U
1
get' a..t.e. 06 thJ..o, theJte..
1
no U QltOm ma.k.J..ng tha.t
12 rn.Ulio n J..n U9 ht y e..a.lt.6
Hope. U 'Jte.. ha.vJ..ng t)un. )
Commod-ity t!ta.cU.ng me..a.nt to be. t)un, even A..6 a e..Uouo.
CommocU.ty tlta.dJ..ng 6un, even J..fi a me..a.YL6 to be.. )
CHAPTER NINE
{ioint &line chartini)
Wel.c.ome. :to :the. wu11.deJL6u.l, wun.dvz.6u.. wo!Lld o6 Po..Ln.:t a.11.d L..ln.e.
c ha.J!.til'l.g
Now, if U are a futures trader who has been trading for some time,
u are probably perplexed by the special activity that relates to
each trading day. I mean, really, what is each day's activity all
about ?
Sure enough, prices will crash/rise thru trend lines, bounce out
of congestions and do all sorts of things. Now I ask U - how many
times does a commodity break thru a trend line ? How many times
does it bounce out of a congestion ? Not very many. Even then,
these exits and bounces can and do abort.
Sure, U can use pressure indicators to get an idea when a market
is overbought or oversold. Sure U can get the same thing that such
a market is correcting by moving average lines criss-crossing over
and around each other, or whatever. Sure, U can get complicated
computerized formulas entailing all sorts of technical data, each
'weighted' against each other or others, verified on an historical
basis and with maybe 'odds' to give the player some return on his
capital. sure, U can havP the soothsayers, - technical and
fundamental analysts of the big brokerage houses who presumably
know when prices are turning or turned or one can turn U're $5,000
into $20,000 in a year or two, now and then, and sometimes they
don't. su.:e, there are winners in the futures and plenty of them.
Perhaps some of these winners change their style to the market in
which they trade, - for that matter, to their mood. ( As I do ) .
Sure, U have professional advisors who very astutely recommend
waiting for the good markets, but how many discipline themselves
so they can accept a protracted rationale that seems to work, and
have the conviction and faith to employ it ?
205
How many of these winners end up as professional advisors publishing
206 ?&I..
newsletters, who consistently make profits, year afte:r- year,
after year. How many of these winners turn out as portfolio
managers ? How many of these winners make enough money so that
they don't have to be bothered with managed accounts ? How many
of these winners hold managed accounts merely as a means to
further discipline for their trading and as a means of keeping
themselves busy, either as a hobby or as an involvrnent to keep
themselves out of the market, and wait for things like sure-thing
trades ? What techniques do all these people use ? They are long
term techniques --- very astute techniques and actually rather
simplistic, both fundamentally and technically.
Be that as it may, this trader has always been totally perplexed
by so much of each day's specific trading activity. What the devil
is the commodity doing to-day ? How can I anticipate what might
happen to-morrow ? How am I supposed to know what's going to
happen to-morrow ? How is anybody supposed to know what's going to
happen to-morrow ? Is it 'random' or isn't it ? If it's random
then why does it do what it does ? If it isn't random-walk, why is
it doing what it's doing ?
As I questioned each day's activity on a purely subjective level,
I envisaged some very obvious realities. It seemed very logical
that to-morrow's prices, in the first place, are going to do
one of three things, - to be up, down or go sideways. ( How about
that. Does that make sense ? ) And, I said to myself - "Oh, dear,
isn't that interesting ! I've got 3 choices ... there ain't
forty . . . . just three " . Why are there just three, and I said
to myself, " It's because there's just three and not forty ". It
c a n g ~ north, east or south. It can't go west. My goodness, I
said to myself,"! have something. -I have a thing called a
C.On6.ta.nt !
11
Whoopeee. Big deal. But then again, I said to myself,
-
11
Goodness, gracious me. I do have a thing called a ' constant'
11
Prices to-morrow are going to go either up, down or sideways,
and that's all there is to that ! Surely there's something to work
with here, since everything is so obvious ! What ? What ?
To continue :
Since prices are going up, down or sideways, we have exactly
one thing - a constant. It's not that prices are going up, down or
sideways, but it's the fact they can do nothing else- we have a
thing called a 'constant' . That being the case, and being a person
of somewhat simplistic nature , .. I said that since going up,
down or sideways is a constant, rather than looking for prices to
go up, down or sideways, how about looking for ... u constants "
CUd it be that this makes sense ? N ow what constant do we have
****
?&:. 207
besides up, down or sideways to-morrow ? And I " We have
a constant- we have a high/low/close to-morrow.
11

Big deal. But then what I have just said is true. And this is
where this author got stuck.
Time passed and all sorts of things filtered thru this author's
technical search. I tried to expose myself to everyone's viewpoint
and then I became fascinated with
11
mathematical trend a.nalysjs "
mentioned in chapter two.
Thank the heavens that at least I have some
historical precedence on which to base Point
and Line charting ) .
Mathematical trend analysis gave me presumably a median trend
line which now and then, generally speaking placed this trend
line somewhat through the middle of a main trend ann so
that action on either o this cen a trend line cud be
observed or tracked. Sounds simple enough ! So, experimenting
with numbers, we were able to ascertain a figure, ( formula is
on page 573
****
which, on a day to day basis tracked itself on an
absolutely straight line , not daily weaving and zigging and
zagging all over the place, but was actually on a straight,
straight line and this is the formula which I have used since
that time ( years and years ago ) . Since first using this formula
in conjunction with mathematical trend analysis, it seemed rather
obvious to me that I had another constant.
}
Now, ! had a constant, that prices were either going to go up,
down or sideways. I had a constant that to-morrowwud have a
high/low/closeing price and now I had a constant which
was a simple mathematical formula which placed this mathematical
data as a ' dot ' or " point
11
on my chart, thereby giving a
constant with or without validity.
Certainly, U cud take any calculation, or mathematical
with the resultant numerical figure being represented as a dot.
If dot ended up on the ceiling, it still obviously was a
constant. Big deal.
At least I was sticking to the path of having realities and
constants. The sun will cum up to-morrow and go away
to-morrow nite. ( At least where I'm living. ) But, at this
juncture, this author was once again at a brick wall. Big deal
So now I have another constant !
But, if I developed another constant once again, was not every
thing becuming a bit too non-simplistic ?
\,
208 ?&L
What more cud I ask for ? Than a mathematical constant which was
an average of such and such. Where can I go from here ?
Needless to say, at this point , ..... drama unfolds. The Great
Big Light strikes ... no more constants
0
Just use what U have .
...... look for variations away from, or around this mathematical
dot. How do prices move around this dot, or what happens when this
dot moves . The question to be asked was ----- ' Can the variations
themselves be constant??? '.
And, with succinct regularity, it became obvious that all of the
imput for several days, weeks and months gave birth to each day's
high/low/close in a constant manner and this expression when
analyzed, signalled the story in relation to its past history -
the mathematical dot, and the movement of prices arqund it.
Gracious me, there were constants all over the place.::::
- prices each day moved a maximum of "x" mm. away from the
'dot' line
-prices each day, moved a maximum of "x" cents up or down
from the dot itself
prices eventually stop moving above the main line in an
up market into an area or channel just under the line,
and in an upmoving market, prices are topping
- the dots started to move closer and closer together in an
upmarket and the market was topping
- dots swung off the main dot line - bells ringing left
and right ---- market is topping
- the dot is swinging more, it's falling under or above.
The dot didn't swing under or above. And sinceit didn't,
and not doing what it's supposed to do, the opposite
is h a p p ~ n i n g
- instead of the dot going up exactly in a straight line,
or down in a straight line, they are "snaking" very
close to each other, horizontally - we're in a congestion.
Often I can tell, two days into a congestion that we're into a
congestion.
The above is just for starters
/
Now .that I've taken u this far, I'm afraid I will have to
U thru lots and lots of explanation and slowly unfold and
I
and illustrate the effectiveness, reality and constinancy
what I call ' P&L Charting ".
I've just told U what it is. The formula is on page 573
And, I've told U how it evolved.
take
reveal
of
P&L 209
D may w ~ s n to make U'reself a student of it, use it casually or
reject it altogether. Certainly P&L charting
is not for everyone. It gets U down there looking at the roots
of the trees, and U can easily get to the point where ucannot
see the trees for the roots, let alone the forest but for the
trees. In this context, it is absolutely essential that U know
conventional technical analysis to know where major trend lines
are, support and resistance, 50% retracements etc. etc. etc.
u must look at the forest,U must look at the trees and now we can
at long last, look at the roots of the trees.
If u are new to futures trading, I do not know what to say to u,
except what is portrayed in the pages on 'planning' (chapt. I3)
I do know P&L can give u birth to enormous profits.
To those who have winning styles and techniques, possibly P&L
charting cud enable U to more accurately pick a top within days
and on many occasion on the very day that the market tops, bottoms.
However,.when U've got a winning style- who needs P&L?
U people who are into Point and 'Figure" charting may even throw
it out altogether.
I presume that even some of those who will use P&L charting will
becum such avid enthusiasts that they in turn will start to throw
out any other new, innovative, technical analysis. The fool
that U are. But, why not? I know I'm hooked on it.
Now, let's get down to the nitty, gritty .....
how it works .....
..... we will go gently with U
at first, and then try to expand some more realities v;i th U as
the pages filter past. There will be plenty of applications and
illustrations. ( Wait 'till U see ch
By way of qualification, it must be stated that pure technical
analysis, no matter how effective, cannot be considered absolute.
The nature of the commodity, the personality patterns of the trader,
the environment and mood of the trader, the commercial hedger's
activities, and the extent of public participation in the market,
all manifest themselves in a peculiar technical manner that places
a distinctive label on the technical patterns of each market and
the trader's interpretation of it.
9
2!0 P&L
Analysis of patterns or formations in price charts can be more
of an art than science, allowing considerable room for interpreta-
tions. Not all chart formations keep their promises
the charts are never wrong ...... only the traders. So Beware !
The subtects to be covered are
- dot direction
- dot distance
- distance from dots ( 2 dots on, 3 dots on )
- dot swinging
- dot turned up/down
- crests
- channel system
- T.R's
- hitting/digging
- blocking
- normal tops/bottoms
main channel
outer channel
main channel lines
channel momentum
- abnormal dot movements
- secondary keys 50% retracements
trend lines
target projections
openings
closings
And, we will discuss P&L charting in terms of trends
congestions
DOTS AND DOT DIRECTION
see page 573 on how to calculate the dot for each day's action.
It takes me approximately 25 sec. to calculate and write down the
two figures, not allowing for the time it takes to record the
high/low/close for the day and going at it rather slowly. Allow
another 30 sees. for fiddling around, shuffling peices of paper,
and putting the dot and high/low/close on the chart. Approximately
one m i n ~ t e for t h ~ entire exercise.
P&L 2!!
Now, take ~ r e c h a r ~ paper, - any size will do as long as it
has parallel lines going horizontally and then vertically, criss-
crossing each other.
This is the chart pattern I use: -
... -
A full page sample
is on page 572,
which U cud use to
make copies of.
Figure out how many horizontal lines U wish for each cent in the
commodity u are charting.
For e.g. , I use:-
one line for
each 'cent'
in silver
high 602
low .592
close 598-70
t,
'jo
2I2 ?&L
one line
for each
'dollar'
in gold
high $222.50
low I93
close 216
For commodities like cotton, bellies, cattle, hogs, soybean oil
sugar, I use IO horizontal lines to equal one cent, so I can
see clearly the fractions of the cent, because I is a big move
in these commodities, isn't it ?
cotton

high 55.30
53.20
f'-1
close 54.60

)l.
Got the picture ? If u don't, then trace the high/low/close on
"U're" graph for the commodity u wish to trace and see if it is
graphic enough to clearly show the high/low/close prices for the
usual range in which it trades. I mean, U don't see pork bellies
trading in dollars each day, do U ? But does. Just try placing
sugar's range between two horizontal lines - U'd never see it-
no, U need ten horizontal lines so 0 can see each fraction of a
cent on each line- in tenths . one tenth for each horizontal
line.
P&L 213
Now, place the dot, as calculated according to the formula on
page 573 . on the appropriate horizontal line. Lets say
that the dot calculation is 594.80 for silver, then I place the
dot one vertical line to the right of the high/low bar line
on the chart for that day.
silver high 602
low 592
close 598
dot calculation 594.50
This author uses two horizontal
lines to portray the closing
price
~ C J t J
S7o
160
This gives me plenty of room
in order to see the dot when
it is placed on line #I
_ I I most certainly wud be foolish to place it on
the day's range, wudn't I ? I wudn't see it,
and if I placed it on the vertical line two
to the right of the day's range, then I wud be
placing it on the vertical line on which I
will be placing to-morrow's prices.
--- --
_......; .
214 ?&L
So, he=e's how Dec. (Chicago) Silver Oct looks for the
last seven trading days.
Do U see how the
'dots' were placed ?
Now, looking at illustration in silver, do U see how closely
related that 'dot' is to the high and low range for the day ?
Pretty close isn't it. It's not a long way away is it ? ( In some
run-away markets U do get the dots quite outside the range of the
day). Knowing that these dots are near at hand to the daily range
means that we have quite an orderly market. - just the kind of
market that good trend channels, or congestion periods.
Now, let's look at some other things.
Do U notice how prices flitter about on one side of the dots and
then swing to the other?
And, that they tend to
stay there for a few days ?
And, that the highs are
roughly parallel to s
string of dots ? "'
We will be studying the movements of prices around these dots,
later on, and there are going to be 'constants' all over the
place. - l!_ighs and to the dots
P&L
in an upmarket, prices do move in a channel just to the left
of the dots, and in a down market, prices will still be at the
left of the string of dots, but, in a market, the prices
will temporarily move to the right of the string of dots. All
sorts of constants. Easily recognized.
For the moment, let's look at the dots themselves
We'll take out the high/low/closes .
The first thing U see is that the dots
are first moving up in a string, and
then suddenly move down. Do U see how
the distance between the dots changes ?
n-:sy:.stance of dot '4' fro.m dot. '3' is
than diS;'jince d;:t :i to 2 -
e a stion cit was!). Do
u see ow dot '6' ?
Do U see how dots 5,6,7 are on a
straight line, if a line is drawn thru
them?
We will be studying how the dots move away and towards each other,
( 'dQt distance' ) and how they swing away from the line which
can be drawn them ( 'dots swinging' ) and how dots move
above and below each other and what the movements of these dots
portray.
Suffice it for now, that we illustrate that in an upmarket, the
dots go up, and in a down market, the dots go down. Silly, isn't
it ? But it's true. The big thing that we're looking at is the
fact we are tracking ultra-short term price trends l Not major
trends, - short and medium term trends, depending on how long the
dots stay in one direction on a straight line.
So, there we have it. Dot direction gives the day by day trend
of the commodity. If I'm lazy and if I wish to day trade, I trade
only in the direction of the dots. If the dots are up, I look to
buy. If the dots are down, I look to sell. If I feel bold, I will
trade against the dots
- outer channel line >
2 dots on, 3 dots on more later
I4 mmm away from dots
Here's a little tid-bit for if dots don't go up or down, but
snakes sideways, horizontally, U have a congestion. More later.
2I5
216 P&L
IDOT DI STAfKEI
Now, let's look at how the dots move away and towards each other
and what it can ! l l ~ - ~ n .. _ Let's take our Dec/78 silver illustration
and tack on another four weeks of trading, and see what we can
learn from dot distance.
First of all, I guess U can see that dot direction is up, except
for short term congestions A , B , C , where dot direction sort
of slithered sideways. ( the fact that A,B,C, did not 'dot:__down
strongly meant a congestion existed ) .
Now notice that in area 'D' , gats are quite amazingly equidistant
from each other ! So are E and F area dots ! And so is G (B) , the
five day contra-trend congestion ! This illustrates a perfectly
happy harmonious market for those few days. Dots are equidistant
apart ( amazing ? ) and in approximately an absolute straight
line. ( amazing ? )
But look what happens on day #I, .the dot turns flat ! The market
is temporarily losing upward steam. Look at the selling the next
P&L 2I7
dav, #2, ..... it closes down to 564.50 . No way wud that market
go higher or up strongly that day ! Too much selling pressure.
But, good gracious, look what happened to the dot that day ( #2 ),
.... it went up .... which meant that buying pressure was really
there that day, and look what happened the next day. It opened 6
and closed IO higher. And the dot moved away from #2's dot .
And, the next day, and the next day. Dots equidistant. Good
orderly momentum. But look at day #3 .... the dot flipped
sideways again. O.K. No way on day #4 wud prices go up strongly.
U wud look to sell, or take long profits, or whatever. Look what
happened to the dot on day #4 . It moved down. But not very far.
Certainly not as far apart as were dots of days between #2 and
just before #3.
This was the signal to me, that since the down dots were not far
apart, that I shud be preparing to buy again and go long, and that
some sort of flag, pennant was forming. And, sure enough, the
days following #3 put the dots close together and in a straight
line and finally on day #5, the dot moved slightly up off the line
and I was a buyer ( more later ) . And suddenly on day 6 the dot
moved strongly up and away we went.
I
So u can see how, generally speaking, the dots tend to stay i ~ a
straight line and that as the market is temporarily slowing down,
the dot will pull back towards the previous day's dot, one way or
another, and that when the dotsmove apart, we have an expression
of a renewed or new trend.
All terribly simplistic, but terribly effective.
Now, I want to mention something special about dot # 7 . Do U
notice that it is further away from the previous day's dot than
anything before it. It means that the day after day 7 , that the
market is going to really have to explode to keep the dots that
wide apart, or else the market is slowing or exhausted itself.
I knew that the close at 604 was against a trend line and that
there was a gap and that volume was not too high that day. Sure
enough, it was a temporary (?) exhaustion gap and prices opened
down and prices tumbled somewhat.
When U get to realize how important the distance of the dots are
from each other, U too will appreciate almost immediately what
the market will do that day and possibly for the next few days.
It is not the purpose of this book to teach U everything U need
to know about dot distance, but once U see the dots unfold as
they shud, or shudn't, U will know all that there is to know.
9
2!8 P&L
-

-.
FROM
Now, we'll swing a little away from looking at the dots (we'll
cum back ) and start to look at what a high or low price in the
day following a dot can portray.
If during the course of events of the day following the day U have
put a dot on the chart - prices move "x" mm ( millimeters ) away
from that dot, U will find that given the normal momentum flow
of the commodity for that general market period - weeks to months -
that the price will be very temporarily ( or permanently, a. top/
bottom ) , over bought or over sold, for that day. ( This enables
u to be in on the very top price or bottom price of the commodity
for that contract price, if u acted inothis range. )
What I am trying to say is. that if to-morrow's price goes "x" mm.
from to-day's dot, then in an upmarket, I wud get out of my long
position, and possibly go short and in a down market I wud get out
of my short position, stand aside or go long. This is especially
true if the dots are ..,.ide apart and momentmn channel uery steep
more later ) which wud be an expression of a runaway market or
a exhausting market.)
.. --... ;--.Jl""oor---- .... .
- f. ----.::- --==t:
::::::::: 0 :::-..::1. t1:::5:::- ..... ..; .. .:=; ._,...:::. -P
- --:;:= : ----=-i:; =- ----- ------- . -
: ::.r.- - :.
--
---- ,_ .:. -
- r-:r:
- 1'-1-0 - - . -
This is an actual
working chart
of soybean '77
market top
see if U can
--0 - -
.= - . =- -"1- - : ,...;._ .. -
find the dot of
the day before
the day with the
big blob on top,
and notice blob
it is over 50 mm.
away from the dot
the day before.
The market was
over-bougllt that
day.
0 - o...,j '-:: : :
_. -- .:.. 0 --4--
;;:-t .... .., .... - .. ::t:
. -0

' 1:-\--
:.;
0 .. ....,..
-
. -
: "
... - _ __.,__
-
....._.,___;
--- --
--
- r--
P&L 219
Let's look at silver .... I4 mm. seems to be the figure for silver
at the moment,
-- - ---- ------- ---
--- ------------------ ___ I_ l ... __ ..
. .
0 ; !
" u v _: . ')- _ - L __ _ --- --- _;________ i_
0
tBT; _--- _ _ _ ;
r . : . . .. . . _ -- ------- ___ ; --
. - . :
... , ...
_, -
. . - -- .. -
i --_ -=_;
t
_""T"" __ ..:..;_ ..;.
-!-- ..
......
that when prices move approximately I4 mm from
a dot, that silver is temporarily oversold/overbought a correction of
one sort or anQther is going to take place.
./
Let's take out section "A" from the
above charting, and look at it at left.
Count up I4 lines from dot fi and U get
the high of 604 for the day,
day "A" Even if U count up 14 from
day #2, u get the high for the following
day.
9
220 P&L
At the moment ( silver is not really a run-away ) , silver goes
a maximum of I4 from the previous day's dot. Last winter, ( all
winter ) it was a maximum of 8 .... there are different market
conditions this fall. Using this overbought condition @ I4 cud
put me within a I or 2 of the contract high of silver, if it
were ever to actually top at these prices. Naturally, when silver
is m a ~ i n g one of these short term tops at I4 , I get out of my
long positions, and may short slightly, but I look to buy a g a ~ n ,
since the major trend is up. ( Remember the trees and the forests ?
Take any commodity U like and if U have the patience, trace out
the dots and high/lows and see if U can cum up with the "x" distance
from dots at which U wud buy/sell, for that commodity for that
'season' . Look at the silver illustration again. Days B,C,D stopped
at I4, and back a few weeks; it was stopping consistently at around
9 (days E,F,G,H,I,J,K,L, ). Since silver has opened to I4, does
this mean it is opening up to commence a bull blow-off, or is it
already topping. I'll tell U something, something is up!!!
---- .... do Usee how watching these dots and prices around them
signals the market's mood ?
There is one time that I am very cautious about taking action at
I4 ( or * or whatever ) and that is when prices break up through
a congestion, as at #L , and E , especially if it closes in the
area of the I4 . -- it is a possible breakout of the congestion
and no way do I act. Wait for the following day ?
There's one other time wherein I am reluctant to act at I4,
in silver at the moment, and that's in a bear crack, whether it be
of a corrective nature, or a major bear trend. U know how ruthless
those cracks are But these distance from dots are miraculous for
medium and major trend bucking .
Needless to say, these distance from dots are useless in a run-
away market. No way wud I short orange juice last year when it was
a run-away market. Silver at the moment is not in a runaway. The
fact that prices dg pgt stop at "x" distance from dots is a first
signal that U are in a run-away.
Let's look at soybeans '77 again. They were in somewhat of a
runaway, but not really .... they were just bloody strong
too much liquidity to give a genuine daily gapping market.
Soybeans opened up to an unbelievable 7 0 rnm distance from dots,
where it was continually stopping at 7 0 mm, both up and down. These
80 mmm caught the ultimate exhaustion within cents, both up and down,
as it pumped away to form its' top. The dots were very wide apart
(obviously topping ) and forming very steep channels ( more later )
signalling the bull blow-off. Do U see how we now have a criteria
for recognizing bull blow-offs ? - dots incredibly wide apart, dots
in a straight line but very, very steep, prices exhausting regularily
around a 'constant 70 mm ( last winter it was 8 mrn ) . Feast U're
eyes on this soybean chart. -
221
- : ::::
........ -
-1- --- - '--+
--.
-:.:.
-.. -- r--: .
-+- .._
t-
-
-
---
----
1-- _..
- -
-:r.
.6
-
t --
ti--
- 1'1-- -

- .,:.-
- --

1

:F-
.........
222 P&L
Now, let's look at this distance from dots another way, and that
is from the criteria of two dots on, three dots on.
The same thing really, but we're looking at it from a different
direction and will express even further, some of the realities
of Point and Line. Cgarting.
2 DOTS ON, 3 DOTS ON
Let's assume that we have an up market.
The dots are pointing upwards and
they're in a straight line, or they're
not. ( It's just that if they're not in
a straight line, it makes the "2dots on,
3 dots on' even m re valid. )
So, we draw a line through the dots,
Now, guess what ? Let's have
a little snapperoo. Let's put
on the line the dot that's going to be there
two days from now,
and, here we are
on
- that's
to-day.
and, why not put on the line the
- three days from now
- two days from now
dot that shud (will ~ t ? )
be there 3 days
from now.
(to-morrow's dot)
A to-day
Well, on the line we've got
to-morrow's dot (who cares .... to-morrow
is going to happen anyways .. maybe the
dot won't even be on the line to-morrow ... a
crucial signal !!!!! .... more later)
\]
So, what's going on? ..... if we already have the dot on the
straight line two or three days from now, to-day, we have a
calculated price i.e. the dot already before us, and somehow the
prices of the day two days away, and three days away are already


P&L 223
known. I guess a computer cud figure out a reasonable range of
prices to put the dots on the line for those two days ( #2 & #3)
Since we wud presume that we already know what the prices cud be
in two or three days from now , in order to give the appropriate
dots so they wud be on the line .... what the heck is one supposed
to think if prices already move into that range, - to-morrow ?
If prices to-morrow ( day #I) are already up to the price of the
dot for the day after, or even better still, the day after that,
i.e. day #3 , then prices to-morrow are already where they're
going to be 2-3 days away ( or 1-2 days from to-morrow ) .
Now, what are we going to do with this ? Well, if prices are
already going to be ahead of and we're assuming that
the market momentum will keep rather constant at least for the
next few days, then why not take profits and maybe short alittle ?
The rationale is similiar to the I4mm, I4 and Bmm, 8 described
re: 'distance from dots' .
j
1 Think about it. It's a phenomenal concept ! If U had a diamond
which U knew wud be worth "x" dollars in two weeks, and the price
was already there to-day ... wby wajt for twO weeks to take
profits and sell it ? Maybe U cud do something else with U're
money during the coming two weeks, and then buy the diamond back
again at the same price or most likely U wud be able to buy the
diamond at a lower price the next week. I for one know that in
the case of commodity futures that in the interim, the price will
cum down. It has to in order for the market momentum to remain
constant.
And, here we get into the realm of the absolute beauty of
P&L Charting.
In order for the market to maintain its same momentum I
know that the dots will be right on this main channel line. If the
e I
1'

dot suddenly moves up gff tbe ljpe I kpow
that the momentum has increased that day,
I know bloody well that the market has to keep
that momentum, because, we now have a new
momentum {_ new momentum line
' "
t/
f/
,/
/
/
a new momentum up and the dots :
will have to be on this new line
with this new momentum. If it doesn't
then I know that this new expression of
strength is nothing but upward exhaustion !
224 ?&L
What happens when ~ ~ e dot doesn't
move up but moves off the line .......
it is a further expression of
an exhausting ( not yet
exhausted, but exhausting )
market .
~ i : - dot shud be
' here
"
,
"-market exhaust
I have interjected this-little seance on dots swinging to explain
to u how interesting those dots can be, and how they express 'the
momentum of the market [ much more later J so , i ~ w_e 're talking
of dots, why not talk of dots where they shud be 2,3 days from
now, and once again, if they're already there , why not take
profits, or maybe go short a little.
J
...
. .
Q
N
X
'0
N
Q
11'1
11'1
"'
"'
/{
Look at day '3' -its' prices stopped on the upside in the area
of the dot two days away - '?' . Ditto for day D,E,F,G, . This
business cud go on for ever, and it does.
P&L 225
We get an idea thru the section on channel momentum , cuming up
later on, how we can relate prices thru placing on charts, the
and lines and consequent prices long before they occur
and get to know how momentum is expressed in terms of how steeply
the dots move or don't move. Let's take soybeans '77 for example.
Now, this author was taking profits 2 & 3 dots on and going short
as market was slowly starting to move up. But, guess what
happened ? Well, this author was shorting about three dots up and
I got nailed. The market was not correcting downwards and a more
steep upward dot line was forming and being confirmed, because I
got nailed two days in a row. I was immediately given the signal
that new forces were entering the market and that if this momentum
kept up, a big move was on the way. ( I switched to other techniques,
see channel system - cuming up ) and I stayed long and pyramided.
If 2 dots on, 3 dots on fails twice in a row ... thank U , but
I will abandon it and adjust to the new market conditions. (And, I had
been waiting for this moment for two years! )

then again,
if all that was happening
was that a new main
channel line
was developing and a steeper
one, wud it not hold true
that '2dots on,3 dots on'
, or even better '4 dots on'
wud work on this new main
channel line ....
.. getting complicated?
Don't worry about it. This is
just a little extension of
?&L charting, as there
are many and U will probably
cum up with a few of U're own.
I know I have some little
special ones which I cannot
put in print, because don't
want. everybody there exactly
where 1 am going to be,
since P&L charting allows
me to fine tune so effectively.
/

/ --
/


f
(j
/
Q
/
_/
/
/
And, u wudn't either. And U won't when U cum across some of them
U'reself. They're all right there. U have all the Fieces right
before U're eyres, as 1 do. All U have to do is think about them.
226 ?&L
Here are a few examples of what I mean about finding out a
few things. They are taken from my notes going back a few
years ( wud U believe six ? ) Cum back to this page in a few
months after U've studied P&L charting for a while and see is
U can find out what I mean.
- momentum of channel has great effect. Watch
out in a relentless bear crack and also a
raging bull
- the first time U have a failure at 2-3 dots
on, U have that bear or bull. This signal
is one of the first and greatest signals for
that bull or bear
- there is something about the good sale, 2 dotsl:f 9
forward, not being hit that day, but holding J
the next day ( incredible ) which is a signal
of a topping market.
We're going to speed up a bit now. I've got a lot to cover and
I will be talking to U in a less gentle style and will be more
didactic. I will be stating realities andpresumably U will catch
on to the significance of P&L charting and appreciate the
significance of that 'dot' or point. There's all sorts of neat
little tricks cuming up. I leave it to U to think about why
they work. (Because, if I can get U to think . I know
U will effectively employ P&L charting and make just scads and
scads of money, and if U employ what's in the rest of this
book, U will keep it! )
DoT SWINGING
The day that dot swings off the main channel line,
watch out !!!
/
/\
/ dot swings off
/

/

/
The day that dot swings off the main channel
line, U can always
sell on that channel
P&L 227
I
line. If a dot moves off
the line, that line becums
4.. U can sell
I here
;
'valid' and U use it to sell with
unless, as on rare
occasions, a vibrant
bull pushes thru.
I
I
.I
1
The day following that day that the dot moves off the line, U
look to sell
.
sell in this area
- look to sell
this day. ( may be only
good for
one day )
Just because the
dot moves off the
line doesn't mean
market has topped
- it's just topping,
- maybe just entering
a congestion, but,
look to sell or take
profits from long
positions.
In an upmarket, dot moving off the line means that market losing
( hasn't lost - just losing ) momentum. ( rPverse for down market
To it, lookee here,
_______ ;
.
. . ---- ..... .
l -- - ...
' j
- .
__ .. ..
.. ::_
Line 'A' and 'B'
becum valid the
moment the dot
moves off U can
use it to buy/sell
with. Do U notice
how prices go exactly
to that line ...and not
beyond ? ( incredible
( don't see the
light on this, some
day U will )
228 P&L
DOT TURNED UP, DOWN
I
"
1 '\-dot turned down from 'a'

I
I

I
I
I
/ '1" whoops - dot just turned up from day 'b'
, .
I b

/
I

'
, )'dot just turned up
\
It's not a bad idea to go with the dot. If the dot turns down, go
with it, look to short or stay short. [ I've already taken long
profits, thanks, because dot swung off the line the day before ]
This is not always a firm rule, because often by the time
the dot has turned around, the market may already have made its
corrective action if the action was just a contra-trend move. If
the dot has already turned down, possibly u shud be looking to buy,
at 2-3 dots down, if the main trend is up. - see what I mean about
looking at the trees and the forest, besides the roots ?
Let's look at the silver chart again, and I will extend it further
backwards to give U further illustrations. It's on the next page.
Days the dot turned up and U cud have gone with it
are # ' s I , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 ,
Days the dot turned up and U cud nor have gone with it.
- #'s IO .. only one day- not bad ! and even then U cud
have gone with it because even two days later, prices went up
P&L 229
::..:. .:r.:.:.:... ::-.:.;: - . : . _- ... . . .
. . .::::::::..::.:.:_ --.
. -- .
. ...
_:::;:::r:..::_ :: .. .. ..
- -. - --- ... . I
... . ... ,.. .... _... ' . -
. ::- -- -_-:-__ .- .. : : .. : - .. . . : .--
- - . . . --. - --- ... - ..... :. - .. .; . . . . . . ; .. -. i . - - : ! - --: .. : . . . . . . . ' . - . . . . .
' o : :. :: :-' :.: :::; ; ' o t o ' ' o ' o , -...!. o I - -:
..:.-=---.---- -.-. . .
: ; 'l1._:7_. - _ .. :_ . :.:::_._:. !_ . ; .: -. . .. , , __ :
: .. :.:t _- .. t- .. . T
---" -. 1 tflll
:-: .... -- ------------------y- --y--.. -. -.
------
....
...
'.
. i .
--:----- ---;-_ ---.
. . > :: t< :::.!:::' ::> .. :. '
, ... --- -------
Days the dot turned down and u cud have gone with
it are #'s II,I2, I3, I4
Days the dot turned down and u cud not have gone
with it are ( remember the major trend in silver is up )
- #'s IS, I6
- only two days
( remember what I said about 2-3 dots on and
trees and forests ) /
So, out of I6 days, only three days of dots turning didn't work
the principle of dots turning up or down is BI % effective
- not bad.
[ By the way, I am applying all my illustrations to the silver chart,
the same silver chart, - even in chapter on planning, so it's not
a case of chqsing a chart that works to prove a point. All my points
have to prove themselves on this one chart. It's the only chart
I'm working on. I'm being very honest. I hope U realize that. J
230 P&L
Since we know that dots turning up/down is around 80 % effective,
one cud concentrate on the conditions in which the 20 % fail.
I suggest U look at a) T.R. 's ( cuming up in our discussion)
b) normal tops/bottoms for the
commodity in which U are trading
( cuming up )
c) are prices in congestion. important
What happens if the dot does not go up, or down ?
This means congestion.
- the dot goes absolutely sideways per x, y, z, z, z,
in above illustration. And obviously, in a major
uptrend, I wud look to buy at the base of the
congestion . If the dot refuses to move down in
an upmarket, obviously this means that there was
support to the market.
Silly .... simple ... but true
Remember, if the dot isn't doing what it's supposed to do
( e.g. shud go down but moves flat ) , then the opposite is
happening .....
I suggest u write that sentence down in big
letters.
One little thing.
In an upmarket ( or down ) if prices
suddenly cause the dot to immediately go flatt off the main

I
~
I
/
I
I
I
1 0 - shud just swing off
I
J - goes flat
channel line,
it means that
an incredible
alternate force
has gone against
the market. It cud
be that the market
is grossly oversold
or in fact, the
next day prices
will go crashing on
F&L 23I
down. If prices don't go crashing on down the day after the dot
goes flat the tSen are oversold and
support evolves.
One hint : - if the close on the
day is down right to the bottom
for that day and travelled to
that point towards the close
( see time-price reversal chapt.23)
then expect ( only expect ) prices
to continue down.
To note here:::::::- the dot shud not move that quickly off
the line. This fact is placed in this book, because u will cum
across it in U're trading and u will have sum reference therein.
So, we.' ve. c..ovette.d the. bcu..i..CA ..<..n Point a.nd Chaltting
1) dot d.Ute.c..tion
2 J dot futa.nc..e.
3) cU..ota.nc..e. t)Jtom dot ( 2, 3 do:U on )
4) dot .ow..<..ng..i..ng
5) dot up/down
/1 c..a.n nov: .6 ..<..ng , do e. ' !ta.lj' me., n a.h .6 0 ,
a.nd, U' ve. le.a.Jtne.d to look a.;t Une..o dJtallJn tlvw the. do:U.
Nov:, le.t'.o .te.a.Jtn the. .tauJ, tee, doe..o,
- "c..Jtut" a.c..tion
- :the. c.ha.n.ne.l .o U.6 -tem
- .the. T. R. '.6 ( an ..i..nCJte.d..tbf.e. de.v.i..c.e. )
- :the. c.onc.e.p:U on IU.:t:t.<.ng, d..<..gg..i..ng a.nd , bloc.IU.ng,
Then we. wil.l look a.:t noltma.l :top.6 I boUom6 a.nd .oome. a.bnoltma.l
dot movemvU:o
\
.Then .oome .oe.c.onda.Jty ke.y.o e.g. 50% JtetJta.c.eme.n:U, ta.Jt.get pJtoje.c.iloYL6
I a.nd .o:tut) t),
WheAe.upon we. will. delve ..<..n:to :tJtend a.na.i.y.o..i...o a.nd c.onge..otion a.na.ly.o..<...o.
9
9
232 P&L
. - - -- -, . . . .
..... _ ..... --
so, to the first topic.
CREST ACTION
Here's a crest
,the 'crest'


Taking the high/low/close bar lines off the silver chart makes
the 'dots' look like this, and will reveal the crest
.. _:.--: ___ _
_J-:-::
- ---- -
....
3355011 20 x 20
7'
111
1, H Be
"'""''' F no,.,
, ..... " ........ -- - _z w,.,, A
"r>A J r Q ""
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
C"ecoS.S'. 1=-
V w .114, 'wit TE
'T"""' ,..,_
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
?&L 233
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 crestshowing 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
new maier trend. This is obvious )
Therefore, if we assume that a crest is valid, any challenge to
9
234 P&L
it by prices must be considered a threat.
; most valid crest
I.
t-1..
G I Prices
+crack
... r
price challenges
crest
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 c r e s ~ 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
--- -- - l-:- ~ - -
tbe crest then the crest stands a good chance to be valid.
Well, anyways, let's illustrate
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,
P&L 235
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 ,
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
'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 (
on each side, creating
two channels.
.!. ..
. . .
-..... ---.----:- - ---------- -------

--: -. --
--s70

. ! .
= r- . . :
__ _:_ __ -
- . . . .
. . . -. --
I
: : 0 '
. .
: __ - -------- ___ -; _________ -----------------
. .... -- ..
.. - . . ..... - --
.- -- ........ _, ... - .. -. -.- -
--. . . . . - t -- .. - . ; .
. - : . -- - .::.: : . : .
_,._
---- ....... .
. -- ........ -
LJ : : <: ... :;::;- : .
.. ..J:I-----------. -- :._:..::.:_ .. _ ----
,._ ....... --
-- - -. . -. -
--------
. -- .... -.
; - - ..
---------- ------------ ---
--
238 P&L
What can I say ? Just look at the above illustration of Dec.
Chic. Silver '78 Look at all those channels - ( each exactly
7 mm wide, drawn parallel out from the 'dot' line - the main
channel line ) What can I say ? Look how prices each time are
confined to the channel and look how more times not, prices
actually just "touched" the lines ! Talk about fine tuning !
I'm rather proud of my channel system. Use it as U will in
U're trading. I leave it to u. Just look at all those opportunities
to buy/sell ! Any kindergarten kid cud tell U that prices stopped
right on the line. ADd even if it went outside of the line, it
didn't mean much, unless the market was turning around.
As I say, I leave it to U to do what U want with it, but I draw
U're attention to the following observations, from above illustration
...
section
'A' in
illust.
section
'B'
- each commodity has its own channel width. Do some tracings
with P&L charting and U will find the width appropriate
for the commodity U are trading in.
- -in the main channel, note how, channel wall caught high
prices at 573 . Notice how two days later, the dot moves
ofr main channel line and the next day prices are off.
note how in outer channel, prices up in outer
channel for five days before falling thru and never enter
back into the main channel
section - now the main channel in the down market - look how it catches
'C' low at 56I and then see how it slithers around for three
days in outer channel 'D' before moving up.
section - very interesting. Once again catching the highs. Note how
'E' prices close one day outside main channel 'E' on the upside
at 584. Rarely does a price do this - it means that the
following day prices had to explode to keep up the same
momentum, but it didn't and fell back into the main channel.
What a day to 'short' . - the bull had evaporated. A typical
bull blow-off. Look at that area again, reread the above and
see what l mean
look at the channels in sections F,G,H,I,J,K,L, , - all
catching highs and lows.
look at the congestion between 'G' and 'F' , when the dots
are snaking almost horizontally, - even then the channel
system was catching the highs at 558 and the lows at 545.
P&L 239
Regarding 'outer channels'
we usually have three patterns in them.
(3)')
\, __ /
prices go thru in almost one day
e.g. in above chart, "M', 'N' .
prices take 3 or 4 days ( very common
before they fall out of outer channel
e.g. in above chart, = 'D'
prices do what I call a 'slithering'
along the outer channel for maybe one
week ( o ~ l o ~ g e r ) befcre finally
falling out and prices come off
sharply or at least for a few days.
whenever I see prices slithering, I
know there is a nice correction curnjpg
~ ( Another criteria for a blow-off )
e.g. in above chart, = 'B' '0' , 'L' .
There is plenty to see with the channel system and it's all yours
to use in U're trading plan, if U wish. ( Don't try selling it to
others, because it is copyrighted, as is all of Point and Line
Charting, per chapters nine and thirteen )
It's a super tool for U day traders, if U have the patience to
wait or stick to a trading planwhich U derive from it.
9
240 ?&L
Be t ~ a t as it may, I do offer it to U, but with some caution,
however. There's every chance in the world that U will get mired
down with the channel system. u will begin looking at too many
roots on the trees and not realize that the tree has been chopped
down. It's a big world out there, and just because U feel super
about becuming a 'channel expert', and start outguessing the market
and let the channels tell U what the market's going to be doing,
U're going to be fooled. Don't outguess the market or presume
anything. Just realize that there are a few consistencies with the
channels, and all it is meant to do is give U further confidence
to strike, when U're trading plan says the moment is right. It's
a very deadly weapon if used right and very messy if U let it
whip-lash U're thinking capabilities.
some tricks:
These channels have momentum graphics, usually three.
I) low momentum MI
2) medium momentum M
2
e.g. in above chart,
E, M, G, N, I, 0
3) steep momentum M
3
e.g. in above chart
A, E
II
u can get in advance, the usual degree of steepness of the commodity
U are trading and record it. ( U have to do some work here. )
Note how momentum of scetions in our silver chart, E,M,G,N,I,O
are roughly parallel
Note how down channels C,D,H, are similiar momentums ( M
2
) and
'J' is similiar to 'P' ( M
1
)
Note how down channel 'F' is very steep i.e. = M
3
P&L 241
Note how up c h a ~ n e l A, B , is steep and is what l call M
3
Blow-offs - another criteria for blow-offs - we've got
three now ! )
Well, i V wish, U can almost project in advance, maybe an
M
2
channel up or down from a congestion or top before it'even
occurs and this wud give U a preconceived idea how far prices
wud move out of the congestion the first day and at that time
give U a probable channel wall for the commodity for the
next few days or weeks.
Take the congestion between 'G' and
/
'F'
-
phantom line
Project a line
up thru dot of
day 'X' , similiar
to momentum M
2
and
draw a line
7 mm. parallel to
it on the upside.
Now, I suggest u
subtract about 2
mm. from 7 to give
u '5' mm, because
the dot for the
next day more times than not will not fire rite up but be a l.ittle
to the rite of the projected ( phantom ) main line. If U look
closely, U will see that this 5 mrn. line turned out to be the
'channel wall ' . This is a reasonably interesting tool, and with
a bit o= exposure U will cum to appreciate what market movements
are all about and how almost predictable they are. This trick belongs
especially to market congestion and topping/bottoming analysis.
Now, we're getting on to some more goodies, and believe me,
the next one is a winner.
THE T,R,'S
Now I'm going to revert a bit, and hold U' re hand again. I
want to go thru this in same detail because of its relevance to
Point and Line Charting.
9
242 ?&L
At the end of the secrion,I will tell U what T.R. means.
U will probably guess it by then ) . ( No peeking . )
The T.R. is one of the most incredible sign-posts, road-map
-whatever - that U .cud use in future trading , whether by
Point and Line criteria or otherwise. It is part of Point and
Line because it is the key which makes everything click.
Without the T.R.,- it almost seems as tho' the market wud have
no energy. If a market is topping, hitting all sorts of lines -
just bang, bang down - everytime it rallies, it is hit hard -
it is not until a T.R. is hit on the downside that the market
can resurge upwards and go thru all those lines, or indeed, the
market does the other by 'cracking' once it goes thru the T.R.
( The only exception to the above is in a genuine runaway,
which by all accounts defies most conventional technical analysis
anyways. It doesn't have the time to wait for all the usual
stop signs and roadblocks. )
T.R. 's are isolated lows/highs , but it is how these jsalated
lows/highs are appreciated that matters. U know what a isolated
high/low is don't U ?
h
h
~
h = isolated high
r j ~ ~ l
1 isolated low
1
and,
the phantom isolated high/low
phantom high
/
phantom
low
There will be definitions cuming up, don't worry
-
=
P&L 243
Here's our friend the silver chart again,
.... ith isolated highs marked X
with isolated lows marked y
with phantom highs marked A
with phantom lows marked B
. ~ ... _
---- .
- '-
Definition time !
- of isolated highs/lows that is, because the definition:of
T.R. 's is something else ( T.R. 's are made from isolate
highs/lows. )
Isolated high
is any daily high
that has a lower
daily high the day
before'it omd a
lower daily high
the day after it.
244 P&L
Isolated lev.. is any daily low
that has a higher
daily low the day
before it and a
higher daily low
the day after it.
Phantom high occurs when there
are not a daily
high on either
side, but the
lows for that

See also
page 584,
585!
high LJ
day have a daily
low on either
side.
lower/
than
A
A bit complicated maybe, but once U get used
to the swings with T.R.'s U'll be glad to
see them, and then U will know what phantom
high/lows are. )

At
'
lower
than
A
T.R. means
- an uptrend begins when the last isolated/phantom
high in a down market is penetrated on the upside
and that at the uptrend stays in effect until
prices fall below an isolated/or phantom low,
whereuoon the new downtrend will stay in effect
until an isolated or phantom high on the upside
is passed thru, and so on and so forth.
Prices swing from one T.R. ( the isolated and phantom high/lows
to another, alternating from up, down. up. down llp, ciown up,
down, - ip infinrite
Money can actually be made by acting on these T.R. 's in sequence.
That is, everytime prices "o thru a T R u enter the market illSt
a tick beyond the T.R .. The only thing with this is that T.R. 's
sometimes fail and U have a loss before the market has moved
sufficiently to give a profit before the opposite T.R. is hit
in the opposite direction. But, there's one thing that stands out.
It is that the more consecutive losses in a row U have, the closer
P&L 245
U are cuming to a big move. To take advantage of the fact that a
high number of consecutive losses gives birth to a big move, is
to increase( Martingale system ) the size of the positions each
time u lose so that when the big move cums, u are fully loaded
with contracts, as prices break out of congestion. Everytime U
lose U add on to the number of contracts, and if U win, U lessen
the number of contracts. U are actually pyramiding the losses.
( Sounds a bit crazy, doesn't it ? )
I've done quite a bit of work on the subject, and I've got
two pyramiding formulas
I - 2 - 7 - IS - 32
11
$35,000 is needed
11
I - 2 - 4 - 5 - 7
11
$10,000 is needed "
I did some calculations, ( I have never used this attack
but the T.R. 's answer a low of questions in P&L charting re:
hitting/digging, blocking .. cuming up in our discussion) .
I used the formula I-2-4-5-7 for the commodities in the following
illustration for period June/75 to Dec. 30/75. ( They are from
my private notes of I976 ) . If I had a loss I wud take on 2 cts.
and if I had another loss, the next trade wud see me with 4 cts.
If the trade won, then :i: wud. reveJ:t back to 2 cts. and I wud move
up and down the pyramid formula, according to whether I loss or
won. Anyways, in the following table U can see that not one
commodity had a loss and only coffee put U at a loss ftom U're
original capital, for the period mentioned.
See next page.
No accommodation was made for bad fills or commissions. This was
just a study I had made. U're 'stop buy/sell order' was placed
just a tick above/below the T.R. with the appropriate number of
contracts. I do not really suggest U actually use this approach,
but it is interesting. Take any commodity U wish and experimep.t.
To review:
9
246 ?&L
.--.
i
[? t:-((1 oo
.
eoP.FE
r
:(!ace Pt
l
: S UG
!

' f'L1t11WIII') 7
. q-t $A "j'
.. . . .. ....
. . 0 JL.,..
Ct-rliL"E

-. ,. .... .
(' l. "fWOOO ;:t .. ;
,
VE:fl.
__J
P&L 247
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.
248 P&L
Position A take I contract profit 2I

B take I contract loss II

c take 2 contracts loss I

D take 4 contracts profit I
E take 2 contracts loss I
F take 4 contracts profit I7
G take 2 contracts profit I
H take I contract loss IO
I take 2 contracts profit I
J take I contract loss 7
K take 2 contracts profit IS
Profit/loss
I = $50.00
Position A 2Ix50 = !050 profit
B IIxSO = 550 loss
c Ix50x2 ( cts.) = IOO loss
D Ix50x4 (cts.)
=
200 profit
E Ix50x2 ( cts. ) = roo loss
F I7x50x4 ( cts. ) = 3400 profit
G Ix50x2 ( cts.) = IOO profit
H IOxSOxi (ct.) = 500 loss
I Ix50x2 ( cts.) = IOO profit
J 7xSOxi (ct. ) = 300 loss
K ISxSOx2(cts.) + 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.
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 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
9
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 )
'hit'
Let's look at our silver chart again.
.
- ' t . -- .. ---. :: __ .. ,- -
- -- . --------; .. --: .. :f_-H-:: ('::;-
-------- ------ --------- -----------r.---........ - - ------
' . ; . . i : . . . <T::::: -;::: __ . . . . - . :
f '.: .-:-""7
. ..
. . ... .
-------------- ---- -------.----'7-- --------- -""'i:-:"-----
; . -. . . .
-. -------:------------ --- -+--:--- .
. R: _;
I . , ..
----. ---- .........
. - ' :
,j
r . . ..
--. 1
1
- _ _:____' -
-- -.,,...-------
. . ' - .
- . '
.. s:>o . :: :: ..
--- ... :----. :
. . -- . - . .
I - .
. . . .... -...
. . . . .... .. --.-
....
... ,
.. --.
. -- . . . .. - - . .. . ....
- ... . -. . . . . .
- ..... . . . . .
::-::: L:::. : :. i
.
AL..i.t ::! ':iJ
.Toft,. . . . - - . . - . . . . .
. . :plt\C&f"C ... :-:.: . . : -: .:
--:-- ::
. . . . .. ::! : . : .. :::: :! : :. . -> . : .. .
----:: : ; --- .__.:[_ . ....
. . . : . . : :: .
t '
J
- !-
. . . i ----- __ .. ____ ..-..;..,._. ________ _
.. -
-. .. ;_;, _._:_.:_ ___ .;:;_;.. _ .. --.:....;:..:..;__-_-- - ------I
.. -- . -- ...
P&L 2SI
Let's take area 'A' prices start t0 hit the channel wall
'W' 562 . No sweat - it doesn't mean market has stopped.
It's just our first 'hit' . All it did was validate the chanpel
wall line, because if a line is hit, the line becums valid and
U can buy/sell on it ( in this case we sell. } Prices fiddle
around for 2 more days between 558-564 while the dots caught
up on the line. Remember 2-3 dots on ? Prices therein move up
to trade for two days @ 563-569 , but, U know what ? They never
got near the channel wall 'W' This means to me that prices are
not even strong enough to go back up to touch the 'W' wall. In
fact, the prices were such that on day 'R' ( range 562-569 } , the
dot swung off the main channel line -ever so slightly. But all the
signals were there for me to consider taking profits and maybe
shorting because a price correction was cuming up. On day 'S',
prices hit their head again on a line drawn thru the last two dots.
Getting complicated ? not really. All I'm trying to do is illustrate
that my psychic starts to get ready for a price correction epee
that 'hitting' occurs a few times, and each hit is on a different
line

as each line swings over.
And, of course, prices on day 'T' finally
gave up and the correction was on its' way.
There's a good example of the opposite happening in section 'B'
on our silver chart, where in this case, prices were digging in
U've seen the bull digging in before it charges, haven't U ?
That's why I call the opposite to hitting ...... digging
If U can appreciate the concept of hitting/digging , then U will
be able to 'smell' when these things are going to happen. u know
that that damn market is going to be ( or permanently
topping/bottoming in 3-6 days.
Now,
U know what ?
There's only one thing that will relieve all that 'hitting'
or digging if it occurs. There's only one thing that will relieve
all that pressure, if say, hitting has occured. And, it's the T.R.
As soon as hitting occurs ( taking hitting as an example ) I start
to look for the nearest T.R. on the downside, or for one developing.
9
252 P&L
Because I know that once the T.R. is passed thru on the downside
(just approaching it in a runaway market is enough sometimes )
and especially if prices have just ticked thru or snuggled up to
as in a runaway market, that the market can almost immediately
shoot back upwards. Once that T.R. is snicked, then the market
can do anything on the way up. All the old lines that evolved
the 'hitting' are now invalid and prices can now shoot up thru
them as if they didn'texist. This rule is firm . so firm that
generally I consider it a firm one. It's so amazing. If there is
a T.R. nearby, prices to get there, one way or another
once the hitting/digging gets underway.
In area 'A' of our silver chart, there is that phantom down T.R.
@ 559 on day 'X' and this T.R. price is passed thru on day 'T' ,
thus relieving the 'hitting' pressure, whereupon I look for
digging in , which occurs on day 'T' , 'U' , 'V' .
This may sound all very complicated at the moment, but don't
worry, because if D shud get involved with P&L charting, U will
cum to know it as a visual momentum barometer, and u won't be
able to live without it.
I cud make some more rules on the topic. ( Now don't groan. )
They're just refinements and not really necessary and cud serve
only to fog clear cogitation.
In order to possibly make things a little clearer for U, we
will express the concept of hitting/digging, T.R. 's in terms
of
BLOCKING
Blocking is a visual representation of a confined
area that encompasses a hitting + T.R. or digging + T.R.

HITTING

DIGGING

P&L 253
Prices seem to congregate into 'blocking' once digging/hitting
occurs. I leave it to U what to do with this, but it's a
fascinating phenomenon. And these blocks seem to be so close
to each other in a non-runaway markets.
In the above, blocks A and B are digging in blocks
, blocks C, D, ans E are hitting .
If u notice that there is not an intervening digging block
between 'D' and 'E' . All the digging was done right in the
hitting box. This implies a rather strong market if prices
do not even bother to correct, and in this case, silver did
indeed continue on up after leaving 'D' to the upside.
! pray that U can begin to see the relevance of what I call
P&L Charting . It is an interesting theory, in that by
the movements of the dot and prices around them, one can tell
by their act;on whether prices in the short run, are continuing
in the same trend or doing the opposite by deviating from the
straight channel line, or whatever, indicating a weakening of
the trend. If prices snake horizontally, we are in congestion.
P&L charting seems to be more consistent ( dots on straight line
more often ) with some commodities than others. I guess it relates
to market conditions. However, putting the thinly traded commodities
aside ( even works there ) I find that silver, gold, copPer,soybeans,
meal, hogs, bellies, corn, wheat, sugar, cocoa, coffee, cotton
are all incredibly map-able. Cattle wiggles too much - but still O.K.
254 ?&L
NORMAL TOPS AND BOTTOMS
Have u ever heard of anything so ridiculous ? - a normal
top or bottom. How cud there ever be such a thing as a normal
top ? All market conditions are different and there's no way
one top can be so similiar to another. So u say !
A couple of years ago I did a P&L charting analysis of all the
major term tops in silver. All I did was take the silver tops
that seemed to be good for a long time. ( weeks to months )
Now, I suggest U do exactly that for the commodity U are
interested in and keep ~ t handy for r2ference.
This is what I found for silver, of thirteen tops.
a) I2 had a down T.R. squeezed up against the top !
b) it took only three days in all I3 to crack with
the T.R. formed within those three days in nine
out of I3 days !
c) all I3 congested and there were no wild swings,
almost as if everything got quieter and quieter,
until booom - down it went !
Analyse and listany common elements that appear in the tops
for the commodity U like and keep it handy. Be rather suspicious
if what appears to be a topping formation doesn't quite fit
that 'normal' pattern.
This is a very handy, handy tool for U big traders. If anything,
use P&L charting for this approach. If U're commodity seems to
be following its 'normal' topping,bottoffiing pattern, govern
U'reself accordingly, especially if this approach fits U're
trading style.
The theory underlying P&L charting states that if what is t o ~ e
expected is not happening then the opposite is true. If the
market is not doing what it shud be doing. then the opposite
is happening. If tbe dot does not stay on that straight channeL
line, then the price momentum is giving up and if the dots
don't keep acing in the same direction, then the opposite
is happening. Always look for the norm and any deviation from
it is abnormal. In our approach to futures trading, a deviation
is a very, very early warning signal.
~ h a v e a computer which will aive me the approximate range of
prices that have to occur to-morrgw for tbe dot to remain on
r
1_ ?&L 255
\rthat channel line. I mean, to-morrow's Cot is alreoav
known ! It's on the line ! And, since it is a numerical computation,
then only certain figures can give it. Right ? Right !
So,
by golly, if to-morrow's prices are not going to give me that
dot on the line - I'm ready The abnormal is happening. Prices
shud be such and such to put that dot on the line. If I am handy
to the market near closing time, I can calculate ( u don't need
a computer ) from the day's range and the close at the high and
mid-range and low ( three 'dot' calculations ) so that before
the market closes, I know where the dot is going to be for that
day. Is it on the line, or is it swinging, or is it turning up
or down, and maybe, is it turning up or down too suddenly.
In an u market, I am never too hap y when that dot suddenly
qoes flat o f e main
\ channel line. The market
too fast oversold too fast. I'm
too suspicious. The market
wud have to gap down the
following morning or I
wud look for further up
prices. - a further example of watching normal, abnormals, the
corner-stone of Point and Line Charting.
SECONVARY KEYS
One can have so many keys to keep a weather-eye on price movements.
We don't want so many. We must know the fundamentals of market
psychology, personal behavioural patterns, factors influencing
prices, market theories and the such, and let's not forget O.I.
and volume and the general behavioural activity of trends and
congestions. ( That is why they are all included in this book/!
And,
they are
But, there are a few items I keep handy
as reference when I'm looking at the chart.
/''\
\
I)\50% retracements
2)}trend lines, support & resistance
3 )j projections
. 4} opem.ngs
IJ
1
) closings
256 ?&L
I) 50% RETRACEMENTS
Every day, prices seem to almost be retracing 50 % , one way
or another. If my dots are rolling over, and maybe the market
is cracking, I want to have some idea where prices may stop.
So, I look at 50 % retracement from the last isolated high to
the last isolated low, and see if I can find a trend line or
something there, or maybe just a 'projected' channel line. It
is not the purpose of this book to explain in great detail the
50 % retracements , but look at the charts and U can see it for
U'reself and because it seems to be happening all over the place,
why not keep it in mind.
2) TRENV LINES & SUPPORT ANV RESISTANCE
An absolute must ! Know everything U can about trend lines
and support/resistance.
Imbed it permanently in U're mind so that U're always on the
look-out. Don't forget that most trend lines originate as prices
which occur at channel walls and outer channel walls.
3) TARGET PROJECTIONS
Now , this is interesting ! If ever prices shud be in target
areas, expect hitting/digging, blocking, congesting, and T.R.
development.
My way of determining a target is by taking a straight line
A
-------------- B
Now, separate that straight line but keep its actual length /
identical,
A-------------------
B
The distance between A and B is the same and who cares what
goes on in between them as long as the distance from A to B
remains constant. ( I like constants. )
P&L 257
To repeat,
as prices move from
to
A ______ ....;;;.;... _________ B I
who cares what happens in between. 'A' is where it started
out and 'B' is where they ended. 'A' is the starting point of
prices and 'B' is the target.
Now, follow me here,
the sum of all the activity from
to
A T
target )
will give the 'T' no longer 'B' for the sake
of developing our argument
So, all of the activity of 'X'
"'- L
A __ T
will equal the distance 'A' to 'T'
Now, don't panic.
Let's say that price movement from A' to 'B' and ..
A-----------B
c---------T
from 'C' to 'T' has to equal the 'T' , the constant,
since it is a part of it. This being the case, then,
A + B ) + ( c + T l equals the distance from___.
'A to 'T' .
( All this is part of simple algebra
We will now designate the distance A to B as simply "B"
and, the distance C to T as "C" and we get
A

9
258 P&L
t-lhat we are saying here is that the distance that "B" travels
plus the distance "C" travels is the same as the distance as
the crow flies from A to T since it is part of the distance
A to T, and that,
that, "B" + "C" A toT
So, we have
"B" + "C" = A + T
( Have faith, I know what I'm doing
How's U're algebra ?
We can take this "B" + "C"
and, turn it into
( "B" + "C" ) - A = T
and, let's mirror that and make it
T = ( "B" + "C" ) - A
WE GOT IT
A+ T
~ a r g e t equals ( "B" + "C" ) - A I
and "B", "C" and A are all numerical numbers
and, for the sake of our calculations they are isolated
highs and lows .
"B" , "C" , and A are prices that are the low or high for that
particular day.
/
So, now let's look at our silver chart and find some of these
highs and lows that we can put into our formula and see
if we can cum up with a target.
Look at the chart on the next page. The trend is up, so we
have two isolated lows ( A and c ) and one isolated high at
'B' . Let's see if we can find a target.
Calculation A=$5.7I
B $5.92
c = $5.83

J?,/c. c.:: J..oo1
I
..:it' 6.0it. P&L
<{"h c !
That being the case, then we
.----.-. take the
T = ( B + C ) - A
formula
and, we get
259
T = ($5.92 + $5.83)-$5.71
-'--
= II7.5 - 57!
= 604
and,
look what happened, .
..... silver went exactly to 604 -astounded?
Don't forget that prices moved from 57I to 604, a distance of 33
and it didn't matter what happened in between, did it ? It still
got there. The only problem was that at 'A' we didn't know that
prices wud go up 33 But we did at 'C' because we cud take
(B+C) -A from our formula and by golly, if prices do go up to
604, the target area, I sure as heck want to be ready for a top,
and as of this writing, it certainly is having a grand time up
there - seven days of congesting- at least I'm ready for the
bear crack correction if it occurs.
I will now take the silver chart and put it back a bit to show
U some more illustrations. I will designate the isolated
highs and lows for U and lay out the calculations and I leave it
to U to apply it to any commodity U wish. Have fun.
For the chart on the next page, the calcualtions are:
( formula (B+C)-A = T )
(B
1
+CI) -AI= ( $5.73 + $5.59 ) - $5.36 =target of $5.96
didn't quite make the target of $5.96 ,
got to $5.89 - oh well ! )
CB
2
+c
2
> - A
2
= (5.89 + 5.60) - 5.59 = target of 5.90
( almost made it to target. Prices got to 5.87 )
( prices got to 5.72 @
'B I
4
9
260 P&L
-
-
--
--t
-l-
-i -- ...,._
- --

- -- --.:..;-
:. :7 ttt'll" __,..__,


--:::
==-=-

::== :-
. :;.:-; -
.-l. - -
-f--

_.,..,..,_ __

-

prices got to 5.80 @ 'X' )
Suffice it to say that when prices got near 5.96, 5.90 ,
5.75, 5.83, and 604 , congested or stopped
Once aga1n, the market unfolds as it shud !
Isn't P&L charting fun
Having fun ? Getting excited ?
P&L 26I
3) & 4)
OPENINGS ANV CLOSINGS
are important to me because ! want to know where they are in
relation to my lines. Are oPenings jumping a main channel line ?
Are they already 2-3 dots uP and shug I sell ? Things like that.
! don't wish to place too many observations here because U may
place too much emphasis on them. We want to keep things simple,
- remember ? I merely wish to bring up this topic so that some
day when U're more advanced into P&L that u may re-read this
page and be stimulated to give some thought to openings and
closing in relation to our lines. They can be bloody important.
For example,
Maybe on closing. I wud like to be shorting if its against
a main channel line. I love this !
( and put into u're bag of tricks )
fe."t:,i
-
what a beautiful day to go short on
close .. prices snug against the
main channel line, andnno T.R. hit on
tbe downside lots of hitting !
- -
Day 'A' was a problem, but I did not
-
go short because when I did my calculations
for the 'dot' that day as the market was
closing (last l/2 hr. ), l saw that
-
-
the dot had turned up suddenly, and
remember what I said about tbings not
doing what they shud ? That dot shud
-
shud be doil}g.
have turned down that day because the
dots had been swinging the two previous
days, damn it. wud I have shorted
dots _doing what they
Such is beauty to me of P&L charting: Anyways, I had bought the( CJ
day before because it was at 50 \ retracement plus the outer (/
channel wall, plus I luv to buck a counter-trend move. ( see chapt.
on trends, chapt.6 )
(5.82 was about S-6 mm out from the main channel line - to the
outer channel wall. The low of the next day just touched the
outer channel wall. Also, I just luv to buy or sell the Ist
day that prices ever enter an outer channel or the dot hasn't
swung, up or down. This first day in outer channe1 bnylseJ1 is
a firm rule. See if U get what I mean. )
262 P&L
SOME NOTES ON CONGESTIONS
This author can very often tell two to three days into a
congestion, that we may be entering a congestion. The first
day that a 'dot' moves off the straight channel line

the trend momentum is arresting aaa
for a congestion is occurinq. either as
a topping/bottoming congestion C resting area
or a continuation congestion. Once that dot moves off
the main channel line, I look for the more normal rolling
over of dots and the dot turning down and the
'dot distance' opening up on the downside for a
downtrend or the dots as they move down, remain
close together, representing support. Understand-? }JC
Don't worry if U don't, . U will . -----
In the case of a topping market. if tbose dots tend to remain close
together. and especially if they wiggle ( snake ) , then a
congestion . is to me at least, clearly represented.
Before we go to the silver chart to show U what I mean, I wish
to bring up two other special items to look for in congestions,
re: P&L Charting.
I) the position of the 'closes' ( settlements )
to each day's dot gives an excellent clue as to
the possible direction of the breakout from the
congestion. ( not always a valid rule, but
nearly every time it does work . ) If the closes
are generally above the dots in a congestion,
then the ultimate breakout will be up.
/
most closes are above dots and breakout will be up
most closes are below dots and breakout will be
.down.
2) hidden, phantom T.R. 's occur ~ i t h great
=reouency in congestions, and if the market
P&L
is to break out on the upside, these phantom
T.R. 'swill be on the lower range of the
congestion area and prices will just break thru,
( maybe just tick thru and sometimes in only one
contract month ) , these downside phantom T.R. 's
are relieving the 'hitting pressure '
~ t t _ , r r
/ ~ h i t this day
phantom
O.K. let's look at the silver chart
263
'
264 P&L
sections B,E,H,L,N,P,R, are congestions because dots
are 'wiggling' or snaking sideways. Each has its' first day a
daily range wherein the dot moves off the main channel lines.
Each possessed the criteria of dots beinq mainly aboye the dOts
and each had a breakout on the A phantom T.R. existed
( 'X' ) and was hit 'H' on the downside in B, E, H, (just ticked
thru ) L, ( just ticked thru ) . Phantom T.R. 's are just
a handy guide in congestions. Isolated T.R. 's are just as
effective e.g. 'N' .
Note the other side of the coin, in that the trends are clearly
marked by straight line channels and dots wide apart, in
A, c, D, F, G, I, J, K, M, 0, Q, . Do U see how readily distinguish-
able trends are from congestions, and how with P&L charting they
are readily recognized ? At least, I for one know when I'm into
a trend or congestion.
Do U note also that in a normal ( talking about constants, once
again ) topping, bottoming that the trend reverses without going
into congestion, without the dots wiggling, but rather neatly
moving off the main channel line and then, usually the very next
day ( maybe a day later as in 'J' ) the dot turns up or down.
Trend section "c" in our silver illustration, swings rite into
downtrend section "D" . Uptrend section "F" reverts immediately
into downtrend "G" ( no congestion - or dots wiggling ) and up
'I" to down "J" .And there's a bottom from down "J" to up "K" .
Need I say more? When those dots go wiggle-diggle as in "H",
"N" .u are not in a trend
U've got only three things
no congestion).
congestion, trend, turn around(with
A word of caution: - donot mistake the evolution of a trend as a
major trend reversal. P&L charting only allows U to latch on to a
minor trend reversal, which of course may turn into a major new
trend. P&L charting will not let U look at the forest, or the
trees, - just the roots.
There's an old saying that "look after the little things
and the big things will look after thenselves". Well, in
commodity trading, more is involved than looking after all
the wiggle-waggles. U must look after the big things too.
That is why I have absolutely refused to write a book solely
about P&L charting. P&L charting cannot be separated from
conventional technical and fundamental approaches, otherwise
U may not see that they have built a dam downstream and that
the forest is about to be submerged & U're roots will drown.
GOOD LUCK
I) enables U to recognize and stick 1+'ith a
short term trend
2)allows U to buck that trend as it moves in
the channel or tops/bottoms
3) allows u to pyramid within the main channel
(if U're adventuresome, but have a plan ! )
4) allows U to recognize and trade in congestions
and in anticipation of breakout
5) allows u to recognize a normal top/bottom
and see one developing
( u shudn't need it. )
In chapter 13 , we will see how different applications of P&L
charting do profit/loss wise in our silver chart. ( Now no
cheating ! There's more to this book than this chapter and
chapter I3 . )
tSUGGESTION
i
"'
- MAKE A PRECIS OF THIS CHAPTER .
PART
B
now it's time for a
chit-chat
the philisophical part
CHAPTER TEN
PRICE MAKING INFLUENCES
AND HOW TO USE THEM
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267
268 PRICE INFLUENCES
PRELUDE
U might very well ask "Why bother with this and the next
chapter?" . U may yawn U're way thru it, but U must realize
that the time will cum when U are sitting there, watching
the "box" of the charts, or the newspaper quotations and
wondering .... "what the heck is going on?".---- with prices.
I know, I have been thru it .. U want to know why prices are
moving as they are and what in heaven's name does "this price
movement mean?". Maybe it's not really worthwhile to know
why the prices are moving, - but, it cud be comforting to
have an idea, and maybe relieve some anxiety in the process.
Anxiety is one of our chief enemies.
If U are at all perplexed at a given price move which seems
to defy U're chart and technical predictions, it's going to
be nice to know that a lot of the price movements are "noise",
or that the market is not responding to news as it should or
that the market just does not seem to be moving when the
fundamentals are incredibly bullish - that U can expect a move
based on historical patterns, or, that " Uncle Sam " is at it
again.
These subjects are worthwhile and basic like the abc's of
learning,writing and arithematic, and they will be of some
comfort on those bleak days when U want to know " WHAT'S GOING
ON!!!".
NEWS
In interpreting and understanding price movernents,if U see
that the market will not act on bullish news, don't buy !
- and, if the market will not fall on bearish news - don't
sell!
It is all a matter of interpretation of the effect on the
market of news items, in order to ascertain whether the news
has already been discounted by market prices.
News is published in newspapers and over the wire services.
Experienced traders act on it when it is initially transmitted
by the wire services. Information available to everyone is of
little or no value as the futures market has an uncanny ability
to discount future events before they are recognized by very
many traders. By the time prices have moved someone, ,somewhere
must have known something and have acted on that knowledge.
PRICE INFLUENCES 269
It has been found that traders who react on broker's advice,
that it takes one week for their effect to be felt on the
market. Remember, that by the time the majority learns a piece
of news, it is already too late.
Also, the enormous amount of news and information that is
received, - one can place very little trust in this and these
data. If U read much at all, often conflicting news, the
commodity letters and free advice just get in the way of
listening to the voice of the market. U need to know what the
market is saying, not the confusion of "babel".
Big money in the commodity markets is almost always made by
astute persons who take information available to all, make
their own interpretation of it - manage their committments
with a proven plan and sit back until the market cums to the
moment of truth that they have seen, which is their moment
to take profit.
Do not distain and do not wholly believe any sources of
information. The best u can do is to review all very carefully
and make an educated estimate of their accuracy and more
important, as to their eventual effect on the market. Try to
learn what news is significant and what is not. Use a panic
exodus, or entry as a trading opportunity, especially if it
is against a strong trend. Know how to interpret major news
items, either of an international or national influence.
Certain news items profoundly affect price prospects for a
particular commodity, while some tend to cum as a surprise
and others develop over a period of time with its attendant
heavy publicity.
What cums to mind is for e.g. a declining hog
market. A Hog Report cums out with bullish
implications, & the market zooms up immediately
following the report. However, the major trend
is down and at most the market will go into a
congestion giving U ample opportunity to decide
whether the trend has changed and whether to
interpret the hog report or any other news as
bearish, based on U're technical analysis.
The second example I wish to give U is what I
call my most significant toO.l in the interpreta-
tionof news and it is that during a major bull
move, I look for any hint of scandal. I watch
the wire services e.g. bean mkt. '77,comment
re C.B.O.T. 'investigation'- 2!/2 weeks before
the market top. I can assure U that the big
boys get out on the first hint of scandal, the
market is near its' top.
270 PRICE INFLUENCES
Another example:- the u.s. dollar is crashing,
the fighting in the Middle East seems to be
escalating and gold is not effectively moving
upwards. I see technical signs, with my channel
system (P&L charting) that gold is not doing
what it shud and I immediately becum "not bullish"
and watch for a decline in prices.
Therefore, the effect of news on prices is a key, key, key,
-I repeat,- key - element in anticipating market tops and the
signal of a break-up from a market bottom.
One more example:- Watch the headlines of your newspaper. There
is something especially funny about our local paper. Everytime
the headlines blare" high beef prices to continue",the futures
market cracks the very next day- ( I'm not kidding! ) .It
happened in I974 and just one month ago. Whenever U see it in
the headlines or a prime news item on T.V. -take profits!!!
This rule U never- never forget!!!
WEATHER
This one is all very obvious. If it doesn't r a i ~ we have
drought. u can't grow tomatoes in dry desert sand. What is
important is being able to anticipate a drought, and,
understanding what the rumours &/or actual facts of lack of
rain have on the market prices, and, this sometimes includes
price effects for a one particular day, as the floor traders
watch for signs of precipitation on their local news facilities.
These floor traders have a first impulse into the market prices
for a particular day.
Over the longer term, astute investors make use of significant
news services who they recognize as being harbingers of /
information on a particular commodity. Some services specialize
on weather for the international commodities, such as coffee,
sugar and cocoa. Such disaster effects on internationals relate
to coffee trees blowing over in Brazil, or frozen, which is
instant almost overnite. This information can be picked up very
quickly thru U're broker.This kind of information sets out a
major trend which cud last for years.
Take note that one can anticipate , such as in orange juice,
the likelihood of some type of weather scare for the autumn
months.
PRICE INFLUENCES 27I
The other approach is the more long term one, where by means
of sunspots, or, as the way things happen, there is a drought
in the Mid-West. This can have a profound effect on prices
for North American grains. Sometimes, even a hint of drought
can send the grains for a very nice medium term move. ( maybe
even 50 to $I.OO on beans.)
When u anticipate the effects of sunspots, it appears that we
cud now just be into the first several years ef the chance of
sunspots and drought. See what I mean about using a broad
spectrum for fundamantal analysis? Knowing that there is a
chance for drought will keep me sharply tuned next summer.
I will be ready for it. At least I am aware. By the time
the public learns of the drought I will be getting out and
saying, "thank U very much, now where do I short?" I will be
looking at the forest with this approach. Conventional
technical analysis will enable me to look at the "trees",
the trends etc, & P&L charting
will enable me to look at the
roots.
Do u follow me?
In analyzing the affect of weather on market prices, zero in
on the technical approach to make certain that the market has
the proper momentum, which suits the weather situation, as U
see it. Always lOok for things unusual in U're technical
analysis. If there is a dm.ught, then the momentum shud be
high and a possible runaway occuring. If that is not happening
then watch out. Something is wrong.
In a bull market, and drought, watch out for distribution -
watch out for those huge, pumping days, - huge ranges and
high volume.
So, remember, if I was able to anticipate a potential drought
I wuc move with the smart money - astute traders, and informed
people who accummulate in a congestion, because of their
access to information,- they know that damage to a crop is
possible, - these people and I know I wud ----when that market
does not seem to be moving --- I wud get out and take profitsr
and stand aside and look to short, a month or two later.
One last little hint: - when V have V're broker
telling V that so & so has flown over in an
airplane such & such a field - my dear friend ,
I think U are being taken for a ride V'reself.
I hate those fly-over reports. ( I like to watch
the action of the market to the news as above
or to the news of weather.)
272 ? F ~ C E INFLUENCES
SEASONAL AND CYCLICAL
I refer u to chapter 24 for the specifics in relation to
knowing what to expect and what to do.
The only comment I have here is that seasonal and cyclical
pattens are one of the key tools in what we call " grand
picture analysis". U take the basis, U take the cash price,
U take U're non-scribbled, clear, chart bar patterns,
(non-mutiliated) and apply the definitive tools of P&L
charting.
Big capital can be laid, and big capital can be made using
seasonal & cyclical patterns as oneof these approaches to
forecast price movements.
Because of the peculiarities in the production of marketing
in each calendar year, most commodities repeatedly tend to
have the same periods of rising prices , as well as the same
periods of declining prices.
U can compare the price level for a specific commodity with
the price level of a year ago ---is it rising or is it
falling? U want to know when the high and low of this specific
commodity usually occur and whether prices have been following
this seasonal pattern.
Also, u have the cyclical patterns of the meats and cyclical
patterns of the sunbursts-- the sunspots, and,,,,, also U
have cyclical patterns of general economic conditions, best
applied on a world-wide basis. Don't forget that the economy
doesn't go upwards forever, - it also has its cyclical
moods and this is particularily effective in applying a
criteria selection for the metals, - and for consumption of
consurnptable consurnptables, ( grains, meat ) and, the purchasing
capacity of the public to buy, - say, meat. [ Can u imagine
North Americans paying $I6.00/lb. for beef as they do in
Japan? No way! J
FUNDAMENTALS
Needless to say, - "fundamentals" - supply and demand - is
what it is all about, ( besides making money )
When U assess the fact that prices have gone far out of kilter,
that eventually, the forces of the fundamentals will play
to create a correction of the price level.
PRICE INFLUENCES 273
Fundamentals are basic to what happens in commodity future
prices, but U are a better man than I if U can figure them out.
However, let's take a look at a few things. Why not ask the
following questions:? - What are the figures of the U.S.
production and stocks relative to a year ago ? What are the
demand prospects domestically ? Better or worse than last
year? How are the number of animal units if it's a grain
feed, or the level of demand for the major industry for
which the commodity is a raw material? What is the production
like outside the u.s. ? Is it larger than a year ago and
where ? Is it a normally exporting or importing country ?
How do the export propects look ? Is it the production of a
competitive society ? How about the government loan levels?
Is it higher or lower than last year? Are there any other
forms of government support - such as export subsidies - or
import quotas ?
My dear friend, the list can go on for ever. However, there's
a couple of things I wish to say. The first is rather simple.
- take note of things like the tight supply situation in the
final months of a crop year. (This can cause the near months
of the futures contracts that still hold the old crops to
advance more sharply than the more distant months, where the
new crops will advance only moderately if at all. The next is
a little comment (about 6 million pages long) Look at the
following box:
Population to double
Mexico City - if current
growth rates continue,
Mexico's pop. of 63
million will double
in 20 years
This tells me that we are going to see bull markets, possibly/
in the future that we have never seen in the past, or the
future is going to crunch us all into the ground with decades
of recession because the productive element of societies will
be unable to cope what these herds of people will do to the
world, negatively speaking.
We cud be at the very beginning of a bull cycle. Imagine, in
twenty years the population of mexico will double! In 20 years
63 million more people will live in Mexico. In 20 years,
Mexico will be twice as large. Muliply that by all the nations
of the world of growing populations and 0 have quite a figure!
INFLUENCES
In 20 years, Mexico alone will need food for 63 million more
mouths.
Is the world going to be starving in 20 years? Where are we
at? I for one cannot guess. But I shutter to think what effect
all this will have on our personal liberties as the governments
thrash to handle the problem. The political consequences are
fodder for U're mind. - time for arm-chair philosophy, my
friends.
One thing for sure, the law of supply and demand is going to
be vicious, no matter what the circumstances of individual
and collective thought portray. I wonder what will happen when
some wrought-up individual blows up the c.E.O.T. with a little
nuclear bomb, protesting the sharks who are allegedly responsible
for the problem of food shortage ? That shud be an interesting
one.
Next, consider this: - we are in year #2 of a drought. Cud this
be year #2 of a 20 year cycle ? What will happen if California
doesn't water next year and water in '79,80,8I, and 82 ?
A tree cut down in the Lake Tahoe area found rings or cycles
that many droughts do not simply last one or two years - they
last for IO years or 20 years.
Will there be a total ban of food exports to those countries
without money, or let's say, they don't obey the u.s. request
for zero population growth. Can U imagine telling the rest of
the world - no hanky-panky! - or take the pill - or we want
to make a little snip, surgically, here and there!
Are we at the end of abundance and is this the start of a
gigantic bull market and are we at the edge of the abyss of
world political turmoil?
Several prominent analysts overwhelmingly agree. My friend,
I leave all of this to U to mull over.
I suppose the only argument contrary to the above dismal
picture is that all the experts agree that it will happen.
And we all know that the experts are always wrong. Which means
I guess, the opposite will happen.
Things like feeding those countries who increase
the birthrate to IO\ or more. A typical sort of
thing a civil servant bureaucrat wud dream up.
PRICE INFLUENCES 275
PRICE LEVEL
A price level, at a particular moment, can by itself influence
prices. Obviously the horde of the public is going to be
buying like crazy the higher prices go and most certainly near
the top. They are influencing the price at this level by
keeping it there. But, they are buying from strong hands and
when the public is satisfied, this price level will by itself
cause the market to crack, and potentially be the market top
for that year. Certainly, smart money buys - especially if
they can do their timing very well - at market bottoms. Price
level assumes that a position is attractive to this smart
money.
Price levels occuring at trend lines, tops and bottoms of
congestion areas can stop the market dead in its track.
A price level which appears to the less astute trader as being
cheap for a particular commodity can be a false price level.
Beware of assuming that a commodity is over-priced or cheap.
Note the following : - there is a clear tendency for speculators
to buy on days of price declines ( cheap prices ) and for
shorts to sell on price rises ( price level too high ) . This
action indicates that traders are predominant price level than
price movement traders. I repeat : - traders are predominant
price level than price movement traders. THIS IS FOOLISH.
Do not think in terms of price level. Think in terms of price
movement.
The affinity for the public and weak traders to assume that
prices are cheap seems to be based on the psychological
precept that the price cannot go below zero on the downside.
Whereas, the sky is the limit on the upside. There seems to
be a huge vacuum on the upside and the public has this affinity
for being bulls. ( As well as full of bull. )
The public never seems to realize that prices do not rise
forever, and they do not seem to realize that they cannot
feel safer the lower ~ h e price gets towards zero in order to
go long.
However, in assessing price levels" on a purely technical
basis, one can ascertain that a price level is too high or
that a price level seems to be low enough to warrant bottoming
formation.
As far as market tops are concerned, after prices have risen
a considerable distance, a general feeling in the market can
develop that prices have gone far enough. Call this a
psychological quirk of traders if U will, but this type of
276 ?RICE I:t-I'"'FLUENCES
thinking becums an important market factor. It does not
necessarily have anything to do with price level, but this
"psychologicalquirk" becums an important market factor and
can result in shorts covering and new buying developing on
this assumption, particularily, if the reaction has carried
50% of the upward move. Take note here, that a SO\ correction
price level, is a price influencing factor by itself. Note
that price level attracts buying or selling re: trend and
congestions and support and resistance levels.
However, by all means do compare price level with previous
years to define the odds (as in chapt.S) as it relates to a
particular conunodi ty.
As far as the cheap price concept is concerned, consider
further that in the commodity markets there is always a
certain level below which U have
. ii,.i.-Jl+t: :-: PDT&TDES IU&IIiE) IIAL 1171U. :7 ,
very little risk on the
downside. Take potatoes
at 3 . U can always
take a long position
on this theory.
I mean,tnere are times.
when something can be
really cheap and I
mean cheap!
. I.
j.
. . . . : 4 : : ::-: . :_ =i:
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TREND

SD!VlCZ
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c::r::>IIIC%"'1 UJIEAU. DC.
One l.Uoerty Plau X. T. X. T. 2 OOOfi
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 dont realize that prices are always going up,
downwards amd sideways, that price direction will change.
r
PRICE INFLLTENCES 277
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
Price Movements Results
to one who is "long" to one who is M s h o r t ~
Cash Future
in the cash market in the cash market
price price Unhedged Hedged Unhedged Hedged
Falls Falls by same Loss Neither profit Profit Neither profit
amounts as cash nor loss nor loss
Falls Falls by greater Loss Profit Profit Loss
amount than cash
Falls Falls by smaller Loss Loss, but Profit Profit, but
amount than cash smaller than smaller than
unbedged loss unbedged
profit
Falls Rises Loss Loss but Profit Profit. but
greater than greater than
unheciged loss unbedged
profit
Rises Rises by same Profit Neither profit Loss Neither profit
amount as cash nor loss nor loss
Rises Rises by greater Profit Loss Loss Profit
amount than cash
Rises Rises by smaller Profit Profit, but Loss Loss. but
amount than cash smaller than smaller than
unhedged anbedged loss
profit
Rises Falls Profit Profit, but Loss Loss, but
greater than greater than
unhedged unbedged loss
profit
SOURCE: B.S. Yamey, "An Investigation of Hedging on an Organized Prociuce Exchange.-
Manchester Sehooll9 (1951), 308.
278 ?RICE IKFLUENCES
WHO TRADES
.Loc.a.6
b-<.g boyJ.J
LU:.ti. e 9 u.yJ.J
c.ha.Jz;t,U .:tA
hedgeJr.
"Who trades" is amply presented in chapter 20. They are presented
here to illustrate a few ways how they influence market prices.
U shud find some of the comments interesting .
.f..oc.a..6 :- They account for much of the "noise" that cums across
the ticker tape. They gobble up the gap openings, reversing
themselves to close the gap and reversing again as the gap closes,
taking their little bites out of price fluctuations all day long.
They are unable to influence prices beyond a day or two, if at
all.
As U know, their main function is scalping for small profits.
However, in moments of ecstacy, they can run prices thru "stops"
and of course, reverse themselves as prices reverse back thru
stops. They may check each other's "decks" (don't believe a
word of anyone who says thay don't). They will run the market
if they have the opportunity, and why not! This effect can be
felt for a day or two. e.g. an end-run out of a congestion.
In the process known as "gunning for stops" local traders, as
the market is dull and listless, and the trading public is
waiting to see which way the cat is going to jump, the floor
traders sense and they know, ckecking each other's cards, that
there are a number of stop-orders which can be activated by a
good day's move in that direction. At this time, individual
traders on the floor may attempt to force the situation to push
the price to a point, where the stop-orders are activated,
reverse their position, making a second profit on the rebound
back away form the stops. Of course, in a particular commodity
pit, if they know that stops are at a particular area and if
prices shud get close to these stops, they cud add momentum
/
to the move as it flows towards the stops, and join in the
genuine trend move for the day.
On the trading floor, one day, I observed a fascinating game,
which obliges us all to be very careful that we do not signal
ourselves as an individual as something unusual, in the way of
distinct behavioural patterns, time-wise or method-wise,
hitting the floor. In this instance, I became aware of traders
anticipating someone on close who rushed in with huge numbers
of cattle contracts and they knew when this person acted. They
waited with anticipation - right on close, in came the order
PRICE INFLUENCES 279
and their faces after close were beaming -they somehow had
taken advantage of this character and they had gotten a
good one. Why not? If the cattle trader was stupid ecough
to let his pattern known.
big b o y ~ :- They cannot create hanky-panky in the markets.
Activity by such men as Hutchinson, Leiter, and Patten in
the years just before the turn of the century resulted in
short-term price distortions, frequently because of inadequate
supplies of a grain in the delivery position. The effectiveness
of such "corners" gradually diminished as competitive balance
appeared in the market, aided by legislation that now rewards
the manipulator with 5 years imprisonment, a $IO,OOO fine, or
both.
I have one word of advice - stay out of thin markets, when
they are wildly trading . I hate potatoes! - except when U
play them seasonally.
Otherwise, the big-boys can not create hanky-panky. They do
occasionally, thru deals, attempt to bias the prices to
germinate, but these " tours de force " do not aim to turn
the trend, but only to manipulate it to advantage. Their
combined buying power can push prices up or down very
dramatically, but they tend to get in and get out early.
They get out on the first hint of scandal, - as they
themselves have an aversion to scandal.
When they leave the market, they give or take to/from
the weak public, and re-enter against the public, creating
tops and bottoms.
We are all subject to the same rules. In fact, the big trader
is watched more closely by the regulatory authorities.
Remember, these big boys cannot manipulate the heavily travelled
markets- just take advantage of price movement.
~ e guy :- This is the one who has little effect on market
tops and market bottoms, accept that his buying dries up,
panics and causes prices to crack. He adds momentum to the
price direction as he buys more and more as prices pass thru
the mid-way point of its major run towards the contract high
of the year. They place their little stops usually outside
congeston areas, creating the price movement of the "dead-run".
Also, it is recognized that those traders who do not rely
28 0 ?RICE mFLUENCES
heavily on brokers for news lag by as much as a week in the
response to new information which hits the market. The small
guy has a clear tendency to arrest prices, buying on days of
price declines and selling on price rises.
These people create their own markets. They anticipate the
breakouts. They take premature positions, knocking prices
around on a day to day basis, creating a lot of the "noise"
as prices zig-zag up and down thru channels and in congestion
areas.
Short term chartists are forever giving little shoves and
pushes to prices - taking a strike at a move thru a trend
line or out of a congestion.
It is important to realize that if enough chartist-traders
are using the usual chart interpretations to trade a given
commodity, it will influence the price of that commodity in
the direction the chartists expect prices to move. Chart
followers prove their own theories right.
hedgeA : - These are the cash merchandizers, the people who
actually have something to do with the commodity themselves,
- the millers, exporters, merchandizers, and farmers.
They position themselves in markets, arresting price
movements that move away from cash. The general rule is
that futures prices will not decline far below cash prices, /
and that the cash dealers wud be better off by buying the
futures contract and taking delivery, than they wud by buying
the actual cash product. Corn will never sell for $5.00 in
cash and futures for $3.00 In the futures market, likewise,
prices will not rise so far above cash that the cash merchan-
dizers wud be better off by selling on the futures market,
than they wud be by selling the cash, thus arresting prices.
PRICE INFLUENCES 28I
Chart patterns have quite an impact on commodity futures
prices. Certainly, in a trend channel, the momentum creates
a market price in the direction of the channel, or a
congestion strangles price movements until something happens.
To recognize that a price trend is self-perpetuating and
that a congestion is self-perpetuating, signals to U're
brain's grey cell matter that indeed patterns do create
price movements, and indeed, price movements create price
patterns.
We get price level influences. Markets are always stopping
somewhere around a 50% retracement. So the answer is, -
indeed that chart patterns create prices - but then again -
how can prices be created without developing chart patterns?
One thing we know is that patterns are self terminating and
no longer affect prices. Why do prices never go to the apex
of a triangle?
All this I cannot figure out - whether the cart is before the
horse or the horse before the cart. I do know that patterns
create markets and these patterns re-occur and re-occur.
so once prices are in a trend it will stay in a trend, and
once prices are in a congestion, they will stay in a congestion
by virtue of the pattern. Oh god, let's get on to the next one!
ma4ket
It has been claimed that commodity prices are primarily a
psychological phenomenon. The psychology of the participants
in the market place invariably have some effect on the way
prices behave. This cud be said to be true.
Let's look at four things. First, - a trend has increased
bullish psychology as trend reaches its apex and manic-
depressive panic selling aborts the trend. (see contrary
opinion chapt.S). Second, - a congestion has high emotions
at its commencement, with high daily ranges and then everyone
settles down towards the termination of the congestion, with
concomitant lower volume. Everyone has gone to sleep, waiting
for the breakout and to really jump on that breakout, creating
maybe a dead-run, or a new trend or the continuation of the
trend. Maybe the new trend aborts and all the psychological
factors of those who are wrong come into play and the price
very quickly moves back into the congestion or trend line.
282 PRICE INFLUENCES
Thirdly, - a market bottom wherein everyone is psychologically
bored. No movement. No interest. Low volume. Low O.I ..
Fourthly, - a surprise bit of news and we get a whip reverse
of market psychology, creating a devastating run - such as a
genuine orange juice, coffee bean freeze. This aspects of
psychological trading has its inherent characteristic of
surprise, and to all traders.
To understand the psychology of the market place is one of the
most engrossing facets of commodity futures trading. To
understand the psychology of all the traders in all markets
is what encompasses two-thirds of this book.
This is well presented in chapter II. What we're talking of
here is "noise" - the random walk of the market - those quiet
days in congestions and those pauses during the day when prices
are wondering where to go. To say that inertia does not affect
prices is not being aware of potential moves when the inertia
is lost. Markets on the short term are not random for ever.
Are we in a recession or inflationary period? Is unemployment
rising or falling? How are retail sales holding up? Are the
indices rising or falling?
I think it's obvious to anyone who is aware of any of the
laws of supply and demand that these fundamental factors of /
the general business conditions can affect the consumption and
demand of a commodity. I believe that one can anticipate
general economic conditions by assessing them on the basis of
what will follow between now and the end of this chapter.
One can see the effect of government on the market place
and one can easily determine the general outcome of commodity
prices with a bit of thought. These factors affect commodity
prices on the long term basis.
PRICE INFLUENCES 283
men - de. v a...u.a.;U.o n
The government prints more money and more money gives more
inflation. The end result is devaluation and international
cuurency runs.
If U're trading currencies, they tend to stick with the trend
on a long term basis, and they also contradict any government
statement. If a government states that they are not going to
devalue their currency, it is a guarantee that the
will be devalued. Whatever the government says- do the
opposite! - ( It works every time. )
Don't forget that increased money supply has a profound affect
on long term prices of everything we use. The more socialism
we have, the more money we will have to print and, ultimately
the more shortages of commodities we will have and the higher
prices we will have. And, present day governments have no
option but to print money, because to do otherwise wud be
political suicide - crunching depression, street riots, economic
chaos.
c.ha.nging govvz..nme.n-t policy
The cynic recognizes that additional rules can be introduced
into the market game and attempts to take them into account.
What about the government loan level? What is the exact dollar
and cent price - is it higher or lower than last year? Are there
other forms of government support such as export subsidies -
import quotas? Prices are now affected by complex government
regulation with regards to harvest time. Another predictable
bias affecting prices is the influence of the government loan
program. Futures prices in wheat for example, have regularily /
risen toward the guaranteed loan price. And even tho that
movement is predictable, it cannot take place until the
movement into government hands has occured.
As Grey and Rutledge observe " so long as movement into loan
is anticipated, it would be an irrational price which reflected
it, for such a price, incorporating the anticipation, would
prevent the event".
( I have left this section choppy and uncorrelated, just to
give U a "feeling" what government is like. Governments don't
make sense, do they? )
284 ?RICE INFLUENCES
a.n.d wofl-tdvJ.<..de : - !.loc.<.a...e,.u.,m
socialism: - U have two cows. U give one to
U're neighbour
fascism: -
nazism: -
government takes both & gives
u milk
government takes both, & sells
u the milk
bureaucracy:- government takes both, shoots one
milks the other & pours the milk
down the drain
communism:- government takes both and shoots
u
capitalism:- U sell one and buy a bull
Taxpayers earning more than $30,000 per year represent only
5% of the population, yet they pay 39 % of the total income
taxes collected in !976. A shivering economic fact is that
a government panacea is designed to cure or correct a
condition but will, instead inevitably further the condition
Acts of government do not create wealth, they redistribute
wealth.
There are real factors which determine the direction of
growth and non-growth. When 40% of a country's gross national
/
product is snapped up by governments, when almost !0% of the
work force is in government, in non-productive jobs, then
elected representatives have an enormous responsibility to
maintain control of this leviathan monster. And most fail.
Self-correction of ordinary spending, .investment decisions are
always thwarted by government policies. They exaggerate the
magnitude of booms and busts.
Restate Emerson's words
wheel of fortune."
" The government chains us to the
??..lCE INFLUENCES 285
The solution to government meddling is government control. !t
is safe to say for example, that the major reason for the
purpose of the office of International Audit & Inspection
of the U.S.D.A. is the fact that " Uncle Sam" has moved from
the role of referee to that of player in the market place.
I repeat: - "UNCLE HAS MOVED FROM THE ROLE OF REFEREE
TO THAT OF PLAYER IN THE MARKET PLACE.
A planned economy is not based on planning - it is that it
aims simply to concentrate power in the hands of the state
and that directed systems function ineffectively, causing
shortages and misuse of resources, as controlled markets
are simply less efficient.
I don't think we have ever seen a completely free market.
In the history of the world, for centuries, individuals
attempted to manipulate the market for their own benefit.
To-day, governments are attempting to manipulate our markets,
and for their own benefit. U know what happened to Rome, -
well, more than 1900 years later, we still permit our lives
to be governed by the whims of government.
Those of us in the open market place are forced to operate
on the basis of the economic use of resources, since we
cannot call on taxpayers to pay for our mistakes.
The controlled market operates on the basis of scare-headlines
instead of the realities of resource availabilities and economy.
If all the areas of individual creativity were pre-empted by
the planned, collective society, our society wud face distinction.
As the cartoonist suggested when he depicted one Russian
bureaucrat speaking to another " When all the world is communist-
where will we get wheat? "
Government intervention presents a strong case for investing
in commodity markets. Being aware of government intervention
and that it can influence prices, makes U a more intelligent
and perceptive investor. The fascinating thing, is that
a shot of government intervention, markets energetically
re-assert themselves.
U must realize that man's mind is limited only because he
either prefers to deny himself the of creating,
of innovation, or of locating alternatives, or he is stymied
by the burdensome bureaucracies that incinerate incentive,
impale initiative and incubate incompetance.
286 PRICE INFLUENCES
Remember John Mitchell ? Well, he said " You better be informed,
instead of listening to what e say. You watch what we do."
This is a useful legacy that will certainly not go unheeded
by the successful speculator. Remember, that when interpreting
official manifestations, cynics survive ! The cynic recognizes
that new rules can be introduced into the game and takes them
into account.
Commodity markets do not differ from other markets, except it
happens to be one of the last ones to be brought under the
destructive wing of government.
Remember the big, big price swings of '73-75 -well, the really
keen professional traders recognized the fact there was
government interference. They quickly learned to discount
official reports and proclamations made for general public
consumption and devised alternate sources of information.
Moreover, recognizing that the markets were overeacting
they decided that the best strategy was to ride the trends
and trade less frequently. That is, trading when risks appeared
reasonably low, and they temporarily discarded some old
concepts. They took a broader view of the market. - in fact,
they took an international view. Both minds and trading plans
were flexible enough to acquire profits even in those
unusual and adverse times.
Don't forget that we are in an age where we do not print our
own money - the government does ! We're getting higher inflation
causing the international value of currencies to deteriorate,
resulting in "x" increase in exports, leading to higher domestic
prices. Government mismanagement, accummulative taxes, and
monetary manipulation cause shortages and surplus of long
standing, and an improper use of resources, which ultimately
leads to a depression. Of course, then the free market forces
re-assert themselves to clean up the mess.
I personally have cum to the point where I'm firmly convinced
that governments exist, of and by and for the government and
only for the government. It's a huge corporation. Imagine, -
they print their own money, they create their own laws, have/
their own board of directors ( even have a president) and we
all work for the one company. And, if we don't really obey,
I suppose we end up in their jails.
Be that as it may, I suggest U filter thru the quotations
of the next few pages. It shud give U a few laughs or make
U cry or raise U're blood pressure a wee bit. And,,, most
likely disgust U socialists out there. ( too bad. U know,
those of us who are not socialists, like to be heard too.)
PRICE INFLUENCES 287
Most commodity traders are not socialist". It is difficult
in this day and age to criticize the socialist. I have some
tripedation in revealing myself as not being a socialist.
Can U imagine that !! I'm rather intimidated by saying I am
not a socialist. However, I tend to feel that like the
headlines in the paper that scream " beef prices to continue
to soar", and wherein the following day the beef futures prices
crack, that on this rule of thumb, that socialism is here -
there's no way of stopping it_- that on this rule of thumb -
that socialism is nearing its end.
QUOTATIONS
A gov't that robs Peter to pay Paul
can always depend on the support of Paul.
- Bernard Shaw
there is still the Russian mind-capturing threat,
which moves from simple forms (e.g. social security
benefits) into advanced forms (cradle-to-grave
security,nationalized industries,transfer of wealth
via taxation,fiat money to pure communism, state
ownership ofeverything, with a loss of freedom
increasing at every step.
Monetary golden rule: He who has the gold makes
the rules. (How about oil+gold?)
wealth is transferred to gov'ts by means of
monetary inflation.
- Congressman Ron Paul
the world asks not what a man knows, but what
he can do with what he knows ~
-Booker T. Washington
You don't make the poor richer by making the rich
/
poorer.
- Winston Churchill
In all healthy societies, it must be the needs &
values of the strong individual which shud obsess
the popular imagination, & dominate the public
mind, since only when these are satisfied will
the weak receive their due.
- Peregrine Worsthorne
288 PRICE INFLUENCES
Modern demagogues curry favour with the people
by consficating large amounts of property thru
t1'le mediurr. of the lak' courts.
- Aristotle
Socialists always want to tinker with the only
mechanism that works. They think gov't controls
are the answer to everything, when in fact they
are the answer to nothing and kill the human
spirit.
- H. Schultz
When a man gets to be well-off & people find out
about it, he will never again be free from attack
by people who want to borrow a bit or "help U
make more" by investing with them. Poor people
don't get bugged like this & I demand equal rights
with the poor to be left alone .... we demand
equal rights .... to enjoy what we've earned
without having to defend it daily.
- Charles Drummond
Socialism & communism are the failure to understand
both human nature & economic law. They therefore
create misery & frustration.
Experience is not what happens to u. It is what
u do with what happens to u.
- Aldous Huxley
What I do say is, that no man is good enough to
govern another man without that other's consent.
- Abraham Lincoln
People do not emigrate from the communist ruled
captive nations, they escape.
- J. Kesner Kahn
The worst :thing about history is that everytime /
it repeats itself, the price goes up.
- Pillar
Nationalization always fails, for lack of responsibility.
It is a principle method of undermining liberty,
free enterprise & freedom of choice. Those who
support nationalization are begging to be
chained.
- H. Schultz
- " - - - - - - ~ -----------------
----------- --------------- ----------
r
PRICE IXFLUENCES 289
The special nature of liberties is that they
can be defended only as long as we still have
them. So the very first signs of their erosion
must be resisted.
Eric Sevareid
Every nation has the government it deserves.
- Joseph de Maitre
If communism had had a vacant country to experiment
with then I suspect it wud have died very fast.
As it is, all the follies of the communist system
have been blamed on the old structures which
they've not yet eliminated.
If all men are born equal, let them prove it
Jo McDonald
Once an inflationary socialist cycle has started,
there is no way to stop it 'til it collapses.
Gov't has no way of cutting its own bills exc.
by cutting welfare. This cannot be done short
of revolution.
When the state is most corrupt, then laws are
most multiplied.
- Tacitus
Definition of a planned economy: - they do the
planning, - U make the
_ John erman
I never had a hankerin to go away on vacation.
When I loaf, I want some work handy to loaf
from. - Burton Hillis
A civil servant is like a broken cannon - it
won't work & U can tt fire it.
- Gen. Geo.s. Patton Jr.
For every person who can't read, there are two
who won't.
Paper money eventually goes down to its intrinsic
value -- zero.
- Voltaire
IO
290 ?RICE INFLUENCES
Any man who thinks he is going to be happy &
prosperous by letting the gov't take care of
him shud take a close look at the American
Indian.
The door to opportunity is heavy, but a strong
push will open it.
In a free country, there is much clamour with
little suffering; in a despotic state there is
little complaint but much suffering.
- Caruot
The state is a de:vice for taking money out of
the pockets & putting it into another.
- Voltaire
The trade of governing has always been a monopoly
of the most ignorant & the most vicious of
mankind.
- Thomas Paine
The socialists persist in thinking a worker in
a nationalized factory will feel be owns it &
will joyously work harder. The opposite happens,
for everybody's property is nobody's property,
& is so treated. Their emphasis is on sharing
wealth over producing wealth, on equality over
liberty. The end of this is the loss of wealth
and loss of liberty.
- Eric Sevareid
They say people make laws, but then the laws
make the people. Bad laws will in time make
bad people.
One can lead a so-called "normal" life or one
can be successful. There is no such thing as a
successful normal life.
H. Schultz
Managing free enterprise people is much harder
(bee. they're individualists) than organizing
the robots that socialism creates ... & that's
why socialism is expanding so fast.
L. Taylor
/
PRICE INFLUENCES 29I
Socialism means a uniform 3rd rate standard
for all.
- H. Schultz
When I make a joke, nobody's injured; when Congress
makes a joke, it's a law.
Will Rodgers
The man who damns money has obtained it
dishonorably. The man who respects it has
earned it.
- A. Rand
The trouble with the world today is too many
people are try ing to keep up with the
Marxists.
- J. McDonald
The roots of education are bitter, but the
fruit is sweet.
- Aristotle
Most socialists are not really socialists bee.
of any humanitarian ideals or convictions, but
simply bee. they lack the ability or initiative
to be capitalists.
J. McDonald
People don't plan to fail. they fail to plan.
He who is not a socialist at 20 is without heart.
He who is still a socialist at 30 is without
brains.
- Anon
The history of liberty is the history o= the
limitation of governmental power, not the
increase o= it.
- Woodrow Wilson
People don't realize that the same men who got us
into this economic mess are being trusted to get
us out of it. They don't know how they got here,
so how can they find their way out?
- H. Shultz
Freedom is not free, free men are not equal,
& equal men are not free.
- R. Cotten
292 ?RICE
When we must wait for Washington to tell us when
to sow & when to reap, we shall soon want bread.
- Jefferson
A gov't which is big enough to give U everything
is big enough to take it all away.
All gov'ts are capitalistic. It's just a matter
of who controls the capital - the people who
earn it or the gov'ts who are always out to
control or confiscate it. That is the basic
difference between individual and state capitalism
R. Emrich
Communism is public ownership of everything,
including people. Capitalism is private ownership
of everything including yourself.
What all the current world strife boils down to
is this: - competent people strongly tend to be
capitalists. Incompetent people strongly tend to
be socialist. The competents can fend for themselves
& thus favour maximum individual liberty. The
incompetent can't manage their lives so well, so
they want to unite with other incompetents &
nationalize & regulate everything, especially
the competents.
The socialists have yet to learn that victimization
of the properous does not bring about uniform
prosperity.
When a man says money isn't everything, it is
clear he doesn't have any ( or he inherited it.)
Inflation is not public enemy no.I
Government interference is.
Socialism distributes wealth - other people's.
( U will never find a socialist redistributing
his own wealth )
We shud renounce as a moral obscenity the Socialist's
demand that the individual sacrifice his own happiness
for that of the tribe. Socialism is a primitive
tribal conception - that the individuals only value
is what he contributes to the tribe. All collectivist
morality is based on human sacrifice. "A morality
for cannibals". - J. Wheeler
PRICE INFLUENCES 293
The socialist cannibals will have us for dinner.
Wealth is created by individuals, not groups.
Resistance to capitalism is mostly pure resentment,
jealousy. Socialists want to drag successful men
down - they oppose success. Socialists avoid that
word bee. it implies hardwork, dedication, solitary
and voluntary effort.
Socialism is theocracy. Calls for sacrifices to
a god e.g. Lenin, Herrenvolk, the state, - and
is based on violence. There is no such thing as
voluntary socialism. If u don't contribute or
agree, they take U over & put U in jail, or
worse. Capitalism is based on trade & individual
freedom of choice - & is the only system that
allows for a plurality of practises. o will never
meet a voluntary system socialist.
The French Revolution symbolized a burst of liberty
explosion that lasted IOO yrs. or so. Man gained
ground in his battle for individual freedom of
choice ---that peaked about 1900 & it's been
shrinking ever since.
If U want a tolerable standard of living, o must
restrict your socialism to the amount capitalism
can pay for.
c. Brogan
Luck is infatuated w i ~ ~ the efficient.
Chance favours only the prepared mind.
Pasteur
Socialism is merely the child of 18th century
Euro aristocracy. Under aristocratic gov't it
was accepted that below a certain level men w e r ~
like animals, that only the chosen few were capable
of governing & enjoying freedom.
lO
294 PRIC:S :NFLUENCES
The socialist fight is for more wages, more
welfare payments, never for a fairer advance-
ment system within the factory. The socialist's
fight is the acceptance of mass man's inequality
- they merely want to be unequal in more comfort,
- for it is ingrained in the socialist's mind
that the mass man's inability to rise to equality
shud be subsidized. The socialist never scream ,
" Allow the masses equality of opportunity".
Equality of man is based on capitalist opportunity
-a national philosophy of American Capitalism -
in an age when belief in the individual never
filtered down below the aristocratic few - as
in Europe, the harbinger of socialism.
A civilization is comparable to a living organism.
Its longevity is a function of its metabolism.
The higher the metabolism ( affluence ) , the
shorter the life. Keynesian economics has allowed
us as affluent but shortened lifespan. We have
now run our course.
- W. E. Davis
P nel.u.de.
PRELUDE
CHAPTER ELEVEN
market theories
AND HOW TO USE THEM
Jta..ndom
!ULUIJ, ne.a.c.t...Lon -ttte.nd, c.ongMtion
WaVeA
C.tj c...Uc.a.f
e.xpe.c.tationo
and de.mand
e1..aJ., tic).;ty htjpO i
p!U.c.e. and p!U.c.e. te.vel.
maJtk.U

Prices fluctuate up, down and sideways, and a lot of this
fluctuation is nothing but "noise".
U have these fluctuations at particular times of year and U
have them sort of waving around almost in recognizeable patterns.
I am not that all pleased with this chapter - it's going to
be one big yawn. We don't want to know why prices are fiddling
295
296 THEORIES
about- we don't want to know how "economics" peop:..e approach
the understanding of market prices -we don't really want to
know the esoteric methodology as to why prices do the things
they do. We want make money. We are traders. Theoriticians
don't make money.They know more about theories of how to make
money than how to make money.
The Washington beaurocrat can theorize how the farmer shud
grow wheat, but the farmer knows how to grow wheat. But, I
tell U one thing - the farmer likes to sit back, and arm-
chair philosophize to himself once in a while about why
wheat grows. - he might even be interested to know what the
beaurocrat thinks.
So, I guess we'll sit back in our little 'ole rocking chairs
and get to know a little about the why's and how's of market
wiggles, and, maybe, at the end, I'll share a great big yawn
with u.
HISTORICAL
New concepts displace other and old concepts. Theoriticians
will never give up. I suggest u join them. I argue fervently,
for example, with the random walk theory. charting has
;;abled me to show that the very short term day to day
fluctuations are constant, given specific momentum and
deviation suggests a weakening of momentum - the dots are
swinging - the prices are not going during the day to the
areas where they shud, and accordingly, the direction of
prices prolate themselves in keeping with the new market.
movement ]
\\
( Or maybe, it's just that I am able to track the random
with P&L charting. But, if it's trackeable, how can
be random-walk? I don't know.)
1

'
r
.
I price,
1 to prevent dots
I ( Take my word for it,'
it's true )
MARKET THEORIES 297
With medium term p=ices, however, I ag=ee with the random
walk, which until f=esh fundamentals cause a play
in prices.
So, u see, even I, with an I.Q. of about two, can assume new
concepts displacing old concepts.
The following table illustrates that concepts do evolve!
New Concepts Concerning Futures
Markets and Prices
New Concepua
1. OpenComract Concept:
Futures markeu serve primarily to fa
cilitate contract holding (1922).
2.. HedgingM11rltet Ctmcept:
Futures markcu ciepend for their exist
ence primarily on hedging (1935; 1946).
3. M11/tip11rpose Concept of Hedging:
Hedging is cione for a variety of different
puposcs and must be ciefined as the use
of futures contractS as a temporary sub
stitute for a merchandising contract,
without specifying the purpose ( 19 S 3).
4. PnceofStorage Concept;
Storage of a commodity is a service sup
plied often at a price that is reflected in
intencmporal price spreads, and because
the holding of commodiry stoeks can af
ford also a "convenience yield," the price
for storing small stocks is often negative
(1933; 1949).
S. Concept of Reliably Anticipatory P>ricts:
- Futures prices tend to be highly reliable
estimates of what should be expected on
the basis of contemporlZ'Iily 1111aillZble in
forrnlZtion concerning present and prob
able future demand and supply; price
changes arc mainly appropriate marker
responses to changes in information on
supply aAd prospccn (19H;
1949).
6. MnltttBIIlllnct Conctpt:
A significant tendency for futures prices
to rise during the life of each future is
nor uniformly in futures mar
kcu, and when it exists is to be attrib
utcd chiefly to lack of balance in the
marker (1960).
aDares shown in parentheses arc years in
which the conecpts may be said to have
emerged. Where rwo dates are shown, the
earlier one the d"e of publication of
recognized as chalicnging the older
. concept; the later date, that of first known
I
source: Speculation,Hedging,& Commodity
Price Forecasts. Labys,Granger.
Displaced Concepts
Futures markets serve primarily to facilitate
buying and selling. (Disproved.)
Futures markets depend for their existence
primarily on speculation. (Disproved.)
Hedging is done solely to avoid or reduce
risk. (Disproved.)
Storage of a commodiry is a service that is
supplied only in response to an assured or
expected financial return equal to or greater
than the cost, the lancr calculable ordinarily .
without regard to the quantity of stocks to be
stored. (Disproved,)
Futures prices arc highly unreliable estimates
of what should be expected on the basis of
existing information; their changes arc largely
unwarranted. (A wholly unproved inference;
accumulating mainly supports the
new concept.?
Aversion to risktaking, leading to risk pre-
miums, produces a general tendency toward
"normal backwardation" in futures markets,
statistically measurable as a tendency for the:
price of any future to be higher in the de-
livery month than several months earlier.
publication of at least the substance of the
new concept.
Source: Holbrook Working, '.'New Concepts
Concerning Futures Markeu and Prices,"
Americ1111 Economic S2. (June 1962):
298 !-l.;RKET THEOP.IES
PRICE FLUCTUATIONS
/ta.n.dom
Jta.Lty Jt ea. c.tio n
wa.ve,o
c.yc.L<..c.a1.
.t!ten.d
c.o n.g eo :U..o n
The only thing we know about prices is this ...
..... they fluctuate !
The accumulative effect of all the market actions self-creates
price fluctuations. The of the natural laws
governing the markets is indeed one of the fascinating aspects
of the futures game. Altho' there are many complex factors
affecting the market, - in reality, there are only a few basic
principles in price movements. But, remember this - price
fluctuations are very incidental to tbe movements themselves.
If u understand the underlying principles why the market does
what it does, U can proceed to trade effectively. But, U must
realize that price fluctuations are only part and parcel of
the basic movement itself.
RANVOM
The random walk hypothesis is really a simple theory. It merely
says - " Price changes are unpredictable, when only the previous
price changes and not all available information are used. "
Futures and cash price changes are uncorrelated with earlier
price changes.
This hypothesis has been largely confirmed aespite some evidence
of seasonal components for monthly series,and,an occasional
weekly cycle is also found.
When technicians attempt to focus attention on short-term
fluctuations, they leave themselves open to considerably more
justifyable criticism as there is substantial evidence that
short-term price changes are very nearly random. This means
that the chartist is essentially performing a highly complicated
and a subjective multiple correlation analysis in his mind as
he examines his chart.
According to Commodity Research excellent book,
MARKET THEORIES 299
" Forecasting Commodity Prices - Hov. the Experts Analyze the
,')arke-:", " there is very little objective explicit evidence
available to support the commonly accepted rules of chart
analysis, yet the rules are '1\'idely accepted as valid and seem
to produce worthwhile results". Chart signals are given by
patterns built from many day's price activity and that are
often extremely difficult to define mathematically.
I wish to repeat here that I feel that P&L charting negates
the theory of random walk on the very short-term, day-to-day
basis. - for the random walk theory states that price changes
are unpredictable using previous day's changes. P&L charting
does just-that. It predicts to-morrow's prices, within the
limits of a given momentum. ( see chapt. nine ) However,
futures' prices do respond over the medium to longer term
periods, weekly to monthly, as it reacts with an important
random effect to seasonal cycles and responds to news items.
I repeat, if one uses averaged monthly prices, then the
hypothesis does not need to be amended. Accepting these
limitations, the major implications of the model can be stated
as follows: I) random walk provides an explanation of monthly
price fluctuations in the middle-run frequencies 2) random
walk is no longer fully appropriate in the long run frequencies
~ ) more than one force is necessary for explaining price
fluctuations in this frequency range 4) these forces can be
effectively aggregated to provide an explanation of price
change.
There is one thing that those who hold that the random walk
model describes reality better than any other model; - they
do not say the trader cannot make money. - the theory itself
becurns fair game ... that it sets the tone for the game makes
beating it a delicacy never expected with certainty, but
always savored. The assumptions of its tenants sharpens the
trader for the battle. He can win but only if he discovers
the reality of the "random" theory.
People like Tewells, Harlow and Stone put forward the likes
of which are presented in the following statement: " Successive
price changes are independant and that past prices are not
a reliable indicator of future prices". I agree except that
P&L charting suggests to me that there is a potential range
for the next day's price - and not random.
Picture the illustration on the next page. It is a formula
given for one approach to the random walk theory. U will
find it quite amazing.
300 !I..ARKET THEORIES
1
-- [(Xz - 1-1) +(XI-
10
1-1 -
10
r-2) .,. '
m
which may be written
1
=- !(m- 1)e
1
.,.
1
+ (m- 2)e
1
_
2
+ ...
m
(3A.4l
There is growing evidence that there exists underlying
mathematical or statistical probability patterns that cannot
be explained in any other way. That is to say, "they" are
"laws". The "why" of these "laws" are into a whole other
realm of life and I leave it to U to explore the reasons, if
U so desire.
Sometimes, in highly competitive, organized, markets, price
changes can be so close to random that they are sometimes
virtually indistinguishable from random, contradicting both
fundamental and technical approaches to market analysis.
Most o! the examination of this theory by statisticians and
economists has been directed to the stock-securities market,
rather than the commodities. Slight variations from this
model can be found for both markets: a trend and long-run
oscillation (periods of two years or more) for stock prices;
and greater evidence for a seasonal somponent in some
commodity prices. source: Labys, Granger "Speculation,
Hedging & Commodity Price
Forecasts" - Heath Lexington
Books.
There are several books that deal with this matter. Take a
visit to U're library.
Be that as it may, there are some hypothesis to the random
walk theory which I like, besides the weekly and monthly
If there is only a few things to be learned
30I
from book, one wud be to realize, basically speaking,
most price fluc-::uations a:::e nothing but "noise". In a random
market, the price will fluctuate daily in a narrow range for
as long as no new information or expectation of new information
applies to the judgment of traders. This movement cud be
accurately duplicated by the simple flip of the coin, and is
insignificant to the trader. These small random fluctuations
are called "noise", I repeat, noise " and any series
of up-ticks wud give the trader no more information about
his position than wud a series of heads to the better on a
coin flip.
In large efficient markets, such noise has been found to
account for as much as 75 % of all new prices coming across
the ticker. It is a meaningless fluctuation that characterizes
a market "at rest". For this reason, I luv to use the term
"resting areas" for "congestion areas". Congestion areas to
me are really weekly or monthly congestion - resting areas.
"Gap openings" and "on close runs"
are not random walks 75% of the time.
A gap opening not closed, is not a
random walk, and a run from one end
of the price range for the day in
the last few minutes to I/2 hour of
trading to the other end of the
trading range for the day is not a
random walk. At least to me, & don't foLget, I'm not an expert
On a daily basis, the first one and
a half hours can be divided up into
three I/@ hour segments, and here
It is trend directional
and on a day-to-day
basis - not random.
we have lots of "noise"- meaningless
movements. Purchases made in the third
half hour(if prices are up
are not as likely to be
correct as purchases made
in the first two segments.
( Prices will usually wander back
toward the first segment prices.)
third day
302 THEORIES
only the price level the time of day (see chapt.8&23)
so that with experience G can anticipate price movements
for the day on a straight line basis. (see chapt. 6,1,8)
Even the price fluctuations within a trend channel cud be
said to be random noise, as it wiggles back and forth thru
the channel.
So, remember that "noise" accounts for 75% of the price
fluctuations that cum across the ticker-tape and that some
studies have indicated that commodities are without important
trending characteristics as much as 85% of the time.
The cyclical component theory of random walk varies in
importance from one commodity to another and some commodities
claim to have a cyclical component of an identical nature,
such as the crazy "moon theory". Wheat,corn,oats, and silver
usually go down on the full moon. ( Now, isn't that crazy!)
(But, I've seen it happen !) (So much for contradiction
of theories.) ( And, so much for U out there who think
P&L charting is full of ...... )
It's what use U make of theories that counts. Do U agree ?
see pg.287
RALLY REACTION
U must admit that not taking into account that prices may
meander all over the place or how they meander, that in the
end run all they do is meander and rally up or down in trends
or rally up and down within sideways patterns. If all that
prices do is fluctuate then all that prices do is go in three
directions only - up, down, or sideways, - within all designated
formations that are perceived by mankind. Such is the birth
of P&L charting).
The theory behind all this is:
Trend :- there is an old adage. - the law of momentum.- once
a trend has commenced, it tends to indure until a significant
counter-force intervenes. This means that trends exist in
periods wherein fundamental factors and technical forces
obviate a prevailing force which is sufficient to constrict
prices from releasing sufficient energy to develop a
compelling force of movement, unrestricted in one direction,
portraying as an inherent factor in its characteristics, as
THEORIES 303
one c movement and degree of movement, which manifests itself
in what is termed - momentum. ( Goodness, gracious. )
An apple falling from a tree, obviously heading in one direction
, develops a certain speed enhanced by i-ts own weight, which
it develops to a full momentum as it hits the ground, and at
the sround, which is the prevailing force against it- the
apple stops dead in its track. We may know the distance the
apple has travelled to the ground; that commodity prices tend
to exhibit a sustained price trend, of which one cannot predict
the extent, at its outset. Except, that we do know that the
price trend continues longer than most wud expect - especially
on the basis of pure chance.
Also the faster the trend progresses and the steeper the trend's
angle of ascent or descent, the sooner the trend will reach
its ultimate objective, and correspondingly the shorter will
be that trend's life.
Price trends can have spectacular moves within brief periods
of time. The strong correlation here is that - the higher
momentum a trend has - (the momentum angle) - the shorter the
time to reach its termination. Inherent in a trend's move is
the continual replacement activity which goes on, as the
various traders jocky about, take profits, re-enter, becurn
impatient, disenchanted, disgusted, enthused, and this continues
until trend is affected by becurning immensely inflated,
deflated in its relation to the cash product, wherein, economic
factors terminate the bull of bear move.
Remember this one bull markets appear in a manner which is
similiar to the pattern followed by nature for most living things
- it consists of a slow start, a gradual acceleration in growth
that terminates at maturity.
Congestions :- there's a natural tug of war between bears and
bulls. The market congestion is predictable. And, trading in
these periods with a system that is based on its characteristic
patterns, can reap enormous profits. (see chapt. 7).
It can be explained in terms of pressure, since in the confines
of the congestion area there are sufficient prevailing forces
to prevent movement. reaction phenomenon is
continually in market congestion areas, such as two
days of by one day S1Mply
. 1
and remember thl.s ru e::_
days up - one down J/
days down - one up
3 04 !'-l.h.RKE': ':'HEORIES
This occurs continually i::: congestions areas.
Studies have revealed that are without important
trending characteristics 85% of the time.
Whatever one believes is being measured, it can be
that certain repetitive patterns of price will occur before
significant price movements, and, here, we have tops and
bottoms which portrays a congestion area as a pause or
resting of market prices before the resumption or creation
of a price move. - a period of static interest in the market.
The more activity that occurs within a congestion, the
greater will be the market move, especially in market
bottoms.
Unduly inflated and unduly deflated prices exert a crucially
powerful impact on producers and consumers alike, and the
longer such prices persist, the greater the resultant impact.
Resting-congestion areas are areas of distribution, re-distri-
bution, accummulation, and re-accummulation (see chapt. 7)
A price, like an army, sometimes advances too rapidly for its
own good, and unable to consolidate at its furthest point of
advance, the price is forced to retreat a short distance for
additional consolidation. The amazing thing about these static
areas is that for most of the time, - a commodity seems to be
in one. And, the theory here is that, sometime, somehow, there
will be that beautiful release. Many commodity advisors
recommend being part of that release. It certainly is an easy
way to trade, if U can recognize the release and recognizing
that the theory of resting areas forlays a future scurrying
away from it.

lke it takes into account trends,
dament technical foreplays of all traders and
and shows the undulation of the market as it unfolds
chart graphs.
congestions
factors
on your
People,.like Elliott, have contributed immensely to this
philosophy. One of the best long term trading tools in
analyzing trends states that a trend will finally wave
itself out of existence and set up a massive correction.
Some others have cum forward with some beautiful complicated
305
theories o: "....-aves" . 'We presen-t here, a nice c:..rc1.:.lar graph
....-ith some nice presentations o: ....-aves:
But all this is not necessary.
simple wave
is the best and I resent it
guic
And, l think V shud memorize and refer to this presentation:-
The entire concept of the Elliott Wave Theory rests on
counting "waves". He argues that complete price movements
tend to occur in five waves ... three in the direction
of the trend ( major, inter-mediate & minor trends ) and
two as part of a corrective re-action in the opposite direction.
In Elliott's view, each of the larger (major) waves, can
themselves be analyzed in sub-movements of five small waves each.
30E YARKET TrlEORIES
On the first segment of the up-move, of the first wave,
occur three successive rr.inor upswings up to it, and then two
small swings down from it,creating a five wave
- first segment
I . .
swl.ngs
0
movement, and
using
concept, one
presumably
has significant
insite into a
market's
current phase
and impending
move.
In connection with the wave theory, there is the frequent
tendency for market corrections to retrace 40-50% of the
preceding advance or decline as part of the wave.
To review: - Elliott's theory in simple terms, is this: -
Once a trend has begun, within that trend you will find 8
price waves which repeat themselves. 5 waves will be in
the direction of the major trend and 3 waves will be in the
opposite direction. Once you are able to recognize this
pattern, you will be able to profit by anticipating upcoming
price movements.
There are a few things I wish to discuss about the wave theory.
We will start with an observation about the length of each
fluctuation or wave :- each successive wave tends to be of
.\\ ecrual d ation, but don't oo or erfect fits. Wave mea urementJ\
does provide the trader with an idea of the magnitude o eac
sw1.ng. (see target calculatl.on, c a_ 9 -------........ ,/
And, the veteran chartist often does not oppose a major trend
unless it has gone thru three separate stages. First, an uptrend,
- the initial thrust, - then a period of consolidation - then
a second upthrust, - another period of consolidation, - finally
the third upward movenment, which often marks the culmination
of the major move. This rule of thumb usually works better in
bull markets, than bears.
some suggest that the first upswing in a bull market represents
a stage of youthful discovery; the next one of mature recognition
THEORIES 3 07
and adaptation and the :ast one that mixes the belated zeal
o= the latecomers witt the lagging strength of old age.
Now, the next idea is that Elliott's wave counts are based
on t::.e "Fibonacci Su."tlmation Series", a no. series with
interesting properties. It has been confirmed that both
living and inanimate objects obey a no of laws that revolve
around the mathematical properties of this series. Using a
"Fibonacci" suromation (!-2-3-5-8-I3-2I-34-55-89-I44-222 etc.)
it is possible [ what do u think. ] for scientists to predict
how the population of animals will multiply, how plants will
grow, how crystalline structures will form naturally, and a
great many other things. This series also yields the "golden
mean" that is used in architecture. It is evident that study
of this series discloses mathematical relationships that hold
in real-life situations. It has been hypothesized that these
relatiors.hips are so all-inclusive that they extend into the
psychological arena as well.
I wish, now, to be critical of the Elliott theory. The first
is that the last wave of the major bull move often breaks up
into many more than five sub-waves. And, the sub-waves shud
not be counted. Next, prices generally speaking only move in
tl]_e five oD_-e time. ana:; three- m-:"e-
common in futnres contracts than five cycles. The theory is
so flexible that it is possible to get several radically
different wave counts by using the same price data, and
leading Elliott interpreters are almost in constant disagree-
ment.
It is not generally realized that Elliott was a mystic, who
also believed in "numerology". He discussed how mathematical
relationships in the "great pyramid of Gizeh", not only
predicted future world events, but tied in with his own
as well.
I do not negate the Elliott wave theory. Anything that can
explain what markets do, appreciating that markets can and do
move in waves, enables the to have some feel of price/
movements. ( So there ! )
CYCLICAL
I refer U to chapter 24 for a blow-by-blow of
" --...
what the cycles and seasonal moves are all about.
must be some reasons
and possibly why they vary in importance
from one commocity to another. It has been suggested that
purely speculative markets cannot produce price "series",
having predictable components or patterns. If they did,
components or patterns wud be traded out of existence. Why
then do some commodity series contain these components?
There seem to be several reasons. Commodity markets are not
pure speculation markets, as goods are actually sold in them
by producers and bought by consumers. The production of many
commodities is very seasonal in nature and demand may also be
seasonal. As the transactional cost is not negligible, due to
storage, insurance, and commissions, one wud not necessarily
expect all of the seasonal patterns to be played out - only
enough of it for the use of this pattern for determining a
buying or selling policy to be barely profitable. In fact,
the seasonal components are of small importance in the actual
price series in that they contribute- a proportion of the
total variance of price. It has been argued that commodity
markets are not sufficiently sophisticated to eliminate
completely every predictable component. It is worth noting
Houthakker's comment " that commodity price developments are
watched by relatively few traders, most of them quite set in
their ways: even in the most active markets. The volume of
research by participants is often small. It is there-
fore possible that systemic patterns will remain largely
unknown for a very long time". And, I certainly agree with
this statement.
THE EXPECTATION HYPOTHESIS
Futures prices represent an expectation of the cash price of/
a given commodity, at the time of the maturity of the futures
contract. To test this hypothesis, relate it to the predictability
of cash price fluctuations.
I strongly suggest that cash price changes are not predictable.
Therefore, the best predictor of a futures cash price is the
current cash price and this being the case the expectations
hypotheses wud lead one to expect a high degree of relatedness
between current cash and futures prices. And, such a relation-
ship, of course, is evident, and cash and futures prices are
highly correlated and unlagged to each other. We know that the
.!-1ARY..E':' :'EEORIE.S 3 09
nearby futures :;?rices are more highly related to current cash
?rice than the more distant =utures and are found to be more
highly related in the long run than in the short run. These
results may not refute t ~ e expectation hypothesis but neither
do they prove it, and, this cud be explained by the fact that
both future and cash price series cud be influenced simultan-
eously by the same flow of unpredictable pieces of information
in the market. The result of all this is that traders have
been unable to predict and expect future or cash price changes.
SUPPLY ANV DEMAND HYPOTHESIS
Holbrook-Working was the first in the commodity futures field
to offer the theory of expectations that result on a premise
that futures reflect anticipated changes in supply and demand
rather than on their immediate values.
Prices are determined by quantity relatives such as supply-
demand or volume of trading. Little direct relationship is
found between price changes and changes in variables such as
volume, O.I., supply and demand. Source :- Speculation,Hedging,
& Commodity Price Forecasts" by Labys, Granger.
But, evidence exists of a relationship between price changes
and the levels of speculation and hedging. Stock market studies
have indicated that the classical demand analysis is inappropr-
iate for strongly speculative markets and this is confirmed
with the consideration of commodity markets. The relationship
between price change and quantity, therefore, is extremely
complex. That is, both physical and speculative quantities
influence price, but each affects price over a different range
of frequencies, and with the realization that w i ~ ~ both
hedging and speculation, that both play a greater role in
price formation than was previously recognized. Considerable/
difficulty remains in postulating a simple demand explanation
for commodity prices. It is reasonable to believe that the
activity of traders represents just one of many influences
which serve to explain price fluctuations.
That hedging and speculation shud influence price, apart from demand
is reasonable when one recalls that the total value of contract
trading in the futures market is often much greater than the
value of physical supply and demand. Prices are less responsive
to supply and demand where speculation is low. With high levels
of speculation and no seasonal patterns one sees little or no
3IO THEORIES
co::::-relation between p::::-ices and supply-demand. ::onversely,
lower levels of speculation shud coincide with slightly
higher correlations between prices and supply-demand.
Commodity prices fluctuate more frequently and widely. This
appears to be a result of differences in inventory levels,
or the gap between production and consumption. Manufacturing
inventories rarely represent more than two month's consumption
while agricultural inventories sometimes account for more
than twelve month's consumption. Note also that the duration
of even the shortest economic fluctuation, such as the business
cycle, is much greater than the period of a future's contract.
In the short run, only a limited relationship exists between
price and quantity. Forces in the market and in the economy
do help to explain long-run fluctuations in monthly commodity
prices. According to the fundamentalist theory, the point
where the quantity demanded and the quantity supplied are equal,
this is called the equilibrium price. The equilibrium price
in a commodity market in the short run is the current market
price and in the longer run equilibrium price will be at a
different level than the current market price.
THE ELASTICITY HYPOTHESIS
The best explanation of price changes has arisen from what is
called cross-elasticity of demand or commodity substitution.
That is, price fluctuations tend to be related to indices
reflecting the price movements of substitute commodities. The
influence of the business cycle gives results in this way.
However, only a few variables exert a reasonable influence on
short-run price fluctuations and that the strength of the
relationship from one commodity to another varies from
stronger in the long-run to weaker in the short-run.
please note that futures prices are better explained by
speculative influences and cash prices are better explained
by physical influences. In our approach to the markets,
remember that market fundamentals, of supply-demand, -
underpin trend direction. Please re-read the last sentence.
!J'..AFJ:::.E':'
PRICE & PRICE LEVEL HYPOTHESIS
Occasionally, a commodity price becums immensely
or immensely deflated and an immensely
inflated price usually peaks and then turns down
as precipitously as it has risen and an immensely
deflated price inadvertently stabs down and then
turns up as precipitously as it has declined.
Prices tend to stay down longer than they tend to
stay up.
The fundamental economic factors that support the
logic of prices, play their most important roles
at tops and bottomes of market place swings. Unduly
inflated and unduly defalted prices exert a
crucially powerful impact on producers and consumers
alike. The longer such prices persist the greater
the resultant impact.
Any commodity can be used for illustration. The details wud
be different but the principles are the same. Accordingly,
beware of prices which cud affect consumption and production.
However, do not becum what is called "price level trader".
Think in terms of price momentum and price movement.
At a grossly inflated price, price momentum will be exhausting
itself, and is chartable (see chapt. 9). The theory of price
and price level will portray itself as market reactions. -
such as frantic contraction at peaks and inherent precipitous
decline, - and what is called 50% retracement.
Price level theorists say that something "is too expensive",
or "too cheap". The question is, how do they know! However,
the 50% area retracement rule is a useful tool in U're overall
trading program. Accordingly, there is frequent tendency for
market corrections to retrace 40-50%.
THE HYPOTHESIS OF MARKET PSYCHOLOGY
Even the strongest powers of empathy in the world are not going
to tell U what price is going to be, if the price is beyond the
control of human will.
DO NOT TRADE ON FEEL
3:: 2 ':':!EOR.IES
Such is the bag of tricks of the public speculator - who masses
like lemmings to the sea to make the last purchases at a market
top. Prices are only at a market top by virtue of the last
buyer being around who is the most bullish making the last
purchase to the first seller of the reverting downtrend. At the
bottom contract price for the year of a given commodity, the
least bullish person cud be selling to the most bullish
purchaser.
As more and more market participants attempt to predicate every
action on chart rules, the accummulative effect of these similiar
chart actions is that it self-creates price fluctuation.
I repeat - the chartists and the buying public create their own
markets and don't forget the simple rules of "who buys where".
The public speculator is more likely to be long, than to be
short, (He thinks that the only way to make money is for prices
to go up) , and, has a clear tendency to buy on days of price
declines and to sell on price rises, indicating that public
traders are predominate price level than price movement traders,
which is a disaster.
THE HYPOTHESIS OF GAMING
Games can describe a competitive situation. Commodity markets
include a large number of traders, leading to a minimax or a
determinant solution and can be constructed to provide a
scenerio of almost any market. The principle advantage is that
the results of each period of play are fed back into the
decision process for the following period of play. This
approximation of reality is a draw-back for gaming.
There are many adherents to this philosophy of commodity futures
trading. They feel that market prices are no more than the flip
of a coin. One prominant commodity advisor flipped a coin to
determine a price movement of an imaginary commodity, to include
a time period of one year, and found that it resembled an actual
commodity chart almost to the "T".
I have yet to talk to anyone who does not feel that commodity
markets is a "game" and is gambling. I find nothing more
preposterous than this assumption. No wonder people consistently
lose money in commodity trading. They buy, sell, sit back, hope
and pray that the game will go their way. This is a facetious
!1J..?.Y...E:" 3 I3
to and is utterly abhorent to this
trader and without in any sense a= the
I advise strongly committing U'reself to "game" rules, (at least
knov; the game) and 1:se a disciplined plan and throw this
"gambling" psychology somewhere where it belongs, - I can't
think of a place good enough for it. How many species on this
planet earth approximate existence with a gambling instinct?
They approximate existence with a determinate approach and U
shud join them in U're trading on the commodity futures market.
This chapter and the last one has been to some degree,
one great big yawn! But, yet, has it? Actually, it's
been fun. At least it's refreshing in its diversity,
and shud prove to expand U're appreciation of the futures
market, as being beyond solely a vehicle to make money,
altho' either is a superb entity unto itself, and each
by itself in conjunction with the other, wud enable the
trader to appreciate that there's nothing quite so
enjoyable and fruitful as expanding one's mind or one's
pocket book. is better, I leave to U. )
3I4
CHAPTER THELVE

systems &
servtces
Modw
Mode BLUl.cU.ng
A C YU;t- Cha-t
V-U c.oW'l.ting o Sy.6.tem6 by I ncU..v.<..ei.u..a..e.6
V-Uc.ou.n.ti.ng o ~ Sy.6.tem6 by .the MMk.e.t Pf.a.c.e.
r-"ODELS
In the last several decades, a Yast amount of work has been done
to erect a means of technical and fundamental tools, all with
the aim of anticipating future prices from trading statistics or
whatever.
Every technical approach from the simplest to the most complex
and esoteric falls into four broad areas.
I. Patterns on price charts
2. Trend following methods
3. Character of market analysis
4. Structural theories
Essentially, a trading guide prods U to proceed as if U knew
what U were doing and which induces U to formulate a set of
rules U can live with. Of course, if U know what U are doing,
the Holy Grail is yours. However, it has been claimed that traders
have not yet found a reliable system on which to trade their
decisions - a system that is not merely a theory and that sounds
logical but effectively works.
.SYS'!'EHS; SERVICES 3.!5
'!'here are rnyri.aas of systems available and many are effective
priceless gems ..... often all too complicated or the terminology
of is known only to the inventor. Usually, these little
gems ao not work, because the trader does not stick to them.
My friend, I wud say that the best model is a self-created one,
rather than an aaopted
That is why, in this book I have attempted to give U plenty of
meat to chew on, and to induce U to develop a style of trading
which is yours, - which is constant and well planned, using
various approaches as suggested or one that U may choose. See
chapter I3, for an idea that if U choose perhaps one of the
" attacks " and stick to it U might get the results as portrayed
on those pages.
Essentially, most models draw a bead on the direction of trend,
but unfortunately only after the trend has been manifested, and
these models will keep U in the market as long as the trend tenure
is unchanged. These systems contain the basic selling/ buying
pressure studies. Various forms of moving averages are utilized
for this purpose. However, I feel that this approach is far too
protracted. I prefer to look after the little things and let the
big things look after themselves. I wish to know the daily
price range in order to analyze " dot movements " , giving a more
acute analysis of trend change, long before most pressure/trend
following moving averages are activated.
Some people even formulate trading plans on moon beams.
Actually, a speculator need not be a statistician to trade
commodities successfully. In fact, many a statistician has failed
miserably when he tried to apply his favourite model. Notice the
terms used in model building that U see all over the place, such
as- "expected", "probable", and these words do not imply position
taking.
The most expensive model in the world will not improve upon
correct estimates. In fundamental analysis, the first step in
building any model is an analytical study of the relationships
which are most important. At the early stage, one draws a kind of
economic road-map to point up the main cause and effect relationships.
l refer u to quite a road-map on page ll This model is
much too much for me. This is something for the bureaucrats in
Washington to play with. -- it wud probably keep about two buildings
full of them happy.
.!2
2
.3! 6 SERVICES
MODEL BUILDING
U are going to take this book and U are going to develop U're
own model ( with lots of help from me ) , otherwise throw this
book away rite now or add it to U're library and becum an
( All experts have a nice big library. )
u will develop U're own approach, possibly taking suggestions
from chapters 4 thru 9, and I3 & I4. U will assume that this
will work. U possibly may paper trade in actual market conditions
or U may, which is what I advise, run back thru any commodity
U wish and see how U're chosen approach has worked and where it
worked, and why it worked. Constants will evolve, I assure U,
from which U will in the future garnish little piles of money
from the "ticker-tape", when U actually get into trading. If
u don't know what paper trading is, - talk to U're broker.
The biggest problem for most traders is when to buy and sell.
It is not that all difficult to predict the direction of the
trend or that it may reverse someday - u must take
correct action at the right time. U, of course, can do this.
( chapt. I3 ) .
To my mind, U will have a chart or charts which will clearly
tell U the tale of the market and which will help U in U're
forecasting ability and U're chart is meant to be the road-
map on the path to fortune. If it is too detailed, please
hang it on the wall and frame it. If U want a detailed map,
make two charts for the given commodity - one with all U're
little lines on it and the with just the high/low close
and maybe the "dot".
U will be simplifying U're trading to one type or pattern,
with which U will have success. U will eventually trade only
those markets which consistently make money u. I am open
to the opinion that people are trading too many markets with
too many different positions and thus becuming frustrated.
I don't know the answer - I feel that there are times U are /
psychologically adapteable to coping with several markets,
but there are times during the year when one commodity will
be enough for U to handle. Me I've walked away from the
markets for months at a time. Like rite now. (Except for
silver ) . I've been away from the markets for three months
now to write this book. I knew some day that I would have to
write it to get it out of my system. And, I'm having more fun
than if I had a holiday - like a world trip. ( Also, I am
snooping around various commodity offices and continuing roy
study of the psychological make-up of traders and brokers.
Great fun.)

Do not be too developing U're moaeL, because U must be
flexible to the current status of the market. If U choose to
day-trade and U find U'reself with a runaway bull, my friend, I
respectfully suggest U change U're approach and ride the bull.
Technicians are famous for making spectacular profits one
week and enormous losses the next. Don't be one of them.
Unexpected moves do happen, and if U are not flexible, don't
anticipate that U will not have to start all over again. And
remember that it is impossible to teach navigation in the middle
of a storm, so it's impossible for u to build an optimum trading
plan when u are in the middle of a bad loss. Walk away from
the market for a week or two and be flexible enough to adopt a
new model, tailor-made for the occasion. What should be placed
at the top of every page in this book is : KEEP THINGS
SIMPLE. This applies to every aspect of trading.
U're approach to the market,
U're
and research,
timing,
and price objective studies.
If U have gotten thru the first week, after initiating a
position, ( if U are medium term trading ) , and U do not have
a loss, consider U'reself on the rite side of the market.
Otherwise after one week, shud U're plan not say - that if
prices have not gone my way- get out ..... ?
Develop some ideas on what the market is doing without the formal
framework of a model. Take a look at prices in supermarkets
are doing and how people are buying. - if people are filling their
buggies full of coffee, U know that the coffee market has
reached it's peak.
/
Remember that few can trade every day and emerge winners. Change
U're style. A corollary here is to have several model approaches
( chapter I3 ? ) which u have developed and as I say, develop
the flexibility to jump from one model to the other, and write
down U're reasons on paper, each time u do.
The most cautious approach I can give U is that U're model shud
ferret out the big moves and to sit on them. Here I quote the
penultimate advice - - - it's just beautiful and perfect,
from Mr. Stanley Kroll. The Professional Commodity Trader,
I974, Stanley Kroll )
!2
2
3!8 SYSTEMS:SERviCES
" After spending many years in Wall Street and
after making and losing millions of dollars,
I want to tell you this. It was never my
thinking that made the big money for me. It
was my sitting got that? My sitting tight.
It's no trick at all to be right on the market.
You can always find lots of early bulls and
bears. Men who can both be right and sit tight
are uncommon. I found it one of the hardest
things to learn. But it is only after an
operator has firmly grasped this fact that he
can make big money. "
If u are going to paper trade, there is an argument against it.
It states that the emotional pressure of real market action
with real money is absent in paper trading. The argument
continues that-many paper millionaires prove unsuccessful on the
firing line. But this argument omits the benefits of paper-
trading.
1-:y belief is this: if a trader in training cannot perform
successfully on paper, his chances of success under actual market
conditions are questionable. If he cannot paper-trade or is
unable to analyse the history of prices and he has not studied
and practised the basics of his adopted approach well enough, or
which is the most insulting of all, he/she is not serious about
the undataking, then there is no hope for this trader. Can U
imagine that one - "not serious" - probably gets a little
serious when he/she loses money! ( Maybe not. Good sports die
broke. )
Paper trade on historical data first.
Apply P&L charting, if U wish, over a period of the last two
months, in an active commodity.
Take one or two weeks doing this.
Select your approach, or for that matter, several approaches,
and see what happens and then paper trade in actual markets for
2-3 months applying money management.
Putting P&L charting aside, and for an over-all picture, entailing
fundamental and technical factors, be aware of the following
steps: -
SYSTEMS:SERVICES 3!9
For example. the steps
invoived in developing a modei to forecast the price of a storable
commodity might consist of:
1. gathering data indicating the components and levels of suppiy and
demand for previous years.
2. comparing total supply and total demand to determine their net
difference at the end of the year (the year-end carryover) for each of
these previous years.
3. relating corresponding price levels to these historical total supply,
tota! demand. and year-end carryover data.
4. forecasting the next year's total supply, total demand, and resulting
carryover. and
5. using the forecast level of carryover and the historical relationship
between prices and carryover to forecast future price levels.
A CHIT-CHAT
source: Commodity Trading manual
I973 C.B.O.T.
No ~ r a c k record is possible on chart reading in general. /
Few chart readers wud doubt the eXistence of a head and shoulders
formation, but in contrast, a one man's reversal signal cud be
another man's flag continuation. But a track record, that is,
applying U're model to an existing price run - is certainly
feasible for the performance of a particular chartist. He cud
look at a series of patterns and identify the limits from which
a top can be identified, which can then be put into mathematical
terms and then fed into a computer, and then the computer cud
spit out a series of price data.
320 SYSTEHS :SERVICES
The -c=ader wuc ":.hen be able to see whether t.."'le "V" :formation
can make any reliable tracing signals. U may eventually becum
sus-::ic.ious of computers, as I am, altho' I use a "home" computer
to ~ ~ o r e data ~ ~ d create some wiggle-waggles on its screen.
If U wish to be as highly skeptical as I am of many chart
reader's claims, either using computers or not, I suggest the
following.
Present [the chart-reader J with an unfamiliar chart, first having covered
over the title and prices which would enable him to identify same and also
having placed a blank sheet of paper on the r i ~ t hand side, leaving clear
just the left hand vertical lines up to any interesting point. Now ask him to
identify the formation and predict the future price action. He will try his
best to weasel out of it, but stick to your guns. With much qualification and
equivocation he may eventually give it a try. Six times out of seven he will
be wrong, and the other time he is probably cheating, having recognized the
chan.
3
S Quentin Fields, unpublished manuscript.
source: Making Money in Commd.
I976 Eugene Epstien.
Un":..il model builders are willing to subject themselves to track
record analysis, it is impossible to take their claims seriously.
If they try to sell U their system, U shud require of them to
give some adequate explanation of why their particular method
works, - the philosophy behind it.
I mentioned the Fibonnocci series in chapter eleven. Some traders
fool around with these numbers. ( Elliot did. ) They do it so
they can take any given price movement, draw a few golden triangles
, golden pentagons, and rectangles, and so forth, and then predict
where prices will be, based on all these littles squares and lines.
U cannot accurately predict world events, simply by measuring
angles and sub-angles and length of lines around a pyramid. ( Or
can U ? I've got my doubts. )
I think U wud agree with me. However, wud U agree with me that
321
many of the com1nodi ty services such as those advertised in
magazines claiming returns of ISO% to 2,000% on equity are a
bunch of crap ? I tell U on the last page and those coming up
how to question these people. But suffice it for the moment
that many traders have been bewitched by the variety of services
and models that may be subscribed to in fees ranging from
several hundred annually to systems worth thousands ..
Assuming that their originators are economically motivated, if
the trading methods were successful, there wud be little need to
broadcast their availability. ( I suppose my approach can be
added to that group. ) The number of handsheets and methods and
computer printouts detailing methods of trade selection can
approach affinity and most will claim excellent results.
In most cases, when U inquire about a technique, ( especially
a commodity service ) , U may be told that the formula is propriety
and therefore secret. Such a statement is probably calculated to
increase the mystery of the particular system.
Coming up with a successful trading formula is really no great
trick. Never trust any formula no matter how good it looks, unless
u U'reself feel that it has worked in the past and that U can run
it in paper trading or feel that once U have entered the market
that it is simple, and easy to use. And, don't forget that most
models and systems work well in a strongly trending market, ( and
sometimes do by themselves create trends. ) Almost any worthless
system will work in a genuine run-away market, if it is a trend
follower, but most of these "any" systems will create losses equal
to profits, when the market has its reactions, spends some time
reversing and retraces itself.
Traders have been searching in vain for the perfect system. The
idea is as intri_guing as it is illusive. As I say, perhaps thousands
of trading systems have been proposed over the years. However, a
fev> can have merit, and knov-'ledge of the principles on which they
are based cud be an essential part of a trader's bag of tricks.
Why are many technical all but worthless ? The most common reason
is that the originator has a very limited amount of data and tised
only that data to create his system. The system turns out to fit
that contract experience and none other. Sometimes, originators of
technical systems phrase their trading rules in such vague terms
that there is really no way of knowing when U are really doing
what U are supposed to do, in actual trading situations. When
confronted with the fact that the system failed the originator can
then claim that their user misinterpreted the rules. It has been
said that a system shud be judged by two things.
322 :SERVICES
I. How well it has performed in past markets.
2. The extent it is based on sound principles.
This has inherent in its criticism that a system is automatic.
I suggest to U that U apply U'reself to an approach which U
know works, .... period. And that the judgement element on U're
part cums to play when U are about to act. U make U're decision
based on technical and fundamental factors . Part of U're plan
is to write down what U are doing and why. The only thing automatic
with this approach is that U are writing down U're plan. U don't
have some silly little computer, based on a historical past market
telling U to buy/sell at such and such a price. Market judgement
is essential, because in a non-trending market, nearly every
trading system will fluctuate the computer/you to death. ( Am I
wrong ? )
Also, there is very little objective explicit evidence available
to support the commonly accepted rules of chart analysis in the
first place, such as chart formations. Yet these rules are widely
accepted as valid and do seem to produce worthwhile results.
( Chapter 23. )
Signals are given by many day's price activities and extremely
diffic:.1lt to define mathematica1ly. The chartist is simply performing
a highly complicated and subjective multiple correlation analysis
as he examines his chart.
u see, u cannot let the computer or a totally mechanical trading
method guide U in extracting millions from the market.
and a plan is involved. To succeed, the chartist must be ready for
thorough study and work and to develop experience .. It is an art
because of his skill and finesse and experience and discipline and
committment to a trading plan and being aware of the various
approaches and why markets are functioning and do function as they
do. So, with all of these services, which are available, do be
aware that any approach must be regarded as unprofitable until it
has proved otherwise.
Go back over existing markets and see that the approach U decide
on works, and observe when it works and get to know when it works.
However, please do not let me negate U're purchasing any trading
plan which-is available. There are trading plans which I wud
certainly not negate, and there are certainly lots of them.
It is worthwhile to procur one of these methods
as the approach to the market may be viable and it may be just
a question of discipline or the desire to trade properly, or
it may just fit in nicely with U're existing trading plan. The
quality of the seller's research is not necessarily low. Another
SYSTEMS:SERVICES 323
for buying a method may be that the method of trade selection
is sound but the trading plan is incomplete, with no allowance made
for like money management. Losses cud be due to poor money
management and not because trade selection was inherently poor.
Because the importance of the complete plan is usually over-looked,
the chances are that many valid methods of trade selection which
u might locate, are uneffective because of this reason.
However, disadvantage of securing private methods are clear,
and the strange availability of these methods by itself call into
question their efficacy.
Remember, that if u basically, simply, isolate U're trading to good
seasonals and to things like trend lines, odds, sideways patterns,
50% retracements, support & resistance, - just forget everything
U cud learn about P&L charting, or whatever, - U wud have plenty
of successful trades every year. ( It's just that I like to apply
P&L to these trades! ) Also, u wud have more trades than U wud
have time to handle with possibly very manageable risks and possibly
make more money net than if U were to trade with the most complicated
computerized system in the world.
If U learn to discipline U'reself to watch for the markets
developing, take a position and learn to sit quietly, until others
panic over the fact that they're not in, whereupon U take profits,
u might be just as far ahead in the end.
However, the computer does tell u,with a mathematical formula
what U shud do. One of its beauties, using this mechanical method
is that it can be back checked. But, remember that all this seems
to involve finding and following a trend.
If all our trading procedures were programed by a computer, then
just think of the fact that our role of speculators wud then be
reduced to a clerk's function. And, the profits which we wud make,
as well as the commodity market itself, wud disappear. Because,
everybody, if a particular computer approach worked, wud be on it,
and the effectiveness of any system is to some extent dependant
on the degree to which it is followed. ( Even tho' the difficulty
of everyone following a particular system is actually compounaed
by the reality of human weakness. )
Psychological studies show that pressures, tensions, anxieties,
fear, seriously impair the decision making skills and that markets
affect the trader emotionally. so, I guess that this means that
the trader will eventually try to outguess the computer :
So what happens now that U have developed an approach which U are
happy with I Well, I'll tell u. Too many traders, once they have
developed a successful technique, tend to experiment and gamble
too much on the first draft of the scheme. They begin to experiment.
Once u have developed U're profitable approach, duplicate it. Be
slow to change, as long as U're approach is fertile. Experiment
cautiously.

But, again U are really only interested in making money
and not becuming totally enwebbed in the function and in the
manipulation of mathematical equations, or whatever. Don '.t
forget that the human mind is capable of infinitely more minute
calculations and assumptions, as it perceives and records, and
details and projects them into the future circumstances. The
point here is that u shud not.:becum entrapped with an ecstatic
framework, and as previously mentioned, have some flexibilty
in U're approach. U must discipline U're thinking to comprehend
as many relationships as necessary to determine the direction
of the market prices and market "flow" , and relate them to
ure trading plan. But, KEEP IT SIMPLE
The most stultifying mistake that can befall the trader is
the assumption that success can be he adopts a rationale
trade selection strategy and intelligently follows the elements
of a successful plan.
There is the final obstacle to success. --- money management!
If the trader lacks the discipline to set objectives and risk
elements (chapt. I4 ) , to act when either is reached, he/she
shud take a close look as to whether he/she shud be trading
commodities. Remember, skillful trading is what counts, not
skillful theoretical theorization.
Develop U're model plan. Stick to it. Be flexible and let the
infinite possibilities of U're mind guide U, in U're discipline
and U're use of it. ( And, U will have that million bucks is
five years. )
DISCOUNTING OF SYSTEMS BY INDIVIDUALS
Theoretically, if any one rule was invariably correct, it wud
be followed to such an extent as to eliminate its validity. The
greater the following, the less golden opportunity. Can U imagine
everyone deciding to sell Dec. Silver on an outer channel line?
(chapt. 9) I just can't wait to see, if I shud decide to publish
my book, if there's going to be any change in market patterns
around these points, and in relation to the extension of a day's
price range. I'll probably have to change my trading style -
that's O.K.; -I do anyways. (And, I've got other tricks in my
bag. l ( And, so will u. ) So, conversely, the smaller the
following, the greater the opportunity. The greater the following,
the more the profits will disappear, because everybody wud be
SYSTE!-!S :SERVICES 325
appyling similar analyti:::al procedures. Eowever, i:: everyone was
supposed to act on a certain area, I know one thinq for sure.
Prices wud go there. Human nature is such that all rules are
eventually broken and with monotonous regularity ..
Chart readers have embalmed in their brain usually 3 or 4 basic
patterns. They may take break-outs of congestion areas, being
trapped in an end-run. Myriad chartists anticipate directional
moves, only to find that the market reacts swiftly in the
opposite direction.Risk analysis is required for these people
and judicious use of stops.
Me, I don't like "stops" . U're quite frequently in the presence
of lots of company and will get mangled in horrid executions,
particularily, if u have heavy no's of contracts, &/or U're in
thin markets. Remember, even using P&L charting, but certainly
general chart approaches, that U will have lots of company.
There are literally thousands, thousands, and thousands of people
charting exactly the same movements U are. So, when a major move
is signalled, or when u decide to put a stop in, U cud have a
lot of the same orders as yours hitting the trading pits.
As far as I'm concerned, a lot of the talk about commodities,
( and it runs into the zillions of words ) is only a repartee
for chin-wags and don't forget that this book joins that group.
Remember what I said a few times in this chapter? KEEP IT
SIMPLE . Take it easy. Armchair philosophize if U will. There's
lots of material in this book for that, but, KEEP IT SIMPLE,
Have great fun with the dissertations, if U will, but,
keep it simple, disciplined and well-planned, when U trade.
DISCOUNTING OF SYSTEMS BY THE MARKET PLACE
News is published in the newspapers. Information available
for everyone has little or no value, yet the futures market
has an uncanny ability to discount future events well before
before thay are recognized by the very many. By this time,
most systems have clicked in, - especially if it has been a
trend run. But once the majority have learned of the news, it
is already too late, because the market has already discounted
the news and probably will discount many, many systems.
r -
2
326 S:SRVICES
The random walk has an uncanny ability to discount many systems
out of existence. In a theoretically perfect market, all traders
receive the information at the same time, and are equally talented
in interpretation and thus the price moves quickly and swiftly
to its new level. There ought to be very little disagreement with
the direction dictated by the new information. But, as U know,
there's no such thing as a perfect market and the market discounts
90% of the "systems" into the ground, because, markets are not
perfect and the reason the markets are not perfect is our little
friend called - human nature. Of the 90\ of the systems which are
discounted and fail, perhaps IOO% of them fail because of human
nature. - bad application of technique.
I am sure that U realize that as more and more market participants
attempt to predicate every action on chart rules and they obeyed
these chart rules, that the accummulative affect of those similiar
actions, - self-creates price fluctuations by itself, destroying
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 penetrations of trend lines. If any one
market device earned profits effortlessly, it wud be used, return-
ing profits until it was discounted by the speculators it was
rewarding.
Please do not forget that altho' the market may have discounted
news that has entered the market, and that the facts are
known by large trading houses and other but that
in reality, certain events can occur unexpectantly. Prices may
not have completely discounted these occurences in which case U
might be caught off guard and very little can be done in these
situations to protect U're position ( and that includes the
professional ) except to be alert to recognize the event,
especially in thin markets, such as orange juice, platinum, and
potatoes. A sudden change in market trend can occur sporadically.
That is why I stay from thin markets, except to trade them in
anticipation of trend direction, such as when seasonal and odds
are in my favour. (chapt. 5,24.) Buy orange juice in the summer
in anticipation of a frost scare in the fall. (maybe.)
SERVICES
Now let's think. - who services U ? ( I mean with trading advice.)
There's the broker, - there's the brokerage house, - and there's
the professional advisor. Our broker pal is covered in chapt. I2
and
SY S':':s!'!S : SERVI C:SS 3 2 7
Don't. forget , his only ::unction is ....... "not: to thank u. "
and to grind out commissions. Don't be failed by this, and don't
be fooled by this. Brokers grind out commissions ana are obliged
to do so by their bosses and the necessity of paying for their
living. We all have to make a living, U know. However, there is
an avant-garde group of brokers, who are sincere and earnest and
develop a long-standing and profiting clientele. I'm seeing more
and more of these earnest, aware brokers nowadays, who tend to
fight their bosses, building their clientele, on the premise that
a continually profitable, unchurned, long-standing clientele,
(maybe only I0-30 ) , is the only way to drive. They tend to be
medium to long term trading brokers.
Believe me, there are some honest, wonderful brokers around. But,
I think_it takes experience to know one. That is difficult for U
novice tradeEs out there. I guess the only advice I can give u is
to ask a broker on what citeria he makes his trading decisions,
and see what U think. Wud U buy a used car from him/her ?
Also, maybe U shud write to Bruce Gould @ Box !6 Seattle,
Washington he has a list of brokers who take it
easy with their trading. But, u will probaly have to subscribe
to Mr. Gould's service to get it. Not a bad investment, I think.
I subscribe.
The brokerage house, however, - the broker's bosses, can be a
bunch of "twits" - they grind out meaningless informations and
recommendations by way of weekly information to their clients,
or to the various brokers who are set up like manikans, all a
function of necessity, I'm sure, in their little offices or
desks. Don't forget that the losers in commodities live off weekly
letters and look for advice. So it isn't really the brokerage-
houses' fault - but, then again they're in it to make money off
the traders and not from their own trading in the pits. Quite a
bag of tricks, isn't it ? No one to blame. Just U'reself, I guess.
U know what cancer is like. It lives off and thrives on weak and
strong tissue. -so with the big "houses " . ( I hope I'm not
being too facetious. )
The "houses" hire analysts, ( fundamental and technical ) an9-,
u must realize that in order for the house to grind out commissions
that these characters have to grind out daily recommendations,
( I feel sorry for them . How wud U like to do it ? ) and don't
let anyone tell me that the purpose of all this is not to "pay
the rent". -the brokerage house must churn and churn and churn
to make money. They don't make money by U making money - U do!
And, the more money U make, the more happy they will be, because
most traders wud churn more.
Somebody doesn't realize that with lots of long-term, successful
clients, if these clients shud stick with them, that they wud
make more money than they ever dreamed of.
See Neil Blewett's article pgs.i-xxx
SYSTEMS : SER"\I CES
Look for a broker, - not the brogerage house. ( except that it
has to be a clearing member ) .
When U go outside the brokerage house and your broker, U're left
with nothing but the professional advisor. He charges U
for his service.
He may see U privately, - probably as he shaves
-because if he's any good, his productive time
is too valuable to be bothered with U, - and
charge $500 to $I,OOO for the visit and probably
give U advice that will shake u to U're boots,
because the advice was probably hardly any advice
at all. - things like convert U're cash to gold.
This consulting game is the biggest game there is
to-day. It all depends on how it is packaged.
It will probably get much, much bigger as everyone
strashes and struggles to find out what's wrong.
Consult the experts! The newest game in town!
I'm scared stiff that once this book is published,
that I will suddenly becum an expert. But I won't
let it happen. There's nothing worse than an expert.
The "Peter Principle". I can see myself now, shaving
away in my bathroom, totally confusing my client and
myself with lots of words and sound advice. Maybe
that's why experts say so very little, - they don't
want to confuse themself or sound stupid. Probably
just give simple advice, which U already know.
So, don't see these people personally, unless at a social level,
or he/she is really going to teach U what he/she knows.
If U're inquiring from a professional mail service, &/or telephone
advisory system, there's a few questions U shud write to them about.
Write to them and ask them these questions. ( This shud be a joke. )
QUESTIONS:
/
I. Why do U give trade advise if U know how to make
money, - u shud get all the money U need from ~ ~ e
commodity exchange, like I try to do.
2. Do U follow U're own advice and if U do, cud I
see U're record of the last two years. ( photo-
copies, including confirmation slips.)
3. Do U trade for yourself first, before U give
advice?
4. May I know the entire model on which U trade ?
SYSTEMS:SERVICES 329
5. Is U're approach entirely mechanical
6. How many subsribers do U have ?
7. Is the advice timed to when I receive it?
Maybe U can dream up a few questions of U're own.
NOW, if they answer,
THEN,
I. I want U're money to use so I can make even
more money. Or, I cannot trade with my own money,
'cause I always seem to lose using my own money.
2. Yes. - to both questions.
3. Yes.
4. Yes.
5. Yes and No.
6. They give it and now U know the size of the
company u keep. ( if U can believe them.)
7. Yes.
you've got a first class advisory service ..... subscribe
In most cases, however, when U inquire, U will be tole that the
formula is proprietary, ---- therefore, secret. Never trust just
a formula, - no matter how good it looks, unless it has first been
tested in the past and authentically.
The only advisory service which I use is,
a ~ fundamental research
- Commodity Advisory Service
commodity Research Bureau
One Liberty Plaza N.Y. N.Y. I0006
b) sound General Advice
- Bruce Gould
Box I6 Seattle Washington 98II
- The Reaper by R.E. McMaster
P.O. Box 39026 Phoenix AZ 85061
( a dandy cyclical analyst ! )
330 SERVICES
If U've got technical tools, and I recommend P&L charting,
( really I do ) then these two sources of information will give
U an incredible grasp on the market.
And, if U really want to get into a long dissertation of
fundamentals on a more analytical basis, I recommend,
Commodities Report : 2I9 Parkade Cedar Falls Iowa 506I3
And, by all means, subscribe to COMMODITIES. MAGAZINE
219 Parkade Cedar Falls IA
506I3
My God. That's a must
But, remember one little thing with regards to these various
professional advisors : - that one of the key ingredients of
contrarian opinion ( chapter 5 ) represents a consensus of
professional advisors. This shows U how good these advisors are!
If the consensus is 85% - that these advisors are bullish - then
the market has run its course and the bull is over. Can u believe
it, the advisors are still bullish!! Some advisor ... some professional.
And it is so sad to me,the fact that the losing speculator finds
that long term success is virtually impossible, and that it does
not deter them, or their salesmen from demanding specific trading
advice from these wire-houses and services.
Remember also, that commodity letters and free advice cud get in
the way of listening to the voice of the market. Better to see who
is buying what at the supermarket. Or, that the market is not
flowing with the news as it shud.
U want to know what the market is saying to u, - not the confusion
of the babel. Really, no one who puts his decisions in the hapds
of others, ( unless they're lucky with a sound advisor ) - succeeds
for very long. Everyone, as he pursues his own self-interest, is
not at all interested, basically speaking, in whether U lose or win.
Unless, once again U have a successful broker.
And, take note also, please that, several brokers are great
technicians and have profound knowledge of the markets and are
very successful, but that, when they trade their own money, they
are unsuccessful. Accordingly, because of their psychological
make-up, they trade only their client's money, since only with
someone else's money, do they have success, and do it extremely well,
and I mean extremely well. I think that U will find that this is
the case with U're successful broker. This is the kind of man/woman
SYSTEMS:SERV!CES 33I
I wud Every city must have at least one! - surely
And cne who will not churn.
Remember, losers are scorned, winners evoke envy. Be careful
of this. There's no joy in this. Please, don't be envious of
a winning broker, or a winner. Stick with them. And, don't
bug There's more than money involved. Respect U're
broker and advisor. Don't treat him/her cheaply. If U want to
go the cheap route, there is only one thing to say - What else
can U expect for a nickel ?
I2
332
CHAPTER THIRTEEN
PLANNING
'

THE ULTIMATE CHAPTER ?
( I think so. )
Herein we try to tie everything together.
" And all around U'll find peace. Not sleepiness. But the
tranquility which stems from being mature of years and
knowing the pace best suited to getting the most out of
life "
- from a Scottish travel brochure .
This trader is always writing things down. I'm continually writins
a discussion of what's happening. What was the activity yesterday ?
What can I expect ? What is the market doing now ?
What can I expect in the future ? Is it or isn't it reacting to
the technical joy-sticks ? And, then when I have done this, ( it
develops a flow after a while) ,I write down the reasons why I'm
going to make a particular trade, whether it be a ten
trade or a major, major position which I had been anticipating for
months.
It's rather embarassing when U've made a bad trade and U see in
print - U're own handwriting, how inane U were to make that trade.
At least U have a record of the reasons behind that trade and can
analyse it for future use. ( Even categorize and put them in a
box for future reference ) . (A box for good trades and one for
bad trades )
Under no circumstances can U continually make money, without writing
--------- ------- -------
an analysis of t ~ e market, and the reasons for making a trade.
Some of U out there may be able to, but it seems mundane to me
not to ! What's a little effort ? How can U fly by the seat of
'C're pants ?
lJ haye to have a trading plan and U have to make it work, and
no fiddling with it ! One of the greatest disciplines to making
U stick with it, is to 'write it down' - each time - daily
No frivolity ! When U've got IOO contracts on, U don't want
frivolity ! And if U are on the line with a small equity of
$2,000 and that's all the money U''!e got in this world - U
most certainly cannot experiment with frivolity. It's
beautiful to look over U're notes of three weeks back and know
where U're thoughts were and it's so easy to 'feel' the evolution
of a contract as a result.
The key to success is being able to organize what U do and then
be able to do it when U don't feel like it. Self-discipline
( I wrote a whole chapter on this one ) is the ultimate key and
it requires hard work and effort. - a total comrnittment one way
or another. And .... -thinking ! It's serious business.
Frivolity is out.
And there's a lot to know. A trader must be able to understand
what sort of factors influence prices. He/she must have a
smattering of market theories to understand why prices move as
they do. He shud be aware of all the various systems and
approaches to the market. - all the various methods of forecast-
ing prices and know the services which are available and whether
he/she shud use them. He shud know the general principles of
money management, for without this he's lost. What are the
general comments that most traders make ? The maxims ? How can
they affect U're thinking ? Do U really know the psychology of
the market ? What are U're value judgments what's important
to U ? Do U know the general philosophy behind charting, it's
weakness and strength, ~ h ~ use of it vs. fundamentals ? Are U
going to continually keep fundamentals in the back of U're mind
as a guide-stick for technical analysis ? Do U understand U're
/
fellow chartists what they're like and where they act ? Do
u know the market place have U been to a brokerage office -
have U visited an exchange ? Do U understand volume, open
interest, comrnittment of traders, the cash, the basis, the odds,
the seasonal patterns, the chart formations ? Do U understand
trends, congestions, and trend reversals, and each of the above
in relation to the other putting aside all the dilly-dallies
of U're favorite technical tools ? What makes a winner ? And
what's a loser like ? Do U have the effort and discipline - the
guts issue of it all ? Does self-awareness mean anything ? ( It
I3
even more guts to accomplish this ! ) Do necessary personality
really have any bearing on successful trading ? Who trades
and how ? What little kit of tools are U going to collect, and
what sort of practical advice can be admitted to U're trading plan ?
last, maybe not least, are u going to let Point and Line
charting influence U ?
Above are listed thirty-six ( count them ) facets of appreciating
commodity trading, and I do not see how the trader cannot help
but to be happy to be well versed in each and to have studied and
recorded them thoroughly. Make a precis of this book. If U're just
starting to trade, make notes, - study. Becum an expert, - a well
disciplined one - wherein U will achieve the position of being
a professional and eventually, and unassumingly rake in hundreds
of thousands of dollars each year. Becum a pro and U can do this.
But it entails achieving all of the above and becuming a so-called
expert in each. No hassle. It can be done - even if U don't
have some money to trade with. Someday U will have some money, and
boy, will U ever be ready.
So, let's get down to specifics.
Let's categorize things a bit.
KEEP IT SIMPLE
U becum a o6
I.
Z.
3.
4.
5.
6.


pychology on the
value j


7. the
6 ettow tf.>
place
8. o 6
- ---- .. - -- ------ ---- ---- -------- ------
1. vo.tu.me.
2. cpe.n
3. c.c nttz.a.Jtia.H c pinion
4. c.ommittment
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 ( go to a
nof!. one yea!!. - make the ) and
I. the and lo.6ef!.6
Z. e66oJtt and
3 . .6 el6- awalt en e.o .o
4. nec.e.6.6af!.y
5. who tJtade.6 and how
above all know theJte to know about
1.
Z c. o n 9 e.o o n.o
3. JteveJt.oa.l.o
maj
tJtend
tltend
do U know wha.t a c.cntJta-tJtend ?
the ma.jof!. tJtend
tJtend
tJtend
both top and bottom
the tJtend channel
vol. 0.1. o6 tJtadeJt.o, c.ontf!..
o n, c.a.6 h, ba.6 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
I3
c. a n.6 id en
3 types I . c. ana eo :U...c n
2 . bLend .U.ne
3 bta.n-6 t 0 Jtm e.d
bec.uming en
?
to be
a.) c.ontinua.tion
b J n e v a.t
: volume a) high/tow activity
duning the. da.y
b) high/tow a.c.tivity
a.t a.nd
n tan c. e.
c.) nean a.pex a.nd at
binth
thnee. up/down, one day down/up ?
length o6
he.igth o6
0.1., c.ommitt o tnaden.6, c.ontn. opinion
ea.6ona.. c.ha.nt
.
did U it developing ?
do U i..t developing ?
ha..6 it developed ?
c.la..6.6iic.a...tion : - 'v' , head &
double, tnipte, nec...ta.ngte
diamond
c.on.6iden : volume
337
0. 1.
ccmmitt. c6
opinion, ca..!:Jh, cdd.o, ba.oi,!l,
.oe.a.oonal
pa:tte.Jtn.6
via
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
1. Moving ave.Jtage..6 ?
2. p!te.o.ouJte indiea:toJt.6 ?
3. point and ?
4. tJte.nd l..i..ne.-6
bJteakou:t.6
new high!..tow.6
:tJtend 6ol..towing me.thod.o
conge.6tion :tJtading tJtic.k.o ?
5. po..i..nt and line chaJtt..i..ng ?
6. whe.Jte. aJte.

.6tcp.6, i6
U ' , .. d2. g o i n 9 t c u.o c. .6 t o p .6
7. u.6e o6
u I
1. - moving av e.Jtag e 0 Jt
whate.ve.Jt
All
o6
2 . b a.o ..i...6 chaJt.t J.Jee pa.ge. 345
which 1 do, 3. di.O CU.6 .6 ..i.. 0 n .o h ee.:t .o ee page 346-7
bu.t 1 4. execution .6 he.e:t .6 ee page 348
leave
....
.{.-{..
5. Jte.coJtd .o hee:t .o ee pa.g e 350
:to u ) 6. adju.6:tme.n.t .ohe.e..t .6 ee page. 352
7. income. .6 he.e.:t .6 pa.g e. 35!
8. da..i...ty quotation ,'L e. co Jtd a.nd
1
do:t
I
c.a..tcu.ta:tic n page 573
I3
in 22
I . g ap.6 ( chapt. Z 3 )
Z. opening6/clo6ing.6
3. tlme
Exclude
I. chin-wag with 6ellow unle.6.6
it6 long, long a
on nact ninilng mi.66lon, the Qlnd u wait
month.6
2. to onnice activitie6
nundamental6 vla
I. Commodltle6 Magazine ( a mu.6 .:t
2!9 Parkade, Cedar Falls IA 506!3
2. Commodity
One Liberty Plaza N.Y. N.Y. 10006
.:to a ( it'6 handy
e.g. I. Commodlty
One Liberty Plaza N.Y. N.Y. !0006
2. IBEX Chart Services
Box 693 2420 Ist Ave. Seattle Wash. 98I2I
Le..t c:thucS d.c .:,cme. 6c:t U ltc.:
H.:c.,.:-Cc.c.-5. Tht cn-C.y cne I :tc
BJtu.c.e. Gou.ld.
Box I6 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 i6 U :th-Cf.>
Jtu.le.. r don':t wan:t u in my
and, ab ab I'm c.onc.e.!tne.d, :thi6
( Oft pabb it on ) i6 U do not WJti:te. e.ve.Jty:thing
down.
O.K. gang. Now U know the ground rules. do the above
U've got it made.
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 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
I3
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 unprofit-
able 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 kith less probability of success
but trading conservatively can actually have a better chance -
of long-term success, winning the game, than a
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
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
3 43
STEP # I
Precis this book - at least 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 )
344 ?LANNING
two daily bar chart with my 'dot' in place, but
three
nothing else just for visual observation
- no scribblings - looking at the trees.
- 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.
::our
PLANNING! 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 uwish and maybe oscillators
at the bottom of the page. We're looking at the
roots !
(Also, prepare a weekly and 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 worksheet for every 'thirty day period.
Two o: them. remember - writin down ?
s'
Qon,..oo.
onos
I)
r:.' :s r .. ,; r (/ ,._,
i .n 111 1'
\4" ... 1') ._,.. ... , .... ,'\(",- rru ......... ........ !...:.. -t'
:.,...._ ...,_ ,I""! I .,..u <4/--'1 - f1 -7.J.,. ti""' ........._
Oa."i - c:.. - r.,, . "t 7"'"".""'" ... ,., ... .,.. ,...," tt '"'""""'"" ,.. l
r;_,, .. ,,. ro,. .. , ... u-., - .,.. ....... 7"r: o., --;.It J s rr,..!",.

')
""" r . ;-.,,...;.... *;.; .. ' -._.:_
"'
describing
what the contract did the day before. Did
it stop at a trend line? etc ... where was
it strong weak, whatever.
b)
c)

e)
DISCUSSION - a chit-chat with myself,
presenting some fundamental/ technical
factors that stand out and what I 'think'
the 'odds' for the commodity
- at the top of the page
what I can expect this month, in 30, 60,
90, I20 days
MY MAJOR STRATEGY -at the toE of :12age
2)

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My technical data, kept up daily and in
A & B listing what I'm actually doing per
contract B = buy S = sell W = wait
a)for silver - 14 on from dot
b) - 8 on from dot
c) dot distance , up"t , down -l-
d) cot off main channel ( v = yes )
e) dot turned ( v' = yes )
f) 3 dots on ( the price at that point
g) days market has been up/down
e.g. 2 = 2 days down
3 't = 3 days up
h) target re calc. in chapt. nine
i) trend line prices for that day
major 1' support v resistance
medium if' " .J, "
minor If " J, "
j) support - 3 kinds
resistance -_3 kinds
2) next 50 % retracement cuming up
m) basis + or
and so forth or whatever.
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346 ?LJ.Nl\!NG!
! have my
1
action
1
sheet which is used wheneve:::, and I mean
I execute a trade. It lists as U can see, the items I
shud keep my mind on, ( at the top ) and asks a few questions.
Vihen I act I circle the appropriate word that supports my move
and place dovm belov. any pertinent figure or comment which may
supportin particular any of the above. ( Develop U
1
re own, but
this sheet is an absolute must, must, must . )
COMMODITY
VOL.
0.1
CONT. OP.
COMM. TRAD.
PSYCHOL. MKT.
P&L
dt.ds.

dt. pos.:
CASH
BASIS
ODDS
SEAS'LS
premiu
1
s
dt. hit
dt. off
old dt. c.c
2 day
chart pat.
trend
congest.
reversal
op.c.c
op.dt c.c
3dts .on
dt 1 .l-
dys1'
c.c hit oid c.c
_I
Fund. imputs that:
Tech. imputs that:
date
technical
T.L. Is
support
resist.
so %
trend mj.
med.
min.
day's up
down
target
I-2-3
breakout
last
day's
acti.
cong.
(con.)
(rev.)
commod. are bullish/bearish General mkt. indicators It
- BUY I SELL because
Action taken
open bought /sold
offset bought I sold
cruantity
I cud have improved if I had
What I did rite
month price
PLANNING! 349
~ o w , we've really gotten somewhere.
We have
a) all the charts I need
b) my basis chart
c) my two note sheets with all the technical data
written down and chit-chats
d) my action sheet - executed as I make my decision to
trade. I never, never make a trade without committing
myself to this sheet. I'm honest with myself.
( A hint - I) I scotch-tape
together into
all the charts and basis chart
one big sheet
2) I scotch-tape the two work sheets into one
long sheet,
ulimately giving me two
study purposes, and,
3) the action sheet for
peices of paper for
under my pillow. )
- And, that's it ! I have all my work sheets,
and, that just leaves us with our book-keeping
of account activity. I suggest u maintain a record of U're
trades, profits,losses, margin, free equity, whatever, - U're
broker can make mistakes, and he/she will respect U if U're
on top of it.
h good record system is I. daily activity record
2. account balance record
3. debit & credit statement
The 'DAILY ACTIVITY RECORD' accounts for the activity that took
place that day, see next page, ( at the top ) and the open /
positions held after closings, which includes a 'power statement'
under it based on closing prices and closed out trades. ( $8,584
plus gains on 'open' silver contracts ) . Margins are portrayed
to give me an idea how much 'free equity' I have for 'free' trading
and if I'm over margined ... I am in the illustration.@ 35% .
. ( remember the 30 % equity rule ? ) . The accummulative balance
is next portrayed on the 'ACCOUNT BALANCE RECORD' , two pages from
here. This tells me how I've done on actual trades, profit or
loss. I like to have this because I can see if I have more wins
than losses they're clearly defined, as is the running
profit/loss figure re: current balance. This is U're closed out
13
350 PLANNING!
RECORD DATE
PREVIOUS :
AC':'IVI'U
I 1'1.1.-l

CO"IIO NO. ltti.l'l 8oUUIT! 9.i9
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OPEN POSITION
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POWER STATEMENT
CAPITAl. (include

9&il>s ' protiul

Mlt:OIN ON OPEN ------
POWER
PLANNING! 35I
BALANCE RECORD
INCOME
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CUIUI.Ell'l' BALANCE
I)ATl ott\,,, tp"Tt I I um.DI- OAn L.OU&S
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ACCOUNT
YEAR

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DEBIT AND CREDIT STATEMENT

I EXPLANATION
I
I
PLANNING! 353
trade sheet. The'daily activity' record accounts for activity plus
if U had closed out on close of all markets that day.
The 'STATEMENT/ON DEBIT AND CREDIT ( last page ) , will account
for corrections of fills, or computer errors. At the end of an
accounting period (monthly ? ) , I can take the net credit/balance
and either add it to my profits or adjust my losses accordingly.
Without this statement, My records wud be out of balance at the
end of my accounting period.
There U have it,
three record sheets.
one, of daily activity and summary
two, a current balance and P /L statei;tent
three, an error account
I hate to tell U, but I've got one more sheet! use. It's just
to have on my desk daily, as a sort of quick-glance watch-dog,
written out each morning. Read it over - I think U will get the
idea. It's very handy and sort of programs me for the day.
poajtjon CDIIIII1\t
STOP_
SOYBEANS
Hf.Jo
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CCP?ER
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PLATINLI'1 !
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BROILERS

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SILVER
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- ------ ----- -----
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!sPECIAL
I3
354 ?LANNING!
ana, that my friend is
At least that's all I can think of. After a while, doesn't
take long to do. ( Actually I have a computer doing some of it
for me now. l But. still, commodity trading is effort and
discipline. If U trade only one commodity and trade long term
and occasionally, it takes no time at all.
APPROACHES TO THE MARKET PLACE
Now I am going to do what few authors and systems advocates do
and that is be honest. The next few pages will show the application
of various trading styles to our Dec. Chicago I 78 silver chart
and to be honest, it is not honest to say that these approaches
work ...... they were applied after the fact .... after the
market had made its' move. Any fool can apply a plan to past prices
and find where it will work, and this is exactly what is done in
this case. However, if one accepts the rationale that if a criteria
existed and was acted upon, then a constant of one sort or another
existed, and must have some validity. U will see how reasonable
these approaches are, and given a rather firm adherance to their
execution and anticipated results, we shall see what happens.
I will say that as I write, I have no idea how they will work out.
This is written before an analysis of the effect these approaches
wud have on the chart. It shud be fun. Are U ready ?
Let's discuss money management We'll assume that the margin
for silver is $!,000 . Therefore, to meet our criteria of
equity rule, we'd need $3,400 to start with one contract. If we
shud build equity in our account as we go thru a plan and it shud
increase sufficient to take on more contracts, yet retaining the
money management rule of 30 \ of equity for margin, we will do so.
If at any time we get under our base cash flow of $3,400 , we will
see what we shall do. ( Probably borrow from our favorite Aunt ! l
Also, no account is being made for bad fills. And, an assumption
is made that we do get filled within close approximation to price
mentioned. ( Do U follow me . )
Using this minimum cash required concept to start with is worthwhile,
as it illustrates that things can be done. Shud U wish to apply
more cash as a starter, do the calculations, pyramide using 30 %
PLA!\'TNING 355
rule and govern U'reself a=cordingly. If U presume U are
$50,000 or one million to the silver chart, this,
at moment ( will discuss later ) is not for U, since U're
either fcolish or an experienced trader who does not need further
suggestions.
Keep in mind that the trader who maintains at all times a maximum
( no matter what ) of $50,000 in his account and trades a maximum
of $8,000 of that amount at any time, will be around a long, long,
time ...... superb money management. !
In the following applications, we consider only specific technical
aspects. We are putting aside any consideration of volume, O.I. ,
basis, odds, seasonal patterns, chart patterns, contrarian opinion,
committment of traders. I leave this to U if U wish to do the
work. We shall try to express only specific technical formats -
the trees and roots, if U will.
The following are techniques used by the following kinds of traders,
and we will go thru each in detail on our silver chart and see how
each does profit wise.
BREAKOUT TRADER
TREND FOLLOWER
TREND CHANNEL TRADING
TREND LINE
HOW I USE TREND LINES ( P&L CHARTING )
THE TREND BUCKER
BUYING/SELL:::NG CONTRA-TREND
BUYING SUPPORT
SELLING ON RESISTANCE
B'l"Y!NG/SELLING @ 50 % RETRACE.iENT
THREE DAY UP/ONE DAY DOWN TRADER
TrlREE DAY DOWNJONE DAY UP TRADER
THE CONGESTION TRADER
FOUR KINDS OF TRADER
SANDWHICH TRADER
DAY TRADER
POSITION TRADER
SURE THING TRADER
P&L TRADER . A detailed application.
!3
3
356
IB:REAKOUT TRADER
-- ----.- - : - - - - " " - - - - - - - - - ~ - :--------:--------
. . . : . ; ' ..
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Purchase one contract (ct. ) on breakout thru previous congestion high
@ 'A' ($5.5I). Next breakout@ B to upside failed@ C, so take profit
- @ 57I as breakout gap @D is closed -(5.7I-minus 5.5I = $I,OOO minns
50 commission= $950 profit) .(Equity now $3,400 + $950 = $4,350,
equity still enough for only one ct. ) Wait for next breakout: occurs
below congestion lows @E - sell one ct. $5.60 market on stop.
Retraces to 5.60 @ F - exit market and stand aside @ 5.61 ($IOO loss
with commission= $4,250 equity) Next breakout@ 5.72 @ G, fails @
H, loss $100 (equity 4,]50) Next breakout @I , good for fifteen points,
($700 profit) Breakout '0' fails @ K- equity now $4,850 . Profit
for period is $!,450 = 42 % return of equity in twelve weeks.
..
..
An even more profitable methid of breakout trading, but
greater risk is to take the breakout @ S.SI 'A' , stop loss
at previous isolated low 532 ( never hit, but if it did, U're
loss was $950 ) and going short at next breakout failure (5.72)
@ C (equity now $4,350 ) and using as stop-loss, the previous
isolated high @ 588, and hold short until a breakout from a
congestion on the upside occurs, that wud give profits, and this
occurs @ 558 ( profit 650 after commissions - equity $5,000 )
and going long @ 558, with offset @ 542, until there is a down
breakout from a congestion or gap breakout that fails on the upside
which occurs @ 598 ( profit $1,950 - equity now $6,950 - 3,550
profit after commissions = 100 % return on money ) Do u notice
that the gap breakout @ G did not really fail, because the low
of day 'X' just filled the gap ? Review the rules in the above
and see if u can cum up with the format and see if it works
elsewhere.
Breakout trading is not too bad, especially if u have a commodity
with a trend. The above format, I think is fairly reasonable, and
rigid enough to be included as a trading format.
I THE TREND FOLLOWER I
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357
358
This trader wud have done his homework and assumed that the trend
of silver wud be up. He wud always look to buy, take profits,
never go short until major turned down. He's a long
He thinks like this : Buy or. breakout opening @A ( offset @ 532)
@ 547. Flag develops @B, get out as prices go thru flag about half
way to end of pole target ( 6.00 ) @ 580 and stand aside. (profit
5.80- 5.47 = 1,650- 50 commission, equity now $5050 ), and wait
for 50 % retracement from top of pole 588 to bottom of pole 532 ,
i.e. 560 which occurs @'C' and buys again. As price approached
previous high again @ 588 @D , he wud be suspicious of a double
top and wud take profits on close. (5.84 , with profit 584 - 560
= 1,200 equity now 6250 ) and wud buy again probably if prices
went over the high. But it didn't. Prices cracked. He wud still
look to buy and wud have done so in congestion @E (stop @542). He
wud still be long since prices have gone over 588 and the 580to
590 area seems to provide support. His profit @F if he had closed
out, was 6.IO -5.60 = 2,500 equity now $8,750 , a $5,350 profit.
Does this make sense ? Do U see how a trend follower only trades
on the side of the trend and do U see his thinking as to when he
takes profits and stands aside ?
I TREND CHANNEL TRADING I
:.r :.: : .. =-......,.---+-- ---- -' 4- . ---+ ... -----.;.v- - :L
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Really a difficult job and I hate it. U want to know why ? Because
there are so many chartists putting channel lines on charts and
there are stops in the market all over the place, with false
penetrations and breakthoughs. I mean, how do U know when to act,
unless U use the upper channel wall to trend buck with. But, do
U know where to buy ? Sometimes, a clearly defined trend channel
exists and sometimes last a long time, but by the time it's formed,
it cud be a little late. I don't know. There's not one trend
channel in the above I cud be happy with. What do U think. Sorry !
I like trend lines much better cuming up next.
I TREND LINE FOLLOWER
I3
359
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3
360
We assume we bought 538 @ 'A' . We use isolated low/highs for
our trend lines. \ole go shor-e as prices go thru trend line @ 'B'
@ 572 (profit I700 - equity now 5050) . We go long on break thru
an upside trend line drawn thru islolated highs, @ 569 @ C. (Maybe
$50 profit after commission - equity now 5IOO). We have a loss as
prices tumble trend line at 'D' of $600 -equity now 4,500 .
and go short ( @'D' ) . There is an isolated high @ 562, so we
draw a line thru 582 (isolated high) and 562 (isolated high) and
we buy as prices go thru @ 550 (profit 450 - equity 4950 ) , @ E .
The next trend line on the downside develops thru isolated lows,
(542 and 548) and prices go down thru this line @ F @ 56I (profit
450- equity now 5400) and go short. We have a loss@ G@ 567,
(loss 400, 5000) and go long. We go short @ F @ 574 (profit
300, equity 5300). Go long@ G@ 574 go short@ H@ 69I
(profit I,ISO- equity 6550). Prices move above down trend line,
but we don't have an up trend line thru isolated highs so we
stay short and go long @ I@ 59I on close. Profit is S3,IOO - IOO%
return on equity in IS weeks. After all that work, don't U feel
that the trend line follower is the winner so far ? And, he's
already at $8,750 , and took it easy .
lHOW I USE TREND LINES ! ( P & L CHARTING. )
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
>C
not
thru
here
I , T
,. Tl'fE.
leaving the gaps open can be effective in runaway markets, or wild
pulsating markets. Do some work this on U're own.)

361
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First, we draw a line thru the highs of day 'I' (550) and day '2'
(546.50) and we have our trend line.OUr P&L trend line.( remember,
always close the gap) We have a trend line. If prices go thru this
trend line we go with it, i.e. day '3'.@ 53B .I shall now draw the
lines for U and see is u can figure it out. ( u will !) Draw line
thru low of day 4 ( close gap ) and day 5 and sell if prices go
down thru it, i.e. day '6' @ 568 . Buy next day @ 568, sell @ 572
(I leave it to U to see why. look at the chart. ) @ day ?
a line thru highs day 7 & 8 , and buy if prices
9 @ 562 . praw line thru low of day 9 and low of day TQ (close gap)
and sell as it touches that line @ 5.82 . Please re-read the above
and see if U get the message where to draw lines. I've drawn the
lines for the rest of the chart for u. If I tried to describe each
line I wud be here forever. U shud be able to figure how they are
placed. If U have troub-le, take U're time, U will see it. Now, I
will review our buy/sells to date, and list them as well as the
future buy/sells past !0 on our chart as numbered and see what
happens and pyramid with 30 % equity, if we can.
362
day 3 buy @ 538 +I- equi enougl"l for
day 6 sell@ 568 4900
day 7 buy @ 568 4850
day 7 sell@ 572
.,..
ISO 5050
day 9 buy @ 56 I
+ 500 5550
day II sell@ 582 I,OOO 6550
I2 buy @ 562 +I,OOO 7550 enough for 2
contracts ( cts. )
next trade.
I3 sell@ 568 + 500(2cts)B050 2 cts.
I4 buy @ 565 + 200(2cts)8250 2 cts.
IS sell@ 582 +I,700(2cts)9950 3cts.
I6 buy @ 548 +4,950(3cts)I4,900 4cts.
I7 sell@ S50 + 200(4cts)IS,IOO 4cts.
I7 buy @ S55 -I,200(4cts)I3,900 4cts.
IS sell@ sss 200(commissions)
I3, 700 4cts.
I9 buy @ S53 200(4cts)I3,900 4cts.
20 sell@ S63 +I,800(4cts)IS,700 4cts.
2I buy @ SS2 +2,000(4cts)I7,700 Sets.
22 sell@ 56 I +2,000(Scts)I9,700 Sets.
23 buy @ S6S -I,2SO(Scts)I8,4SO Sets.
24 sell@ 578 +3,000(5cts)2I,450 6cts.
25 buy @ S74 + 900(6cts)223SO 6cts.
26 sell@ 592 +5,I00(6cts)27450 Sets.
27 buy @ 587 +I,600(8cts)29050 Bets.
28 sell@ 604 +6,400(8cts)3S450 IOcts.
29 buy @ 589 +7,000(I0ct)42,4SO I2cts.
30 sell@ 60I +6,600(I2ct)49,050 I4ets.
3I buy @ 588 +8,400(I4ct)57,4SO I7cts.
anc, goodness gracious me, let's stop rite and talk a little.
U know why I cud not hold U're hand thru all of this. If U
can't figure out how to do it - keep looking at it - the light
will dawn. /
Three things I) . close those 'gaps ' ;t ..
2) act only on
3) don't the really flat line
as per area '23'
and, then oscillate from an up line to down line ad

So, in fifteen w ve an increase in capital from $3,400
to $57,450 , that's . 689 return on equity. ( U're probably
shaking ) ( Maybe it' y U're head.) Give this concept some
363
thought - it's very interesting. And, silver ~ a s mainly in congestion
between 590 and 540 - so much for not being a congestion trader.
And, I '!Cl J::.appy to share one of my secret, secret tools with U.
However, if e is bo-}: i.s published, there cud be some funny business
\
\going on, because there cud be too man" peop
1
~ doing the same t_hing \l
Jat the same time, .which is why I will not reveal some of -;:,y more
definitive tools. Be that as it may, if the market is determined
to go in one direction, it will do so in spite of any fancy, little
technique, no matter how widely it is used. We shall see what will
happen.
Now, let's assume that once u reach $50,000 equity, that U withdraw
any amount over fifty thousand dollars from U're account ( and
give it to U're favourite charity - namely U'reself ) , and accordingly
at 30% equity rule, U're maximum number of contracts with silver
will be IS contracts. O.K., using my trendline system, ( a 'line'
in Point & Line Charting! ) , silver has given 2!7 points in the
last fifteen weeks of trading ( after commissions ) . That's an
average of I4 points a week. Let's lop off two more points for
bad fills, or whatever, that's I2 points profit per contract of
silver per week after commissions and bad fills. Let's lop off
another four points - what the heck, why not ? Let's use that eight
point per contract per week. For silver, at 30% equity of $50,000
at IS contracts per trade, for the year ending after the IS weeks,
i.e. 37 more weeks ... at the end of the year with the above
constants U wud have equity $50,000 ( end of IS weeks ) plus,
8 points at $50 a point = $400 per week times IS contracts =
$6,000 per week. ( Cud U live with $6,000 income per week ? )
for 37 weeks cums to $222,000 plus the $50,000, gives U an income
for the year of $272,000
Cud U live with that ?
Give it some thought.
And, U started with $3,000 , in this illustration, in any case.
With other aspects of P&L charting , it is possible to tune it even
finer. Take the above trendline system, get U'reself a graphyig
enough to visualize the high/lows effectively, and see if U can see
anything. Remember, actual market conditions are something else.
Actually, I doubt very many people will be successful with this
technique because ofour little friend called human nature. At any
rate, good luck.
!3
364
THE 'TREND BUCKER
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-
Rule . Use trend line ( t.'l-le {not P&L) trend line ) , after
prices have been up 2 or 3 or 4 days to short against
and wait three days to take profit.
Day A - short @ 573 (3 days up ) - take profit 3 days later @ B
- happy with 562. Profit $450
Day c - short @ 587 (4 days up) - profit 3 days later @ D - happy
on opening 565 Profit $1050
Day E - short @ 585 (3 days up) - take profit 3 days later @ F
- happy with 555 Profit $1,450
Day G - short @ 567 ( 3 days up .... the closes in the 3
previous days', 56I count as one day up ) , take profit
3 days later @ H - 'happy' with close @ 557 . Profit S450
There is no hit on trend line '!'
Day J - short @ 603 (2 days up) -)take profit $400 , 3 days later
@ K - happy 594
Total profit $3,800 - over IOO\ return on equity in IS weeks.
Not bad. Who says trend bucking doesn't work. But do U see how
conservative I was ? Only five trades. The 'rule' criteria I used
makes sense to me - but it is arch conservative. It illustrates
that the prime trend bucking points occur infrequently. But why
not wait for the loaded trades ? With SIO,OOO equity @ 30 %, U wud
have capital for 3 contracts - profit $I!,400 $760 per week.
Not bad. Our problem is when to take profits. I use 'happy' as
terminclogy, for when U wud be content to take profits. ( not
reverse U're position ) .
!BUYING/SELLING
L ' ,
--:-
--------
-r
.t ===r.
- -->----
t
365
,.
366
_;::; thil?. ca.se, we are b-.Jying, because silver is in a major trend
We look to buy the contra-trend down. Rules: - buy 2-4 days
from an isolated high, looking for 50 % retracements &/or support
areas, utilizing chart patterns as guidelines.
Day A - 50% retracement @ 555, but flag formed, use bottom line
of flag to buy on day I-. @ 560 - take profits @ trend
line @ B @ 587 - stand aside. Profit $!,300
Day B - wait 2-4 days, look to buy. We have support @ 560 , buy
day B - a good bet because of support. ( This approach is
a bit more subjective, isn't it?) - hold to sell @ trend
line @ C @ 585 Profit $I,I50
Day D - wait 2-4 days . Wait to see if challenge to support is
successful- it isn't- wait and buy in congection@ D
@ 550 Look to take profit @ 50\ correction up, @ 563 ,
(terribly subjective!) Profit $600
Day F - wait 2-4 days from isolated high to buy near support
@ 548-50, but try trend line @ 553 Buy, prices ccngest
@ G- take profit, stand side @ 577 Profit $I,I50
Day G - buy in support area 'H' @ 565 , sell @ trend line @ 604
Profit $I,900
Day I - buy @ support @ 'I' we're still long
Total profit, $6,IOO , !79 % return on capital of $3,400 in
fifteen weeks.
Do u see how nice and relatively safe contra-trend buying can
be ? And profitable. Good for huge numbers of contracts. U can
accummulate quietly, and is less well defined than the parameters
of P&L Charting, wherein U mite feel obligated to act in a very
small frame of reference. ( U can't beat 'trees' .)This is fun
and profitable type of trading. Perfect for telephone booth trading.
Use P&L charting to support this approach and U have it made ! It's
easy. If the trend is up, look to buy down contra-trend at
the last. fresh, support area,nor in the region of 50 % , keeping
'n mipd congestions that are either continuation or reversal and
take profits off trendlines from the upside or 50% corrections up,
as in'E' in the above and one I did not include in above @ 'J' !
Good luck. This is one of the best and easiest and slowest ways to
trade. - They're usually loaded. Have the patience to sit on U're
cash for the buy point and sit on U're trade until profit areas are
reached. U and U're broker will be very happy, as this is one of the

ways to trade. u cud be in commodities a long, long time. But,

first, p must know whether the major trend of the commodity is up
or down. The answer is on the pages of this book !
367
BUYING SUPPORT
Support exists thru lines A, B, C, D, E, Any time prices approach
one of these lines we will buy and take profits @ 50 \ up retracements
or resistance
Day : -buy @ 562- sell@ up 50% retracment@ day '2' @ 573
Profit $500
Day 3 - buy @ 562 , take pro=it, stand aside @ trend line @ 585
Profit $1,100
{ Note on day '4' , prices gap thru support l ~ e )
Day 5 - buy on support line 'A' @ 550 , sell @ 50 % retracement
up @ day '6' @ 564 Profit $650
Day 7 - buy as prices approach two support lines 'A' & 'C' @ 552
( We cud take profits as prices hit resistance line
@ '8' and buy on close day 9 @ 564 , assuming that
resistance line D of the pennant congestion will
hold, but we won't wait for our calculations! )
Hold ~ 7 until trend line hit @ '10' @ 579 Profit $1,300
l3
368
-..............
--=-
--<=1
q::; __ _

--
--
Day II - buy @ support line 'D' @ !! @ 565 , hold until trend
line @ #12 hit @ 602 Profit $1,800
Day !3 -buy@ 583 and we're long
Profit for buying support areas and taking profits @ trend lines,
resistance or 50% up retracements is $5,350 - no losses - I57 %
return on equity in fifteen weeks. Who needs fancy, expensive
moving average, weighted average lines ! Another example of how
easy trading can be. But do U notice we operate by rather specific
criteria. At least it's fairly well defined. I really pray I am
not leading too many people down the garden path. But the above
seems so very obvious. Just take the above criteria to a few charts
and see what happens. Really, shudn't everyone be able to succeed
in futures trading ??? The above guidelines alone are sufficient
to achieve a workable format for success, let alone any programs
r have presented so far and yet to cum. ( Take U're pick ??? )
I guess the reason is that most traders do not have the patience
to sit on their cash to wait for the buy and sit on their trades
to wait to sell. They have to fiddle with the market, and are more
by the activities of the market than they are by making
money. What do U think.
SELLING ON RESISTANCE
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.
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This is really trend bucking. In this case, since the major
silver trend is up. But here go - - we will take the first
challenge of a resistance and use support to take profit.
Day : - take first challenge of resistance ( refer to appropriate
section in this book to know why we take the isolated high
@ 574 for resistance) , @ day #I and sell @ 572 (stop-loss
on close above 574) Take profits on a correction, assuming
a flag formation, day #2 @ 563 Profit $500
Day 3 - take next first challenge back to resistance line 'B' ,
take profits @ support #4 @ 564 Profit $400
Day 5 - take first challenge of resistance line 'A' @ #5 on close
and sell @ 583 . Do not take line B for profit because
we do not yet know if this old resistance line has becum
a support, which it hasn't . Take profits @ 550 support
area@ #6 Profit $1,700
Day 7 - sell and take first challenge of resistance of 558 and
take profits that day as prices reach the support area of
550 (sold 556,bought 560 day trade) Profit $250
Dav 8 - sell on resistane (old support) line c also there is
a trend line thru tops of the last four days. Sell @ #8
@ 567 , buy as prices approach 550 again ( there's a trend
line there, can U find it ?) @ 552 @ #9 Profit $700
Day IO - short first challenge to resistance line @ IO @ 567 (stop
-loss on close above 559) .Take profits @ trend line thru
pennant bottom line @ #IOb @ 563 (hardly worth the risk)
Profit SIOO
Day II - take first challenge of resistance line 'F' @ day #II
@ 579 (stop-loss on close above 580) - stoppec out un
close @ 583 Loss $250
Day I2 - take first challenge of resistance line G @ day !2 @ 592
(stop=loss on close above 593) We were stopped out on close
@ 592 @ day I2 with loss $200
Day I3 - take first challenge of resistance 604 and sell @ 602
(stop-loss above 604, close only) take profits day I4 @
support area @ 584 Profit $950
Very interesting, isn't it? Did u learn anything ?
in an up market are fascinating. Usually if the first challenge to
an isolated high is successful on close, per day #II , it means
that the resistance is actually support and market is going up
much further. Do U understand?
Total profit was $4,150 and !22% return on equity in fifteen weeks.
All this is very subjective, I agree, but it can be dona. - and
we did use some objective guidelines, did we not?
Note. We cud have taken a trade between day 'X' and day 'Y' .
I leave it to U to see why.
369
370
I BUYING/SELLING at 50% RETRACEMENT
;(f __ :: -=-_ - ~ .
~ Jr _ - L : -i >:: :
/
Take isolated high 'A' (586) and add to it isolated low 'B' (533)
and divide by two and U have $560.50 and this price is reached
@ day #I , which is a 50% retracement down from the high 588
and buy here for day #I
Day I - buy @ 56I - sell @ 50% retracement up from low C (560)
towards high 588 and this 50% retracement equals 574 .
Sell/reverse @ day #2 @ 573 Profit $550
Day 2 - we are short here at 573, and we buy again old 50% support
area and reverse and go long @ 562 Profit $500
Day 3 - we are long @ 562 and since we have a major up
in silver, we assume that the next 50 %move up might
not stop there. Take profit on first sign of weakness
from old top, on day #4, possibly on close @ 575 . We
do not go short because we do not have any 50% to go
by (altho' the 575 area did seem to hold once again.)
Profit $600
Day 4 - sell on day 4 as it is a 50% correction up from the
low 'D' @ 543 from previous high 'A' @ 588
( (588+543)divided by 2= 565.50 J Sell @ day @ 565
Hold to buy and reverse @ 50% correction down from high
569 (E) to low 543 (D) i.e. 556 , which we do on day #5
Profit $400
Day 5 - we are long @ 556 and hold as prices go thru previous
50% retracement (E) and take profits on trend line
@ 575 day #6 and stand aside because we do not have a
50% to go by. We are interested only in taking a position
in the market by the 50% rule, not to take profits ----
If a 50% is there to take profits, fine, but, if a strong
resistance area, or trend line exists, why not take profits
and stand aside. Profits $900
Day 7 - high 580 (F) plus low 55I (G) divided by 2 , equal 565.50 ,
so we buy @ 50% retracement on day #7 @ 566 and where we
take profits I leave to U, but I take day #8 on trend
line @ 603 and stand side Profit $!,800
Day 9 - is a 50% retracement from 'H' to 'I' @ 593 , so we buy.
We cud take profits at old highs, for other reasons, but
otherwise for our present argument there's little reason
to do so. Place stop-loss after prices challenge 604 @ 594
to cover commissions. Profit/loss is zero
Day IO - buy @ 50% retracernent 584 from 'P.' (604) to 'J' (564) -we
are still long. Profits $4750 - I39% return on equity in
weeks.
Are u interested in 50% corrections? Does it make sense to U ? Cud
U derive a trading plan with builtin rules and constants and stick
to it ? Do U have the patience ? Wud U use my approach for 50%
corrections ? Do U see what this author's rules of the game were ?
Do U see how these rules of the game flowed thru IS weeks of silver
trading ? Do U want to apply these guidelines to another commodity
that has a past history to see if it werks ?Give it same thought.
We made $4,750 on the above experiment and we didn't use stops .
So much for stops ?
(Please note that in the last few approaches that as we approached
$7,000 equity, I did not apply our 30% equity rule, and increase
the number of contracts to two contracts for any trades at that
point. If I had done so, the above profits wud be somewhat higher.
If U wish, go over my work and increase the profits accordingly
.... maybe a good exercise for U.) (In the following approaches l
will increase the number of contracts if the $7,000 equity figure
is hit and build on that too. )
I3
37I
372
3 DAY UP I ONE DAY DiJ'Vv'N TRADER
3 DAY DOWN I ONE DAY UP TRADER
- -..;. -~ -+ :_r--- r---
___ .:
- 1--1-
These guys have a fascinating time. _Every day a market goes up
three days in a row, they look for a place to sell ang take profits
the next day. They sell on trend l ~ e s and resistance during that
third day up. They look to take profits the next day. usuaJJy op
close, unless there's a trend line or support to the prices, where
they will act. The reverse holds for three days down, and one day up.
Let's see what these guys are up to. _.--
Day I - third day up,
take profits the next
lows on day #2 @ 564
one day's work. Maybe
so we sell on trend line @ 573 . We look to
day, which wud be good @ trend line thru
. Stand aside. Profit $400 (Not bad for
these guys are on to something.)
Day 3 - the next third day up, we find a trend line @ day 3 @ 583
on cl9se, so we short. We take profits the next day on close. (The
high of that day bounced off a trend line, so why not wait 'till
close?), on day #4@ 572 Profit $500 (Not bad.)
Day 5 - was the third day down, so we look to buy. 563 looks
good @ trend line. Buy on close. Take profits next day on close
@ day #6 @ 569 Profit S250 ( Not bad. )
Day thi=c day up, on trend line, sell @ 584 . Buy on close
the next day @ day #8 @ 576 ?ro::it $350 (Note how t=end lines
a=e many minor trend lines. )
Day 9 - third day down - buy on close @ 553 . Sell next day #IO
@ resistance line 'A' to take profit. (We have to take orofit
somewhere this day and the resistance area is being challenged,
so why not take profits?) Take profit @ #IO @ 56! Profit $350
Day II - is the next three day segment. (We had to wait three
weeks !!!! ) we buy the third day down@ #II@ 552@ trend line.
The next day we have to be satisfied with 556 on day #I2 .
Profits $250
Day !3 - we sell on close @ 566 (three days up). Take profits
next day @ 563, day #14 Profit SIOO
Day I5 - three days down, buy @ 566 (trend line) and sell next day
@ 574 on close. Profit $350
Day !6 - three days up sell trend line on close @ 604 . Buy on
close next day @ 592 Profit $550
Total equity now $5,800 , profits $2,400 This is a fascinating
game. I occasionally use it to trade with, but actually I use
this three day rule to analyse corrective moves to the market. I
don't wish to give U any ideas, but do U see how the market moves
in three day segments, three day swings, three days up,
three days down, three days up etc. I apply this rule generally in
373
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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
a runaway market ( I hope U know what a runaway is. ) ,
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 I
--------- t ---
"9__,._ . - , .
t .. --+- ------ 1 -. -----

- _ ___,
- -=
--.;:;-'- -
1---

. .:__,.
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
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. 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
375
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,
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 wishes to categorize what he
calls the four kinds of trader.
I. sandwhich t.rader
2. day-trader
3. position trader
4. 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 day.
The position trader tends to take advantage of those three day
was dtellhing U. maybde selling on /f-'"\
tren an t en 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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}-c?---- _____ ;.._ :_ __ . ______ .;. __ _;__ -----:_: ____ .. ________ _..: _______ ; __ ; __ _!;.._- -
: :-: : : . : ... : . __ :;. ,. .- .... . . :.: .. . -- . . .. : __
.. :- ---: 1'1 . : --: .. _.:..:;-- .. :. . :_. ::...;.J
llltitl . . . -. .. . . . . . . . . . . . !'
r . . ... .J _ .. .. . . - .. __
: ..
- 4 ' - ..... - -. - -.-- ---
- _ _;_:_:_;_> .:_. ---- .;..:. __
. . .. . ___ - - : . :-_.::_ .. ------ .... - ....
- . - ... . :_ --- . '1 ;: . .. i - -:::-::.- :::: ;:-:.=-
. -----"=;--- -_ _:toi _::_:jL:
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:fJ 7- : -:- J-;?r-:-_
--------- --- ..-----:-..-:-..:--:--:-::
- ..
I. SANDWICH TRADER
He has done his homework and is bullish on silver and if given
only this chart, he may have waited for the correction @ 'B'
or we cud assume he accummulated at 'A' or previously. He's
happily sandwiched in above the lows and is probably getting
out now in area 'C' , or is he? Who knows.(U'll never see him.)
(He's probably still in the market, because we haven't had much of
bull volume blow-off yet, have we, with huge swings, limit up,
limit down, or whatever. ) Tell me, however, if u had 300 contracts
on ( margin $300,000 , equity 900,000 ) wud U be happy with U're
550 or whatever move to 595 move, with a 44 point move and $660,000
profit Now U see why he moves so quietly.
378
I 2. wAY - TR . .<\wE?. \
Let's say his game plan is to act only against the market on
trend lines and looks for 6 profit after commissions. He gets
his wish on days 'X' ( can U find the trend lines ? ) , i.e.
seventeen days. Waiting out the market and waiting for these
particular days (we're being subjective) and taking the above
criteria, and if he stated with SIO,OOO equity ( 3 cts. to
start with ) then in the fifteen weeks, pyramiding with the
30% equity rule, up to IO contracts on the I7th day trade ,
the equity is $38,800 , a profit of $28,800 . Do U see why
this trader likes to occasionally day trade ? It's fun and
profitable. I usually limit a day trade to sure-thing trades,
cuming up shortly. Consistently successful day-traders stick to
a trading plan. There's plenty of material for U to stick to, if
c wish to be a day trader. The market is U're's to do with as
U wish.
3. POSITION TRADER
The position trader's dream wud be somehow to get on the swings
I to 2, 3 to 4, 5 to 6, 7 to 8, 9 to IO, IO to II,to I2 toi3
to I4 to IS to I6, and then up. U say this is crazy. Who can
pick the exact tops and bottoms. So U say ! Let's look at what
each was: -
Day I - we'll assume for some reason it was a buy. My reason is
that on day 'X' prices moved above line. That's
good enough for me.
Day 2 - prices hit a trend line third day up. Sell
Day 3 - bottom of flag - continuation congestion. Buy.
Day 4 - trend line. Sell
Day 5 - support area. Buy
Day I6 - SO% retracement up. Sell
Day 6 - support area. Buy again.
Day 7 - previous high challenged (stop-loss above 588) . Sell
Day 8 - 50% correction area. Buy
Day 9 - 50% up correction area. Sell
Day IO - 50% correction area, the support area . Buy
Day II - trend lines from all over place hit this area.
Day I2 - support @ 562 (last congestion bottom) Buy
Day I3 - trend line and target area (604) . Sell
Day I4 - SO\ retracement. Sell
Day IS - double top ? Sell
Day I7 - support 583 . Buy
Impossible to pick bottoms, tops ? Garbage All I did was look for
a) trend lines
b) support ( to a major trend
c) 50 % corrections
d) resistance challenged
And, that's all I used - four tricks. And U say U cannot pick
the swings. One thing tho' - U do not know whether one of the
above will be the permanent top or bottom to the market. D cannot
assume this. Use long term charts, (Monthly, weekly,) market
psychology, fundamentals, reaction to news, or whatever to achieve
this.
4 SURE - THING TRADER I
Looking for moments of unusual appeal.
379
These are the moments that are second on my list of priorities.
First is sandwiching - long term analysis. Swinging and day
trading are just part of the act and keep this author entertained
with wins and losses.
The second big moment is the surething trade. A surething trade
to me is over with quickly. Usually in about three days.
Naturally there are myriads of sure-thing situations, but there
are ones that are incredibly loaded.
Our example : - 'loaded trade' on our chart. Let me tell u why.
The price on day #7 is a challenge to old high of 588 . That
day saw a gap. Most of the trading was between 582 and 587.
There was a wall of sellers @ 587 and I wud join them - heavily
The high of the day was at the trend line thru the highs of
the last three days. - perfect. It was the third day up.-perfect.
We have a trend line thru the lows of that and the previous
day, thru which if prices passed the following day, the bears
are in control. It's high is on the 'channel wall' (P&L) for
the day. It's 14 on from the previous day's dot (P&L), it's
past the 3 'dots' on (P&L) . What happens if the bulls panic
Everything, absolutely, and I mean absolutely everything for
a potential short term, ferocious bear crack. (They cum up in
silver about every 2-3 months lately}. I wud run to the old sock
and hit the market with everything I had, on day #7 @ 584 area and
I wud have been long gone the next day if prices were over 586 .
I ~ ~ a have pushed prices thru stops I wud have covered so fast.
It turned out I was right. Prices gapped down the next day. Lets
say I had $25,000 capital. I wud have committed the full capital
to this loaded trade ... the only, and I mean the only time I
break the 30 % equity rule. I wud be short 33 contracts @ 583-4
Every 5 down from 583 I wud have shorted IO more on stop, but
only while in congestion.
My game plan wud be
380
Day I- short 33 cts ..... 583
::::ay 2- short IO :::ts. 578 only ( stop loss 586)
I short on scale down :? 5 each day only !
Day 3 - short IO cts. 573 (stoploss 586)
I ~ ~ d have been satisfied on third day down to take profits
on close ..
We're talking here of those special, special days, wn1cn cum now
and then. To this author, these are situations of unusual appeal.
To other traders, maybe following the trend is the sure-thing trade.
In my sure-thing trade, or unusual appeal, I nailed home $66,700
with the $25,000 equity. Perhaps one shud wait with huge capital
for these kinds of trades and do nothing else.
Draw u re list of sure-thing trades and look for them. Actually,
U will be surprised how often they occur.
381
p & L TRADER I: A DETAILED APPLICATION
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3
lcay rfwe wud buy@ 5.38 as Prices rose thru rnv
't::-end line' (close gap). Sell and reverse on Jdav =iJ
because of trend line :2 572 , Plus 3 days up, I4 abo'lLf!
'dot', 3 dots on & on channel wall @572 (see P&L charting
chapter nine) . Stav short assuming a three day Pause to
see if dot swings off main channel line, which it does
on day confirming short position, look to buy at
3-4 days into continuation (?) congestion, flag, bottom
trend line thru lows. Buy day #6 @ 562 and hold. (also,
this day saw the low of 559 as touching as outer channel
wall - a line drawn 7mm parallel to the right of the
main up channel line) and look to sell. Sell the day
following the third day's up strong close, when prices
approach the trend line, sell @ 586, day #7 which is also
the main channel wall (drawn 7 mm out to the left of
up dots of main channel line) and which is also I4 on
l from dot of previous day and 3 dots 'on' . Hold this
because that day's action forced the dot off
the main channel line, so further selling will occur.
Look to buy. Buy @ 562 , day#S which is at a trend line
as well as the main channel (down) wall, as well as a
support area and 50 % retracement, as well as I4
below previous day's dot, 3 dots down, and three days
down. Look for market to rise three.days. Look to sell.
Sell @ 573 day #9 , a 50 % up, and third day
of attempting to rise plus it is the outer channel wall
of down channels, as well the dot of the day before
turned flat, indicating selling pressure. Look to buy.
Probable congestion above support 560, as dots snake
sideways. Volume dries up as prices touch 560 again.
Buy 562 Day #II at bottom of congestion. Hold, wait
to sell approximately three days later. Do so @ 585 day
#I2 at trend line and challenge to old high 588,
resistance. - gap opening that day - I4 on, 3 dots on,
- temporary exhaustion gap - breakaway gap ? - wall of
sellers. Hold. Look to buy three days later, - prices
gap thru support @ 562 . Hold, wait for dot to move off
main(down)channel line. -wary of bear cracks ! Dot
moves off on day# I3 so buy following day in
Stand aside - do not go long until a pattern develops.
Possible congestion, dots swinging and pulling together,
so look to buy. Buy day #I4 as prices touch a line drawn
thru the dots as they are swinging @ 545 day #I4
(a little trick). Look to sell - cannot sell - no
confines presented to congestion. Look for 'T.R.' be
hit on upside. Market is 'digging in' and T.R. will
re 1 ieve this supper t pres sure (see section on hitting ,digging
chapt. nine) In spite of this release, support is there.
Look to sell. Look for breakout on upside and sell three
day's later ? Breakout occurs day # IS , look to sell
382
and reverse 3 days later - which we do @ 568 day#I6,
a trend line. Dots are crunching up - selling pressure -
hold short - look to buy 3 days later. Gap opening day
- hold short because prices are falling from 'crest'
not a runaway bear. Look to buy @ support plus trend
line @ 554 day #IB and reverse, of course hold long
minimum of three days. Sell day #!9 @ 567 challenge
to resistance @ 569 , plus I4 above dot and 3 dots
on. Buy on close @ 563 of day #20 because dot just
catching up and prices stopped on main channel line
(a little trick) Sell day #2! @ 57! as prices reached
a line that is parallel and out 7 mm from main channel
line. - the main channel wall. Buy once again on close
that day because close is on main channel line and
and dots have not swung, buy day #2I @ 565 The next
day is quiet and dot swings off main channel line and
swings flat. It swung too fast. Look to sell next day
day #22 Do so on main channel line @ 570 and reverse,
of course. On day # 22, prices were such that the dot
that day turned up. If sellers were in control, the dot
wud have turned down. Signal given day before when dot
swung off main channel line flat - prices were oversold
that day, the day before #22. Therefore, since I do my
dot calculation one half hour before close, I saw that
the dot turned up day #22 so buy on close Day #22
@ 564 Look to sell and reverse 3 days later. Do so
day #23 @ 578 which is a trendline as well as the old
main channel line. Suspect temporary top, because when
prices stop on old main channel lines, and when prices
slither up outer channel, expect a correction. Look to
buy 3 days later. Do so @ day #24 @ 565 a support area
383
and 3 days down, as well as a 50% correction (580 to SSI)
Hold long, look to sell 3 days later, but notice dots,
how tight they are together around day #24 This means
incredible buying force, since dots are down and buying
force is sufficient to keep those dots tight together,
altho' bears still in control. The bears will exhaust
themselves and short-cover, so expect extended move up.
Sell day #25 @ 592 as it touches main channel wall ~ h i r d
time. Prices will fall away. The dot the following day
pulls off main channel line so expect selling pressure
day #26. Look to buy 3 days from day #25 .Do so on day
#27 @ 582 , which is the outer channel wall, silver
usually takes 3 days to fall out of outer channel, if
it's going to, as well as support @ 580 Dot turns up
that day, so hold long - look to sell and reverse three
days later, do so @ day #29 @ 604, which is a gap, plus
the old main channel line, plus a new channel wall out
7 mm from last row of dots, - a set-up for a bear crack,
but there is no previous high to be challenged, so not
384
Day
a sure-thing trade for heavy committment. 604 is
the meeting area for of trend lines plus I4
on .... look to buy 3 days later. Do so @ day #30 @ 590
which is a 50% retracement plus support area. Look to
sell 3 days later, but can't because trend line hit @
day #3I @ 604 , reverse of course. Close is off highs
for day from the challenge to 604. Volume is heavy.
Suspect bear crack, but look to buy 3 days later. Prices
do not crack, but slowly, and orderly progress downwards
for 4 days. Assume support @ 582 and buy @ 50 % retracement
584 (from 604 to 564) @ day #32 Market cud be expected
to crack, but it did bounce off a major support trend
line thru 550 - 552 - 564 to 582 . The dot swung the
day following day #32 . The market exploded from here,
and we will stop.
This author tried to keep it simple for U as I went thru
the application of P&L charting to the silver chart. Do U see how
I made use of the 'dots' swinging off the main channel line, as
well as use of channel.walls (main & outer) - distance of dots to
each other? The use of trend lines, support, resistance, 50%
retracernents ? It will probably take U a couple of months to
understand. But, have faith. It's there. And all very rationale.
SCORE SHEET no.
of
profit cts. equity
#I buy 538 (& reverse) 3400
3 sell 572 I650 5050
6 buy 562 450 5500
7 sell 586 IISO 6650
8 buy 562 IISO 7800
9 sell 573 IOOO 2 8800
II buy 562 IOOO 2 9800
I2 sell 585 2200 2 12000
!3 buy 550 stand as_.=.= sroo 3 I7IOO
14 buy 545
16 sell 568 (& reverse) 5500 5 22600
IS buy 554 3900 6 26500
19 sell 567 4200 7 30700
20 buy 563
II
900 9 31600
2I sell 57I 3I50 9 34750
2I buy 565
II
2500 IO 37250
22 sell 570
"
2200 II 39450
22 buy 564
II
2750
..--
... 42200
23 sell 578
II
7800 12 50000
24 buy 565
..
9000 IS 59000
25 sell 592 22100:: I7 BIIOO
27 buy 582 I0800 24 91900
29 sell 604 28350 27 !20250
30 buy 590 23400 36 143650
31 sell 604 27950 43 I7I600
32 buy 584 48450 51 220050
)'
. 385
('A bit frightening isn't it ? $ 220,050 after fifteen weeks, ,
tartinq v.ith S 3,400 ( pyramiding with 30 % equity rule. )
Take it easy. Take U're time. Take a few months , maybe a year
or two, and U v.ill get on to Point and Line Charting.
Read this book and get to know it thoroughly, and when U know
and I mean know all the basics of volume, whatever, plus some
guidelines from Point and Line Charting, - svmeday, some.how,
someday U can put it all and cum up with favourable
results.
Take it easy, keep things simple, but persevere. Study, and
study, - the light will dawn. Have faith in U'reself that U
can do it but study, study first. Take U're time. If U're
going to make $ 220, ooo in fifteen weeks someday, - U 're got
plenty of time.
For gosh sakes, don't rush out and apply Point and Line
Charting to U're trading account. Take months please
take months, maybe a year, until U've got a good grip on it.
And, when U do, don't let go.
A bit of a warning: U may becum such an expert that some day
U may start to blow U're brains and day trade with P&L and make
mistakes. Look at theborrendous losses in my debit column
which follows.
-
........ .
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:"': .-
LIST OF PRICES FOR THE DEC. '78 CHIC. SILVER
CHSILVER 7812
DATE OPEN HIGH LOW CLOSE HLC AHLC
780630 543. 50 546. 50 538. 50 541. 30 542. 1 547.8
780703 544. 00 545. 00 541. 50 543. 50 543.3 543.9
780705 546. 00 546. 40 540. 50 542. 70 543.2 542. 9
780706 541. 50 541. 50 534. 00 536. so 537.4 541. 3
780707 539. 00 543. 50 538. 50 543. 10 541. 7 540.8
780710 545. 50 548. 80 544. 30 544. 70 545. 9 541. 7
780711 544. 00 545.80 542. 60 545. 30 544.6 544. 1
780712 546. 00 548.00 545. 50 546.20 546.6 545.7
START (780713 548. 50 550. 50 541.00 542. 60 544. 7 545.3
780714 544. 00 544.00 541. 50 543.30 542.9 544.7
780717 539. 00 539.00 532. 50 538. 70 536. 7 541. 5
780718 538. 00 541. 00 536. 50 539. 10 538.9 539. 5
780719 539. 00 543.00 536.00 541. 60 540.2 538.6
780720 545. 00 557. 50 545.00 557.00 553.2 544. 1
780721 557. 00 _574 .. 00
553. 50 566.80 564.8 552. 7
780724 570. 00 57o.oo 562. 10 565. 30 565.8 561. 2
780725 563. 50 573.00 562. 50 567.70 567. 7 566. 1
780726 563. 50 567.00 559.00 563.90 563.3 565.6
780727 560. 50 571. 00 558. 50 570. 70 566.7 565. 9
780728 580. 00 583.00 572.20 574. 50 576.6 568.9
780731 574. 50 583. 50 573. 50 582. 50 579.8 574.4
780801 588. 00 588.00 570.00 572.00 576. 7 577. 7
780802 573. 50 575. 50 567.00 568. 50 570.3 575.6
780803 568. 00 571. 50 560. 50 562. 50 564.8 570.6
780804 565. 00 570. 50 563.60 569.80 568.0 567. 7
780807 571. 50 572.00 566.00 569.80 569.3 567.4
780808 568. 50 574. 00 561. 50 566. 50 567.3 568.2
780809 566.-50- 569.60 560.60 562.20 564. 1 566.9
780810 561. 00 572. 00 561. 00 571. 20 568. 1 566. 5
780811 573. 00 579.00 572. 50 575.80 575.8 569.3
780814 581. 00 585.90 578.00 583.20 582.4 575.4
780815 581. 00 581. 00 572. 10 575. 50 576.2 578. 1
780816 577. 50 581. 50 564. 50 568.20 571. 4 576. 7
780817 561. 00 562. 00 551. 00 552.70 555. 2 567. 6
780818 562. 00 562.00 545. 50 552.00 553.2 559.9
780821 547. 00 555. 50 545.60 554.80 552.0 553. 5
780822 554. 00 555.00 548.00 550.30 551. 1 552. 1
780823 543. 00 555.80 543.00 554.90 551. 2
551. 4 /
780824 555. 00 557.00 551. 30 555.70 554. 7 552.3
780825 550. 50 554.80 549. 10 552.40 552. 1 552. 7
780828 553. 50 557. 60 548. 10 549. 70 551. 8 552.9
780829 551. 00 561.90 550.00 561. 70 557.9 553.9
780830 559. 50 563.90 557.70 560.30 560.6 556.8
780831 563. 00 564. 50 558.00 561. 20 561.2 559.9
780901 562. 50 568.30 561. 70 567.90 566.0 562.6
780905 564. 00 569.00 562. 10 567.60 566. 2 564. 5
780906 564. 50 566. 50 560.60 564. 30 563.8 565.3
780907 559. 50 561.30 555. 50 556.20 557. 7 562. 6
780908 554. 80 555. 50 551. 10 554.80 553.8 558.4
780911 552. 00 557. 50 552. 00 556.30 555.3 555.6
780912 558. 00 559. 90 556. 50 558.60 558. 3 555.8
780913 559. 50 567. 50 558. 50 566. 60 564.2 559.3
780914 564. 00 566. 00 562.00 563.60 563.9 562. 1
780915 565. 50 572.00 564. 10 565.70 567.3 565. 1
780918 563. 10 568. 70 562. 00 566.80 565.8 565. 7
780919 565. 00 571. 50 562. 50 564. 70 566.2 566. 4
780920 570. 50 577. 00 570. 10 576.80 574. 6 568. 9
780921 576. 80 577. 50 572. 00 574. 50 574. 7 571.8
780922 570. 00 578. 00 569. 00 576. 80 574. 6 574.6
780925 575. 50 580. 00 572. 80 573. 10 575.3 574. 9
780926 578. 00 579. 00 567. 00 570.90 572. 3 574. 1
780927 564. 00 576. 50 564. 00 "575. 80 572. 1 573.2
780928 574. 00 576. 50 572.30 573. 90 574.2 572. 9
780929 571. 50 573. 80 570. 80 573. 30 572.6 573.0
781002 572. 00 583. 50 570. 80 582. 80 579.0 575. 3
781003 584. 20 589. 40 581. 50 589. 00 586.6 579.4
781004 591. 00 592. 30 585. 50 586. 70 588.2 584.6
781005 588. 50 591. 00 585. 60 588.30 588.3 587. 7
781006 586. 50 588. 00 582. so 584. 20 584. 9 587. 1
781009 584. 00 595. 50 582. 50 594.30 590.8 588.0
781010 600. 00 603. 00 595.00 595.80 597.9 591.2
781011 601. 50 604. 00 599. 50 603.70 602.4 597.0
781012 601. 00 601. 00 591. 50 593. 50 595.3 598.6
781013 594. 50 595. 90 591. 00 592.80 593.2 597.0
781016 590. 00 600. 5o 588.00 598.70 595.7 594.8
781017 600. 50 604. 50 595. 50 599.20 599.7 596.2
781018 602.00 602.00 594. 00 597.80 597. 9 597.8
781019 592.00 595.20 598. 50 590.60 591.4 596.4
781020 595. 50 596. 00 584. 00 589.20 589.7 593.0
781023 589. 00 591. 50 583.00 583. 50 586.0 589. 1
781024 584. 00 591. 00 583. 00 590. 70 588.2 588. 0
(781025 596. 00 610. 60 596.00 610.30 605.6 593. 3- - LAST PRICE
781026 612. 50 619. 00 607. 60 612. 50 613. 0 602. 3 ON OUR
781027 611. 00 624. 00 608. 20 620.00 617. 4 612.0 CHART
781030 627. 50 640. 00 627. 50 637.00 634. e 621.8
781031 631. 50 632. 50 617. 50 621. 60 623. 9 625. 4
781101 601. 60 . 601. 60 601. 60 601. 60 601. 6 620. 1
781102 581. 60 592. 00 .581. 60 587. 30 587. 0 604. 1
781103 580. 50 591. 00 580. 50 584. 80 585. 4 591. 3
781106 579. 00 585. 50 579. 00 585. 30 583.3 585. 2
781108 590. 00 592. 00 584. 50 585. 00 587.2 585. 3
781109 580. 00 582. 00 566. 50 567. 00 571. 8 580. 8
781i10 567. 00 572. 50 564. 20 572. 10 569. 6 576.2
781113 568. 50 592. 10 568. 50 592. 10 584.2 575. 2
781114 589. 50 593. 00 572. 10 580. 10 581. 7 578. 5
7EH 115 577. 00 581. 50 568. 00 573. 90 574. 5 580. 1 /
7E31116 568. 00 585. 00 568. 00 582. 70 578.6 578. 3
7E5111 7 580. 00 601. 00 579. 00 599. 00 593. 0 582.0
7 ! : ~ 1 1 2 0 596. 00 607. 00 594.00 598.20 599. 7 590.4
781121 600. 00 611. 50 599. 00 603.80 604. 8 599.2
781122 601. 00 612. 20 600. 00 609.30 607. 2 603.9
781124 613. 00 615. 00 609. 10 612.80 612. 3 608. 1
781127 606. 50 608. 50 603. 10 604. 10 605.2 608.2
781128 602.00 604. 00 . 589 .. 00 591. 80 594.9 604.2
781129 597. 00 597. 50 585.00 590.90 591. 1 597. 1
781130 591. 50 599. 50 588. 00 597.20 594. 9 593. 7
781201 597. 00 598. 50 588. 00 589.00 591. 8 592. 6
781204 594. 00 595. 50 583. 00 584. 90 587.8
591. 5
781205 586. 00 590. 00 585. 50 585.80 587. 1 588.9
781206 585. 50 585. 50 579. 00 581. 80 582. 1 585. 7
781207 587. 00 587. 00 580. 00 581. 60 592. 9 584. 0
781208 585. 50 567. 00 585. 00 586. 90 586. 3 583. 8
781211 590. 00 590. 00 583. 50 583. 70 585. 7 585.0
.781212 582. 50 587. 80 582. 00 586. 40 585.4 585.8
PART
c
now we're getting
down to serious
,
serious business
the psychological part
386
money
CHAPTER FOURTEEN
management !
$
ONE GREAT BIG HAPPY HARANGUE
topics which arediscussed
f.locJ..aiMm
o b j e.cti v eo a.nd etvi..:tvvi..a.
a.M e.,t pJt eo e.Jt v a.ti.o n

ma./Ung $100,000
30 % e.qu.<..ty Jtule.
$
$
a.cce.pt only 10 % Lo-6-6 pe.Jt tJta.de.
t OuJt Oa.-6.-{.c. Ue.me.n:t-6 0 n mo ne.y ma.n.a.g e.me.vL-t
on c.a.-6h
rvU.k
pytz..a.m.-i..rU.ng
co ng eo tio YL-6
d.a..y- tJta.rU.ng
a.nd Lou moJte.
$$S 387
My friend- U know, I'm absolutely amazed dth myself. I have one
absolute criteria for successful trading in commodity futures
contracts, and, that is to keep my physical condition and mental
condition in optimum format, and I'm breaking that rule. (More
later). Also, I have been wanting now for one month to return to
the commodity market full time, but because of this book I have
taken three months off ( a good step anyone shud take ) and, I'm
finding all by myself that perhaps one of the most important
chapters in a book on commodities that one cud write : - is,
money management.
It's early Monday morning, July 3Ist, I978, and by early I mean
4:45 A.M.. I have had a rather pleasant week-end and guess what
I'm doing? (More later). Well, - this book is beginning to irritate
me; - I itch to return to the market, but some compelling force
obliges me to write .. And, I'm determined to finish it - even if it
means not partaking.of the opportunity to make many times more
money in the market than I cud ever dream of making on publication
of this book. -, but here I am, 5:00A.M. - sitting down and
writing a damn book ! and, I'm into a chapter called money
management. It is simplistic. - there's nothing to money management,
except hard fast rules, which U and I, and everyone who wishes to
make money- no matter if we're buying potatoes in the grocery
store - we shud oblige ourselves by. It is simplistic and it is
hardcore. There's nothing like hardcore. I tell U one thing - I
shall precise this chapter to death because money management is
incredibly simplistic - but, U know what I'm doing ? (The more later).
To cope with this simple problem ? I have had I/2 a bottle of wine.
Maybe it's because this chapter is so incredibly simplistic that
I need some diversion to cope with it. - I mean, really, one can
jabber away on market theories and price making influences - on
any stimulus that can occur to me from my environment. To really
go far out, I will state "isn't that what socialism is all about ?"
free-loading - freeloading ! Anyone can rant and rave about market
forces - and market theories. But when it cums down to hardcore
realities of life - a socialist will fail. He's only interested
in taking from others and redistributing. ( A socialist never
distributes his own money. ) Strange tho' that the topic of money
shud fascinate a socialist. There's only one thing that m a k e ~ a
socialist happy, -and that's money .. and lots of it. Me, I'm
interested in expressing my wares to others. If they don't wish to
"buy" - that's fine. But, here I am in the middle of a conundrum.
One of the most important chapters in the book and I'm stymied
with the truth. A corollary of our present times - stymied by the
truth. And, the truth is - as far as this chapter is concerned -
that money management is simply a prime prerequisite of those who
wish to assume that they are alive and well in the commodity futures
388 SS$
market, or any facet of life, for that matter.
Have U ever been flat broke ? Have U ever
done without cigarettes, booze, movies,
taxi-rides, public transit, non-grain food,
and so forth for years on end, in order to
save and get ahead financially? Or have U
joined the nearest picket line.
Imagine, at S:oo A.M. , I/2 bottle wine and I'm trying to tell
U one of the truthisms in commodity trading and life. Money
management.
I'll tell U something. One thing I've learned in these few
years been around is that U DO NOT put all your cards on
the table and with money, - U do not blow it. At least it is
true that those who are without money - have only one thing to
put on the line and that is themselves. And to rant and rave
about socialism some more, that is one thing the socialists
don't realize. ( Heaven helprne, that I should criticize them
- that, without the factor, - the factor of demand/supply,
there will be nothing to redistribute and, that the results of
the supply/demand factor will distribute nothing and that the
people around the earth - and we're talking of billions - have
nothing else but themselves to offer. They don't try to take
from others. Only the socialists do that. The people are too
busy into existing.
To go one step further, there's nothing worse than a liberal.
He seems to be guilty with his existence, which is in contrast
with those who are less fortunate and he wishes to say " Oh my,
I am guilty- it's ridiculous what's going on, - that I shud
have so much. It's sinful that we shud have all this in my life."
And he parlays it into a psychological escapism - which says
to ethers " here U are- I will show U the lite". Liberals
luv to direct traffic, to be with everybody else in this world,
and join the survival game. They want to look after others.
Socialism says - we want to take from others and direct others,
(typical fascism- don't forget Hitler was a socialist)
liberal says - we want to look after others. It cud possibly be
a delight to the world, if they cud mind their own business for
a while. Liberals and socialists. have one thing in common. -
they will never redistribute their own money. U watch that fact.
They luv the "buck" as much as any of us. Bresnef has his
duchas or villas (indoor tennis courts) and Mao Tse-Tung had
his Mercedes Benz ( the big one, of course.).
I tell U - there is nothing like existing and unfortunately
existing involves not putting U're balls on the line all at
once, and that is what money management in commodity futures
trading is all about. We piece-meal it out.
S$S 389
In total dollar volume, commodity future trading equals I/3rd
of the total Gross National Product of the U.S ... What else
can express the la"' of supply and demand - as corranodi ties do ?
No wonder the socialist hates commodity traders. The socialist
does not understand that u cannot control the market place.
Tell me, why else do U think there is a shortage of grain in
all the communist countries, besides the fact that socialism
creates inefficiency. It's because the law of supply/demand
says - that those who produce have a vested interest. Is it
unthinkable that the producers are raiding the granaries and
stealing government grain ?. They're taking from the granaries
one way or another ? The only true form of capitalism exists
not in our society - but in the communist societies ? - They
know that the only true form of supply demand exists in a true
market and that results with them in what's called the black
market ? They get there what they wish ? The black market reflects
supply/demand ?
Golly, I hope I have irritated U in the last few paragraphs,
maybe got U're ole' grey cell matter twitching )
Money management shud not require considerable degree of thought.
It shud not be full of dilemas and It shud not
be frustrating. To say that a trader is doing so and making
progress is incredibly ridiculous. U do not have to assume that
U have to realize thatgverything is full of dilemas, contradictions
and is frustrating to make progress. U just simply have to follow
simple basic rules and face up to it. What the hell is the point
of enjoying if U have to worry about such silly things as delirnas,
contradictions and frustrating elements ? It's simple. Just follow
the rules of basic simple money management.
All decisions do not have to be determined by each trader for
himself. He knows how much money he has. He knows by his own
judgment how much he shud allocate to the market and he
much he shud risk to the market at any one time. How simplistic !
Money management is simple. U do not put U're cards on the table
at one time, unless U feel that U shud strike while the iron is
hot. And that's what major trends and major bull markets are made
of. At that time, maybe , U strike and strike hard. ( Buying as
long as the "dots" are up and not "3-4 days on" - only when it
cums back thru the dots. ( chapt. 9) )
On order to live long enough in the world of games, it has been
said that to reach the long run, u must be solvent. We're not
talking here of games. I'm talking of reality- How much money
U have and how much U shud put on the basic survival plan.
I4
390 sss
I a ~ not with the losers. I am not with those who burden society
and build on defeatism.
It has been said that money management principles contain so
many decisions that it must be determined by each trader for
himself and that no specific program, adequate for all traders
can be devised. To this I say ...... no way. U've got SIO,OOO
to invest - U've got $IOO,OOO to invest. U have made $50,000,
U have $5,000 to invest. - U have $1,000 to invest and to each
of these is applied specific criteria. If U've made over $50,000
then U take out $40,000 and start all over again with $!0,000 ?
Because, all U need is a certain amount of money and U can make
all the money U wish. U do not need a $IOO,OOO to make $100,000.
All U need is $5,000- IO,OOO and for those who have $!0,000
U only use a certain. percentage of that ( 30% maximum). If U
have $5,000, then U use a certain percentage of the ( still 30%
and if u have only $!,000, U must be very careful, but cum back
later if U're blown out of the box. ( Better to lose $I,OOO than
SIOO,OOO ! )
But the same criteria holds true for all of those who have $IOO,OOOO
$I,OOO,OOO , or $5,000 to invest. U have specific rules to oblige
by and that is what is involved with money management.
It has been said that it is impossible to consistently make money
in the commodity futures market ......
A trader who is to succeed in the long
run must be able to recognize and develop his behavioural skills
to his own style. He must be able to handle his money in a logical
and disciplined manner, and this can be more important than to
learn the rules of the trading procedure.
However, the most stullifying mistake that befalls a trader is the
assumption that success can be certain if he adopts a rationale
trade selection strategy and intelligently follows the elements
of a successful plan. Unfortunately, there is the final obstacle
to success. - money management. If the trader lacks the discipline
to set objectives and risk limits and to act when either is reached
it cud be that he shud not trade commodities.
There are ways of preserving U're assets. Emerson advises :Let us
not becum elated when we pluck a few thousand dollars from the
market. Don't believe that happy days are here with a few lucky
shots. Nothing can bring U peace but the triumph of principles.
And money management is one of those essential principles.
Remember that efficient money management will keep U in the game
and in the end run it will be long enough to give U the kind of
life U dream of, which to some people wud be a shot of vitamins
from time to time.
$$$ 39!
It has been said that C shud acquire wealth at a flat rate faster
than the speed at which U previously stored wealth. That is to say,
it's easy enough to make money and more difficult to hang on to it,
and that u shud acquire U're wealth slowly and surely - at a flat
rate and this flat rate shud be faster than U previously store
U're wealth.
There's the old saying - easy cum , easy go.
I prefer the flat rate. The solid sure method of accummulating
money.
Let's say that U decide to launch a program.
That U desire to accummulate $!00,000 with only $5,000 invested.
This approach will be less conservative than commencing with
$5,000, and with $5,'000 U try to errogate to $!0,000 Of
course, once u have the SIO,OOO, then U can errogate U'reself
towards the $100,000 and more moneys.
The purpose of all this is to develop what is called an asset
preservation. That is, reducing the percentage u commit to the
market at any one time. And to those who are defeatists, U are
cutting the amount U pledge to lose. If U have committed $5,000
u are going to retain 40% of it in reserve, and of the other
60% do not pledge more than I/2. If U're bank role shud grow,
gradually diminish this amount, and as a result protect U're
wealth. So that when U're capital aggregates $50,000 or more,
reduce committment level to I/4 th of the 60% per trade. The
firm rule which U have is that U do not commit more than 30%
of all U're positions combined. Unless, of course, U are willing
to facilitate an increase in capital by using various means of
pyrarr.iding. That involves going with trend and buying and
pyramiding on reactions of the market that have a relation to
"channels, "going with the dots" or whatever. (chapt. 6&9)
There are four basic elements of money management.
I. initial capital
2. objectives
3. expectation of the game being played
4. probability of ruin
The expectation of the game and probability of ruin are perhaps
the two chief culprits of the does not win. The
average trader is not aware and is generally unconvinced that he
cannot change the mathematical expectation of the game by the
way he plays the game. The probability of ruin does not receive
the cool reflection it deserves. The speculator may be playing the
I4
392 $$$
game to the hilt. Contrary to this is the trader who is aware
that greater advantage that u have - that success is vastly
increased. A trader with less probability of success, but
trading conservatively, actually has a better chance of long
term success than winning the game. This is in contrast to the
trader with a higher probability of success, but who chooses
to trade more aggressively. We're talking of long term success
here.
8ne of the more difficult aspects of commodity trading is being
able to sit on one's cash. -probably one of the hardest rules
for budding traders to self-enforce. A trader who will be around
a long time is one who maintains $50,000 in his account, but
trades up to a of $8,000 for margin and holds the rest
in reserve. He sits .on the remaining $42,000 . Can U imagine
that ! But he will be around a long time. There has never been
a successful trader, no matter how magnificent his style who is
not a superb manager of his money. And, the dismal probability of
the small trader results mainly as a consequence of his inability
to manage his/her money intelligently.
There are some generally accepted rule of thumbs around for
money management. Some of them are :
I. using maximum of 30% of equity for margin
requirements
- to this I adhere.
2. why not pledge 50% margin to equity ? Just
like U now can with the stock market. Then
u can avoid the intermediate wash-outs and take
advantage of the long run inflationary trends.
/
.3.Do not take a position in the market unless u
feel that the price objective is at least
8-IO times your commission costs.
4. Risk as small as IO% of the trading capital
as possible, and never more than IS% . As
anything over IS% of trading capital after 6
consecutive losses will evict U from the game.
5. One shud be reconciled in assessing risk to
losing I/2 if a margin requirement three times
while still retaining the full amount of a
margin, plus I/2 of the margin to survive
initial adversity of the fourth trade. Shud
the fourth loss occur, the trader shud
reconsider tis whole trading program.
sss 393
All of this above is involved with " risk " . We might as well
assume that there's risk in the market. Everyone else does.
Altho' risk is profoundly reduced by judicious application of
things like "dot direction" (chapt. 9) . It has been said that
so-so trades offer a possible gain equal to or greater than the
risk must eventually drag most traders down. It cud be true.
However, when involved with trading ranges, sometimes the price
objective is however, it is money and in analysing
congestions, it cannot be said that u cannot make money therein
and that the eventual outcome of the market breakout cannot be
determined. Risk is minimized is congestions and this includes,
- bottoming and topping formations.
Also, risk is minimized by day-traders who day trade from only
one side of the market - going with the trend. Prices move back
and forth thru upslanting or downslanting channels. Day trading
furnishes more possibilities to stretch risk capital as some
brokerage houses require less security deposits for day traders,
because risk exposure is reduced. Some brokers will ignore U're
account balance as long as U are not debit. U can swing some
big no's with less cash this way. I have nothing against day
traders.
However, those who maintain a neutral behaviour towards risk
can very easily becum buried. Some of us like risk.
Some have a high degree of risk aversion. Risk lovers either
require treatment or have already been restrained. All investors
fall into a range of optimists and pessimists and behaviour is
coupled with a degree of a risk-aversion in their personalities.
An optimist will go long and a pessimist will be short and those
who are optimistic will have a high degree of risk aversion -
react more emotionally to the market and tend to be the
successful and this group engulfs the vast majority of investors.
Those with a low aversion to risk, whether optimistic or
pessimistic have the best chance of making profits. Emotions are
the enemy of the commodity trader. - especially fear. So, if U
are afraid of risk - U're in trouble. If U are analyzing risk
in U're approach to trading, re-read the above.
The risk on each position that U have shud not exceed IS% of
U're total capital and reduce this as close to IO\ as possible
and even less as capital grows. We're talking here of stops
when the market goes against U and with a IO-IS\ loss of equity
U say - " I want out. " . There are times in the market place
I4
394 $$$
the risk involved in trading is at a minimum and times
when it is at a maximum. Risk on the breakout of a congestion
area can be calculated and therefore appears minimal and
manageable. A run-away bull or bear, risk is minimal. ( Even
the worst "system" works. ) - cause all U have to do is go with
this major move. - however, risk is incredibly at a maximum as
market tops and bottoms are forming - especially tops. This,
my friend, is where P&L charting will cum in. To enable U to
see that a top may be forming or to have formed. Here, in this
area of a market top, risk is high; U cud lose all the money
U have made in the uptrend as the market pumps away with its
topping formation.
U risk by U're trading approach And this does not
include stop-loss positioning. If ever I use a stop it is a
mental stop. I don't like stops. I don't use them. But I do
not suggest that U don't.
Moreover, when U recognize that markets are over reacting, the
best strategy to minimize risk is to ride the trends and trade
less frequently. That is. to trade when risk appears reasonably
low - not against the trend. Stick with it ! Take a broader view
of the market.
Some people play the markets on the basis that as soon as prices
tend in general to rise as the maturity of the contract approaches,
the trader simply goes along and has sufficient capital to take
care of the interim market reaction reversals. A lot of these
people in the long run will have profit.
It has been said that plunging is the most cardinal sin in money
management. Pyramiding, in many instances, establishes u in a
position similiar to plunging.
Be very careful of pyramiding. But it can be very profitable/cit
times - but only when U have a sustained bull or bear run. I have
rammed $I,OOO into $450,000 in my lifetime, pyramiding and
applying P&L trading. But pyramiding is fraught with danger.
What happens if U don't have a sustained market flow of a major
bear or bull ?
Be careful of pyramiding, and apply only the formulas as
explained in the following graphics, if U are a budding trader.
These approaches are traditional and they're based on the premise,
. that U pyramid with fewer contracts as prices move in the direction
of the major trend.
A
A A
A A 6
A A A A
AAAAA
6 A A A A A
. n.-..-.,....
1V 1V 1V 1V 1V 1V
1V 1V 1V 1V 1V
1V \l \l 'l
'V 1V 'l
'l \l
1V
co Q
Q Q c Q
c c c Q
t::l c c Q
0 0 Q 0 0 c
---
A
-15.60
A A
- u . ~
A L A -15.4.0
A A D. A - 15.)0
A 6 A D. D. -u.zo
r:::::J
Q
-15.15
c c
-15.10
c Q
- IS.CID
SSS 395
Personally, I have a different approach. Every now and then, I
will bite the bullet - never more than 2-3 times a year it seems,
and I will press a market. Particularily if I've been waiting for
a year or two for a particular market to develop - and, it.is
finally here. I break my cardinal rule of maximum 30\ equity
committed to the market. I bring equityout of the woodwork
to the brokerage houses and away I go and plunge. I affect a
396 $$$
80% of equity involvement and I apply this 80% rule to the
accrued profits as well and accordingly pyramid: that in the
end result, I am applying more contracts as the prices move, as
apposed to when the move started. But, my friend, each purchase
has its own mental stop. I make each accelerated purchase on
the basis of my P&L charting rules. In other words I gobble up
everytime the market makes a slight retracement back to maybe
the main channel line (chapt.9) But, I may only do this for
I/4 of the time span that is involved in a major price trend
move. Inother words, if I anticipate that prices are going to
go for ":x" months, I will spend l/4 of that time accummulating
and that to me is my base and I sit back and wait during the
rest of the time span period and analyse very carefully a
topping formation before taking profits. Perhaps U too will
have U're own approach to pyramiding. Remember, I feel that each
step of accummulation must by itself be considered technically
and psychologically U're first entry point and that each
purchase being maybe twice as much as U bought at $5.00, and @
$5.50 and when something with the market goes wrong I wud dump
what u bought @ $5.50, - not what U bought at 5 bucks. Unless,
U are convinced that the market has topped and take profits
and possibly stand aside and wait to short. ( Does that make
sense ? )
CHAPTER FIFTEEN

max1 m s
n.on- C6.oe.nt..t.a..e. 6u.zzy. ma.x..Un6
CRITICISM
There is some old saying that will justify almost anything.
There is always an equally plausible maxim that appears to
justify diametrically opposed actions. No matter what the
event there are maxims around to describe it. Traders often
blithely choose the one that encourages only what they are
doing. Orin Thevault ( Commodity Futures Game, Who Wins,
Who loses,Why! - Mcgraw Hill ) states that sociologists have
named this phenomenon " selective perception " . The most
favoured alibi comforts the trader when he has taken a loss
or a smaller profit than he shud have.
The successful trader derides maxims as conventional wisdom,
that are overly general and have no predictive value and belong
more in an explanation of random-walk theory than in a trading
plan. He believes that success in trading requires more than/
the judicious choice and observation of maxims.
" Nothing is so useless as a general maxim
- Thomas Babington
Lord - Macaulay - I859
IS
39i
398 MAXIMS
Theoretically, if any one rule or maxim was invariably correct
it wud be followed to such an extent as to eliminate its validity.
Human nature is such that any valid maxims are broken with
monotonous regularity. So, if we do have a good maxim, it
does n 't mean very much does it ? Because most people will not
pay any attention to it anyway. After all, U can't remember
everything. Lord Macaulay may have been rite. But there are a
series of so-called maxims. which are applicable to good commodity
trading. And, some of them are rather profound and shud be committed
to memory. Take U're choice. In fact, I suggest that U make U're
own collection of maxims that are good to U and repeatedly question
and test them.
SOME ESSENTIAL MAXIMS
The most effective approach to the objective of maximizing
results is to play a favourable game in a
small scale
less desirable, but still providing a reasonable chance of
success, is playing a favourable game on a large
scale with enough profits coming early in the
game to avoid ruin.
A basically unfavourable game may yield profitable results
if one plays seldom and bets heavily.
The only road that leads inevitably to disaster is playing
an unfavourable game continuously.
Good sports die broke.
There are no sure things.
Traders sleep, markets don't.
Dialogue is appropriate if the mutual goal is
enlightenment.
Accidental successes usually turn into accidental failures.
MAXIMS 399
manifests both positive and negative aspects.
What the few can de, the many cannot accomplish.
Take positions along the line of least resistance.
Sell famine I buy glut
Buy the rumour ? sell the news .
When to buy and sell is more important than what
to buy I sell
A bull can make money. A bear can make money, but a hog
never can .
Never buy at the bottom, and always sell too soon .
Buy what will not go in a bear market. Never buy
something that won't go up in a bull market.
Many a healthy reaction has proved fatal.
Watch out for a trend when market opinion seems sided.
Confine U're trading to situations of unusual appeal.
There is wisdom in patience. Wait for situations in which
profit potentials seems unusually high.
IS
400 HAXIMS
Trade infrequently unless. U're trading plan reasonably
requires U =o take positions often.
There is hardly a maxim that someone cud not find fault
with.
Put half U're profits in a safety deposit box.
Money is easier to make than it is to keep.
The race doesn't always go to the swift or the battle
to the strong, but that's the way to bet.
MAXIMS FOR THE PESSIMIST
If anything can go w r o n g ~ it will.
No matter what the result, there's always someone
to fake one better.
No matter what the result, there's always someone
eager to misinterpret it .
No matter what occurs, there is always someone who
believes it happened according to his pet
theory.
In any collection of data, the figure that is most
obviously correct - beyond all need of
correcting - is a mistake .
Even if it is impossible to derive a wrong number,
still a way will be found to do it.
Broad is the path that leadeth to destruction.
A trader will have to leave his mouth open a long
time before a roast pigeon falls in.
FUZZY MAXIMS
Cut U're losses. Let U're profits run.
- ( it's like telling somebody to
stay happy and healthy. )
B u ~ only on down days. Sell only on up days.
403
CHAPTER SIXTEEN
WINNERS & lOSERS
WHO ARE THEY?
How the. L o-6 e.tt T h..i..n.k.
How the. Th-i..n.k.-6
on a
on a. Lo-6
What Succe..6 and Fo...i..lutte. Me.o.n.-6
HOW LOSERS THINK
Tagore - the famous poet: ---- wrote, "Pessimism is a form of
mental dysomania. It distains healthy nourishment and indulges
in the strong drink of denunciation and creates an artificial
rejection which thirsts for a stronger draught".
The losers are like the lemmings that race to the sea. They
are caught in the trap of self-denunciation , artificial
rejection and they can't wait to get more of it! Bombardment
by negatives, by parents and relatives to children and the
continuation of this thru life is as if there is a conspiracy
to develop and sustain a "can't do" thinking-attitude in
individuals. Conditioning continues thru song lyrics,television
commercials, pressures from friends, relatives, neighbours,
social contacts and nearly all of society. A newspaper cannot
be sold, a news hour cannot be made interesting unless it reeks
with unpleasantries and miseries, .... that which loser is
made of.
The losers of the world love misery ... it is the only thing
that makes him happy. Think of it!
The losing trader is a self-defeatist. He functions best when
he is under stress and strain, and is at home when he is losing
404 WINNERS:LOSERS
money. The loser who strikes gold in the market, literally
falls apart ... he is not used to it. He does not know how
to enjoy success. His thoughts have always been built on
struggling and losing. He wins, - he goes berserk - he becums
an expert - he develops what one prominent futures trader
(Larry Williams) called the King Kong feeling". He loses
self-control, and boom- his profits are gone, and he's back
to the misery and struggling again, that which he is used
to, - like lemmings to the sea, and he may not wish to admit
it but he loves to struggle,- to struggle to win. But his
mind cannot cope with the winning itself. It copes with the
struggle. Amazing, isn't it?
He correlates a posture of immaturity. No wonder he is made
a fool of by the amicable political candidate who assures the
loser with "Look, don't worry about U're life. We'll take care
of it for u. We know better than U what is good for U".
The loser just has an overwhelmjng desire to win. They persuade
themselves they can win, and keep coming back determined to
save face. The degree of ineffectualness is already programmed
into his/her psychological patterns. With success he becums
almost hypnotized by the events which then shower upon him.
He enters a trans state. - mind hypnotism. He gets sinking
feelings about this and that. He cannot wait to apply what he
did right, usually to the same market again, but at the wrong
time. His mind is almost saying to him, "It really isn't
happening to U". He doesn't really know where he is. He becums
another person.
[ It is always a happy event to see a loser win, but it's sad
because U can recognize the transe state they are in, and you
know that given time they will lose again -so much, that they
will be right back where they started.]
Sometimes when a profit does accrue, the loser's mind will be
so happy with the profit, that it will grab it, but nearly
always prematurely. If a loss is occuring to the account, his
mind says "It will all work out in the end" and he/she hangs
on. He always cuts his profits short, and lets his losses run.
/
The budding trader finds it hard to short the market. He thinks
that the sky is the limit and that there is no ceiling on
prices. As long as he buys against base zero, growth is
inevitable, since to his mind, that is what life is all about,
- growth, upward movement.
His mind has a predilection to going only long in the market.
He figures that if prices cum down, then that's a good time to
buy. The budding trader is a price level trader rather than a
price movement trader. He thinks in terms of value, not in
WINNERS:LOSERS 405
~ e r m s of value movements. He buys on days of declines.
Everyday logic does not work in the market. The loser thinks
that his natural reaction to news is invariably correct. The
opposite is true. Our natural reaction to news is invariably
wrong. The loser is mentally attracted to the negative news
output of our society. He knee-jerks in times of embullient
excitement. He will slip into the market with the news rather
than against it. He cannot stop himself from becoming more
and more fascinated with publicized bullish and bearish events.
His mind just does not "cotton" to dull markets. He always
seems to be buying on up days, buying on emotion. The herd
instinct makes him buy on the first reaction in a topping
formation, simply because it's "cheaper",- simply because
his mind says the price is cheap.
His mind is so caught up with enjoying misery and struggling
to exist, that it becums chained and entrapped in its own
inertia. It does not release its host to self-perception, to
self-awareness, to research its own attitudes and emotions,
allowing it to probe its inner feelings in order to determine
the market's influence on him.
The losers mind does not think. It's supposed to. But it
doesn't. It's entrapped by emotion. It's processes are over-
whelmed by fear, greed, insecurity, unawareness. Sociologists
claim that 85% of all the people on planet earth do not think.
Of the remaining IS%, I3% think they think and the remaining
2% think. Got that? 2% of the total world population actually
think! And, it's got nothing to do with being stupid, or bright.
Even stupid people can think. - it's just that they don't!
An interesting corollary here is that the 2% thinkers actually
approximate the percentage of commodity traders who are
consistently successful year after year. The 2% who think,
know the market their trading, know the price movements, know
the fundamental factors underpinning the trend, and the market's
reaction to it, and are well-disciplined, almost bored, without
fear, and know the game in the spirit of fair, good and bad
bets. The I3% who think they think, involve themselves with
all the technical wiggle-waggles of chart formations. T h ~
becum "pros" - especially as a result of a short-lived, recent
success and feel that they have found the holy grail and are
capable of finally reaping revenge, and garnishing continuous
success. At the back of his mind is fear, - insecurity, - all
the non-productive behavoural patterns engrained since youth.
They're still there, lurking, and he knows it. And, the market
leaps back up to him, and grabs him, and shakes him, once
again to his very roots.
Involuntarily, Mr. I3% reverts back to the remaining 85% who
4 06 HINNERS :LOSERS
\\'ho oo_not think at all. He believes that there is a
conspiracy against him, by the market itself, by the floor
traders, - those all around him. He feels this experience,
rather than thinking about it. Fear, fear of the future,
uncertainties, worries, insecurities, obviate all rationality
and he exposes himself without thinking, - to risk, to
plunging back into the market, biting the bullet, since he
feels that an aggressive stance, (Mr. Macho) that the struggle
will result in a return to some profit, with which he can
start all over again.
C. This is the man who just hates going home to his wife with
bad news. Emotions grip him, during this event, just as it
did when he was in the market place.)
It is sad, very sad.. However, the ratio of thinkers to non-
thinkers inevitably _will never change.
HOW THE WINNER THINKS
I hate to tell U one thing. The winner doesn't think at all.
Am I shocking U ? Well, he is almost bored by it all.
My friend, I'm telling U of the moment his mind has decided
to strike in the market. His mind has stopped thinking, at
least momentarily. His mind has relaxed, because he knows
his game plan and the thinking is done.
Maybe his mind will take a rest for one week, while his
execution is in the market. He decides that if he's not in
profits by one week, then he will get out, or some other
rule. His mind jumps to the task, maybe after that one
week - or when a signal permeates his mental alarm system
that something is wrong with prices, with the market's
reaction to news - the market is just not doing what it is
supposed to. His mind is quick to adapt.
He may decide to get out of the market until his thinking
process is able to understand what has happened. His mind
is sharp enough to know what is to be anticipated from his
technical analysis and any deviation from that is thoroughly
analyzed. He takes into account.the "noise" of the market.
He digests news at an almost subliminal level. And, he
applies news consumption to its affect on the market. His
mind is continuously self-perceiving, making itself
407
thoroughly aware and introspective, thoroughly researching
it's own attitudes and emotions, probing his inner feelings
in order to determine the market's influence in him.
His mind has been disciplined to avoid thinking in terms of
the quick killing and knows that commodities will always be
there to-morrow and that there's a train leaving everyday,
week or month, or at least, several times a year.
He rarely blames anyone else for his mistakes. He plays
fair with others. His mind is reclusive, not letting others
influence it unless it's by mutual enlightenment, as it is
yet expansive and all encompassing, - analyzing, questioning,
appreciating. And, above all, enjoying what it is doing. It
is not grappled by the nitemare of emotions, fear, and greed.
It shuns all elements. It watches very closely
all that orbits in world. It thirsts for healthy nourish-
ment. It rejects artificial stimulation, drinks only at the
trough of knowledge. Fancy words! - But it is true!
Above all, it has a sense of humour. It is even able to
quietly laugh, although with sympathy for the loser. It
respects the loser. It respects what it has already been
thru. In fact, it respects everything. It allows the human
element only emotions of compassion, sympathy and sometimes
indulges in pleasure. It may say to its host "O.K. buddy, u
like Beluga caviar. I know U do & U've just made $50,000 in
the market & I want u to go out & buy $400 worth of it, &
indulge U'reself with it. Eat nothing else. I think it's
wonderful for U".
It coasts along, it gets off on new information, but screens
it as thoroughly as a bean picker at the supermarket.
It will know all of the good elements in this book, and
rejects memorization pertaining to the loser. It involves
itself instead with the good things in this book and is
very selective in its acceptance, knowing the golden rule
"Keep It Simple". It haspatience, it is able to think when
required. It is able to sit and wait, since it is so well
disciplined.
Maybe the mind is lazy. Maybe it just wants to sit and wait.
After all, enough is expected of it. A well honed mind is in
such good shape that like the jogger who is capable of ten
miles, - that running to catch the bus is child's play. It
is so well honed and trained that it can take it easy and
can be lazy. It doesn't have to be worrying about "sprinting
to the bus" -so lazy and so well tuned that it can just sit
and wait for the silly little demands that the market place
makes of it. It handles it like the pro it is - lazy, aware,
.LC
408 WINNERS: LOSERS
tuned to the penultimate - life is a joy and trading in the
market is unadulterated pure joy --- heaven on earth, and
its radiance beams like diamonds falling from the galaxcy on
all those around it, and that includes its host.
PoRTRAIT OF A WINNER
Most who trade futures have the capacity to develop winning
styles. However, most cannot resist deviating from their
styles that customarily win for them. The winner sticks to
a winning sty 1 e , - ~ n o w s that this requires patience and
perseverance. The w ~ n n e r has the fortitude to await those
opportunities for which his style is tailor-made. A winner
is foremost a controller. He luvs to focus on the loaded
trades. He writes down on a piece of paper his reasons for
making a trade. A winner realizes that there are very few
surething trades and never over-looks the best trades and
he sits tight on good positions. Discipline pays!
He/she admits his/her fallibility, but is hungry and intent
to take a turn and knows that there is no easy way for doing
it. He is a thorough assessor of sound fundamentals. Often,
he will discuss in full every aspect of the market with
which he is involved. A winner can smell fear and will act
ruthlessly. He analyzes the human element of the market.
His style is magnificent. He is serene. peaceful. possibly
auiet. He gives the outward appearance of being bored.
(He probably is). His eyes sparkle. He enjoys life, and
peoPle. But, watch out if U were to get too close to him or
to interfere with his game plan - to try to get information
out of him, or an idea from him what he is doing, - to ask
his opinion of the market,- what is going to happen!
Just try bugging him and see what happens to u. Otherwise,
he/she will shower U with his sparkling ambience.
He has learned to recognize and develop his behavioural skills.
He possesses the tremendous self-control needed to over-ride
the sterile habits developed and rehearsed for many years.
They are realists. They will never hold a position during a
vacation. They occasionally exit "from-.the market to rest,
to count profits and re-appraise situations. He/she learns
the causes of his/her successes (not his failures) . He/she
records its persistence. He knows that it's a winning style
that pays. He knows his place in his environment and he
WINNERS:LOSERS 409
controls it. He knows that big money can be earned by those
who can accept the emotional risk of going against universal
opinion. He is wary of trend bucking, but at the same time
knows its' golden opportunities. He knows when to strike,-
striking with his technical analysis and the market's reaction
to fundamentals. He outguesses to-morrow's price changes,
[P&L charting], as they are likely to depend on to-morrow's
news, or anticipated news;- change in weather, released crop
estimate, an unforeseen strike. His discipline and awareness
results in a low aversion to risk. He is a realist. U do not
have to tell him that those with low aversion to risk, whether
optimistic or pessimistic, have the best chance of making
profits.
With great pistache, he throws away the enemies of the comm-
odity trader - emotion, especially fear and greed. He/she
adheres to the money management plan. With such a growth
process, the winner has the quality of persistence. It
looms large and to him is virtually irreplaceable.
Most successful traders have been bloodied at least once.
All have tried again. Some traders say that if U haven't
made or lost a million dollars a couple of times, U have
not got U're feet wet.
Successful people focus sharply on goals. They pursue
fulfillment of their needs with energy and direction. They
make their own decisions on the control of their lives,
and property. They decide what they wish to protect and get
on with the job.
The champion is aware of the circle of influence around him.
He willingly defends his territory. He does not let others
take advantage of him. He asserts himself.
Winners first of all decide to claim victory. They are
people with goals. They will probably tell U what their
goal is.
The great speculators of the past have all believed that
the study of psychology, - the psychology of self, and
the market place exceed all statistics in importance.
These champions succeed. Their wealth grows. Their status
becums permanent. It flows to them in seemingly endless
fashion. They are beautiful people. (At least, I like a
winner.)
AmvU.c.a. WM buift on .tov..<..ng .the. w.i.nneJt. [The .to.o e.M o 6 .the
woJt.td .oeem .to be. d!t.a.gg..<..ng on .the U.S o6 A. PopuL<..6m hM
.e.cid a. c.a.ltC.e./t. I.:t t,e.e.d6 011 wel6 a.nd bdv.. c6t) .the. ha.ltd .:tha..t
-t-'Uu .tc n e.e.d d) . The. 0 n .:the. wo!Zl..d a-te. ..the. piC..ovJ...de./1.}.,
the wc:u.d. THEIR SPIRIT WILL NEVER BE BROKEN. They
a..te.ov.: the. .c, fta.c.kl..e...6 o 6 t.he. mJ...ncLte...6-b 9 8% o 6 the. wo!Zl..d .to g e..t
tc theJn.
The.Jte. a.Jte. g..i.ve.M and ta.k.e.M ..i.n tJU.o wo!tf..d.
The. winne.Jt ..i.-6 Wa.JUj o 6 ..the. ta.k.e.IC... He. ..i.-6
the. He. lu.v.o to g.<..ve., bU-t doe not
g.<. v e. .<..nv o ..u.nta.JL,i...y
Why .ohu.d he. e.ve.IC.. g.<..ve. ..the. le.e.c.h a. c.ha.nc.e.?
" If you let the pigs up on your porch, they will s .. t
all over it!"
- an old farmer saying, Ottawa Valley,Canada.
A successful professional trader will make important big
money four to five years out of six.
PORTRAIT OF A LOSER
The loser is the public speculator. He may have recently
begun commodity trading. He is frequently a poor student
a= the commodity. He places his market action on hot tips,
rumours and hunches.
Because they know their positions are based on shaky
grounds, they close them out quickly, as a way of finding
protection against unanticipated adverse developments.
They are frequently out to make a quick killing. i.e. They
are plungers.
He misjudges events, distorts facts, panics easily. The
loser will convince himself that a trend is not underway
until it has nearly reached its peak. Incredibly, he refuses
to accept large profits. He settles for small profits. He
can't wait to incur large losses.
The degree of ineffectualness is programed into his
psychological pattern. He buys and sells with news, rather
than against it. He's always there, buying on the first
reaction of a topping formation, usually because it's
"cheap".
4II
He is a price level trader, as opposed to being a price
movement trader.
Although he may be optimistic, he usually has a high degree
of risk aversion and accordingly, reacts very emotionally to
the market. This category engulfs the vast majority of
traders.
His emotions are his blatant enemy, especially fear.
He does not look well. He does not keep himself in shape.
He may be a yahoo - a great talker - full of memorized jokes-
outwardly gregarious. The aura about him is one of heaviness.
He never keeps things simple. He never, never appears bored.
Rather, he/she is frantic and determined - usually a know-all.
He will demand the most from all of those around him. He will
demand the best position in the market, or in the office. If
he is in the office; he will try to hog the "box" to himself.
He responds to all kinds of fear, - fear of the future,- all
uncertainties. He is so incredibly insecure. And he worries
about everything, and makes a big fuss about .it. He is the
kind of person who will hoard storable commodities in fear
of a shortage. He will blame others for his mistakes.
He becurns hypnotized by the market. He will never accept the
fact that bad things are happening to him. He believes that
all will work out in the end. He is an ego tripper. His ego
tripping ruins him in commodities.
The majority anticipate no need to change their habits. Only
I2% of traders consider the possibility of discontinuing
trading as a result of losing money.
He is inclined to join those who blame "speculators" for the
rise in food prices, unless of course he has made money on
the way up.
They do have an overwhelming desire to win. They persuade /
themselves that they can win and keep coming back determined
to continue.
They tend not to be thorough. He is undisciplined and easily
swayed by other people, - greedy, stubborn, and lazy. He
runs with the crowd.
He does not have the hungry element so often found in the
winner.
U will never find him a "bastard",- just annoying.
4I2 WI!\"NERS :LOSERS
He seldom i:f ever runs his profits ruthlessly. "A profit
is a profit" is his motto, when he shud be staying in a
position. Losers invariably over-trade, as they scramble
onto the rainbow. He will make his decisions on possible
reactions to price moves or to margin calls. High risk
trades nickle and dime him to death. He never sits tight
on sure-thing trades,let alone recognize them.
The very moment the market is peaking, he rests assured
that it is going higher. He never realizes that the highest
price for a commodity is formed only as the last purchaser
buys is an environment of totally exhausted bullish news.
He is the worst money manager in the world. They all are.
Read on. 0 shud get a kick out of the
following, reprinted with the kind
permission of Richard Tewels,Charles
Harlow,Herbert Stone, authors of the
excellent book on which a lot of this
chapter is based, namely commodity
Futures Game
Who Wins,Who Loses & Why.
Publishers: McGraw Hill
If 0 recognize O'reself, go out and get a bottle of Scotch.
"drink it all" & have a little talk with U'reself, - even
it"s U're first time! (either for the scotch, or whatever,
or talking with O'reself).
(Notice I said talking with U'reself, & not to U'reself.)
Hoyk has had more frielllis. reiAtiYCS. and at the
sc:ilool than anyone eise. Herben himself enroliect as a stueient more than
-10 years ago )USt after u-p his secun" holdiqs em a 20 -peRCnt
margm. stanmg in August 1929. He .bas JPDt ell the yecs siDce uyinst
to deYeio-p 1 sim-ple set of mechanicaJ rules (secret, o! coune) that will
belp him to achieve a substantial profit each ,ear at a CDDStant rate while
usiDc a small -t o{ capicai ad entailinc virtually no risk. Herilen
became seriously interested ill lDs project - yean aco wiler! lie DOiiced
that lDs rules worked specuculariy. panicuiarly w!Hm applied c:ar.iully
to the body o{ historical data fl'lllll wilich the rules .t:a.d to- develo-ped.
1 aoticed." says Hen-t. bis e,es unowed. that o-taber Wb.t
sold at a significazuly bialler price on September 8 thaD it hid on July 20
thl'lll.llhout the entire -period co"CC''ICi by 1111' records at the lime <four yean).
On the July 20 followiug the completion of lilY I qaiedy boqbt
all the December Wheat that I CDUid afford 15.000 busbels) but uaicw-
tllllltely a 111C11111 redi&Ctioll in tbe CONIWI loan priciC had DOt t..l
fully disc:DWited. ad I lost l4 cenu a busbel. I decidect that beaceforth
wheat sbould lie boudlt only ill yean wben &bere was DO aci.iuslmat ill the
loan price, aud I changect my rules ICilDrdizlaly.
'"'The following ,ear I bou&ht wheat apiD on July 20 but lost 19 cents .
a busbel by September 8. I noticed - late that the difference ill price
wheat and c:crn was wider than it had been for tbe last fie .,.an
ad l had failect to consider the imponuce of this ill my earlier -a,..
sions. There was no point in my work because. of tbe liz
Iaow .bad. four had -kect suc:ceaiully and tbe other two CDUid
be eAlily filtered out. Tbe foUowiDc year I was aliule Wllucky. Tbeft-
no chance in the loan priee, but tbe betweeo wbeat and CDI'II prima
was even wider than it had been tbe year before. so lutarally did 1101 buy
tbe wbeat. ln fact. utibzinc tbe infonD&tioa I bad piDecl, I sold it sbort
iastead. When it rose '7 cenu a busbel by Selxember 8 with no '-liacl
greater than ,_. c:eot a busbel. I was a little diaalPPiDteci. of caune. but tt-
l suddenly realized tbe sigDificaDce of tbe late Walell - whiclt
viously cancels out tbe effect of tbe wbeat<Dn> spread. Of IDY -
senatiom. actually five had worir.ect, .-ltbou&h 1 did DOl beDefit by tbe
one aDd two were filtered out. The ei&htb year was really quite
I apm bou&ht tbe wheat on July 20 and it was 4 ceDIS bieber 011 Sept-t.r
8. just as I had expected iD light of the natrOW s;nad aDd uriy
Leat. Because of some nm>Or of bea"Y Frencb export: in Aupst. wheat
prices dropped DIOI'e tbaa 50 eeuu and before Iller CDuld rally back my
lllal'lin was lODe aDd my broker sold me out cat off tbe bottom. .My
record. however, really is liz wins in ei&ht yean with tbe other two .,.an
filtered out. Now I a.m sun tbat I have ell the important faaors, and if I
can 1et SSOO 101etber belore July 20 I to maiLe- really iiDPDn&Dt
moaey in the wboat market bum now ou. Wlless my c:nditDrs attach 111y
ac:c:oUDt &pill before tbe realiziD& move takes place.
Hen-t s rules. inciucling the filters and uceptioDs. DOW fill S'! type.
written pages (sinclo-spacecil wbich Hen-t keeps iD a padlockect clraww
for Jealriry ,_ alODg with instrUCtions 10 pass tbe -es aloD& to his
cbildren in the .. eat of his pusing or beiD& committect to an illslitutioCL.
THE COMMODITY FUTURES GAME by
Tewels et al. Copyright !974
by McGraw Hill. Reprinted by
permission of McGraw-Hill Book
Company, Publishers.
4I3
414 :I.OSERS
Co'll G .. llibie fiDcis Herben Hoyie's scholarly fundameaw approach
far 100 mmpiic:.ateci ancl believes the sollftCiest approach to uaciing is a buic
ally simple one. Gary inieially tried to adliewe wealth at the borw ,_
.aiter bwm1 a booit suuesliD& that the proper approKh was to bet OD the
m-iteS to sbow OD the ias: race each ciay early iD the JUSOil, Tbe tbiiDry
hold that the wiDDiD& bertws would all ba .. aaae home by the last racc ucl
thai the baDciic::appers hac! DOt ,et bad lime to evaluate suffacitiDI data t.o
weilht the bones properly. Cary became cliscourqed wheo be nralia& thAt
his profiu did DOt equal the cost of his racclhCk admissiolts. his pariWI&,
loaldocs .and dazliDc billl for his cbedced sponcgat. NcilbeT did the,
- bis losses.
Cary nest U'ieclt.o make rome -.y playiDc bi.dtjack at N...U Pill'
iDI: paiaces .aiter a boolc IUQCS&iD& tlu11 it wu .,..,._,. Gilly 10
kee$) lr.ICk oi picture canis .-i fiwes 111111 alwayo double dow1l OD IWO .lliDelo.
l.loiort-tcly, wbell' Cary fiD.ally ac:nwed up enougil couraa:e to take a bus
111 L:u Veaas. his resulcs were DOt Dearly so aood as they bad "- wbell
he dealt bimseJI $Cvetal tbousud iltlllds OD his cliDiDc I'OOIZl table. He a!-
-u:recl a iiDty.eycd duicr who -.ked with five decks or canis .and
cloalt them from a card shoe so rapidly that Gary CDUJd DOt keep CDUIII.
It ... then that Gary turned to CIOIDIIIOdil)l
""''bere is ao poizlt examillillc lbe Cary tells us.
refiectee! i.D pnces uyhow. Tbe most imponant tbiaa is to
nae aaiy CICIIIIisleDtJy with lbe buic trellci. N-lrlllie apizlst tile trelld!
WbCII it is up. olliy be lolij:. Wbell it is dowD. DDiy be short. Tbe buic u-d
_,. be euily determiDed ill IliAD)' ways. but - oi tbe bat is with a line
cbarL Just draw aliDe ulcmc receDt bouoms i.D a risizl& market or -t tops
ill alalliac market and you h.awe a dear piccure oi a .marltet , direc:ciaa and
ita rate of IDOIIl-OCHIII=t.
"'The best way oi all. tbou&b. i.Dvolwes the IHOl* .... of mcmnc .........
wbicll requires some intelliaezace ll.Q. uceer:ii.Dc 55) ucl some k-*lac
ol awh--rics (addit:ioD .and sublndiaD). I have cliiCID..-.d -hioa
really remarkable." COiltizwes Cary iD CDIIfidCIIIial IOQC of woice. "Wboon
,.ou uae movi.Dc ...,.... of diffan1 time spas. like 3 da'l'5 .and 10 Wa'l'5-
ill ..;ceu that are IDO\IiDc aroUDd at all.ud plot thae weraces as linG un
a cbart. the S-clay liDe will cross tbe 10-day liM &om time to time. altbou&b
1-DOt c:enaiD what e&\11&5 this. Cary leus baclr. ill bi. chair to ciw the
listaer time eo absorb tbe of his ......aatiom. &11 order to make
tba liM5 clar ciurioc per;ocis of unow Jlrice I 6Dcl it best 10
- CDiored peacils. It is wile 10 use c:banreuse for lbe avwace and
t-isc for the lo.day avcrace. Whal tile c:hartreule lit>e is below the
turquoise liDe. I sell sbon uci wbeD it aoes above I - .and co ltmc- Of
- I cet wbipuwed oace iD while. but at least when tba-e IS D>lliur
n..ad I AID ill tbe market the ricbt way &bd 1 suy witb tbe 1110ve UDtil it baa
IWI itJ course. while C..,., wu tradmc tbcte pro...d 10 be
_. oanow uadi.D& mari<ets thaD treDdiD& markets twbich wu abo true
bebw Cary bepa tr:ldi.Dc as well as afteri 10 Cary bas beell whipped and
sawed rather thotouchir. He u cunwstiy 10 imllfO"C his system
eitber by requiria1: siw1lcT c:tossillc of tbe liDes tas -* by a pitic
protne111r i or by waitinc lor - period of time to elapso. after a CI'DSiiDat
l>efcmo consitierilll!. a positioft to be worth So far the ideal periocl
II> wait has ""'* bisloric::llly 10 ...,. hom one to :54 days. but Cary De-
li.- 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 and spmt tbe otlaer third 011
chan paper. coioreti pem:ils. and tbe prwactOr.
Fcntcy turned to commodity trading m=y yean qo after suf.
ferinst JneOUS losses traciinlt Czarist bond&. He has "-e a
el<pert in !he an of spreaciillc positions to avoid realiziac losres. F nd u
eopeQally piuseci witb his results so far this year ciuriaa wbicb he ilu DOt
h:od a sinl!ie dosecl lou. He believes that he is fmaliy about to -
the misfortunes he lw borne the last 26 yean. b8viD& lost -.y
in 25 of them. (He broke e-oen one l'UT wileD he was - busy dealiDc with
his di..,rce and banicruptey pt i"ap 10 tnlde). Fnd lw told .-,-e
who will listen of his maricet succeaes this year during wbich be lw bad
six profits. He bas taken panicular J)QiDs to keep til.ree board-
room ac:quaintances informed -=-- be is c:un-ently tfYiD& to Wiace tbem
10 allow him to trade their accounts in retum for 3 a -tb of their
inworted pius One-half of all cm.d proats aaadjusted by op1111 1oaa.
-m Juuary I boqbt o-iler silwr." relates fnd. "bcause of the
c:ontinuinr; imbalmce of suJIIIIy and demuci. the outlook for _,. - of
fiim bec:lluse of the recent inCDtion of a D- type of camera. aod subaao-
tial sales of a series of znecials J)OI"lnYing f.-s india cbieis by a priY&te
mint I was a little early. and December silCI" dropped 600 poiots. aod l
tbou&ilt I had better buy time. so l110ld March ..Wt my ion& December.
The moricet dropped aaotber 300 $Dints. just as I tboalbt it -wei, so I
tooic my prvfit in the Marcil. To take IICivantaKe ol tbe shonterm inaliaDal
wea1mess in the market Uld to proteCt my Deeember posiDoll I aoici a May
c:nntract. Sure enou(dl. the market continued doom UKi I - eble to al<e a
S200 profit in the May and manqed to sell July after a further dJvp of cm1y
so pointl. nus maricet has been lilte money machiM. 1 ba9e - take
six stnli&ht profits on the sbon side. UKi now I line a -nsk palitiozl
short September UKi still ioftJ that DrilliDal December wbicb will pnlbably
yield the ueatest profit of all."
fred proudly displays his the 11.470 profits
nn the shon-side traDadions which he carries with bim at all times to belp
him seU his manapi-aCICDuut procram which he has ,_tly bid copyo
m:bted as '"The fred f&Dwy lnlallo Procram" tllliommately the marltet
rallied a little alter fred's seventh short sale and be now bas a 1150 ope11
loss on the short September silwer as well as the ope loss of 12.375 on the
nrill:inai purchase of the December sUOiel". but this cioa not ciisbaarttm fr.d.
He bas a plan. "'When the marltet takes its nat clip. n1 - September
ano stay with the December. This will ll"e me- profits in a row. so
een if December cioem't recover lil still haw seven Jl")hiS out oi ei&ht,
and the random w.U. boys can'tlawrh &bat of!." A visitor has some quesliDDs.
to uic Fred about some as-peas of lw iog,c: as well as r- be will J)ft>ide
the trulfltiD requjred to support bis December position after he liquidates
tbe Sel>t-ber. but Fred bas bee led away for bis claily tnmcruiiizer iDjee-
tion.
4I5
0
4I6 WINNERS:LOSERS
William rull, wanted to be a out was ilom in
piace :11 the wron@: ume. lJoaoie to rcaiize his prUnar,r ambition. he tumed
to commocilty tratiins:. '"I'bis wn01e ilusmess is icill or be icilied: says Wil
iiam. hoiciinlt up his clens:hed iist and fac:illlt the emperor. "The war to ileat
this lhmlt JS to probe ior tile ilac one anci tileD milk it cirv. William accom-
plishes this by wauinr; untii he sees wnat be believes 10 be a IJ'UI oppor
tunil'!' ed then IIIOYintt in with all his resoun:es. '"I'be way to detennine
the size of an irutilli posit:IOD is to d!vicie your Cftdit balarac:e by the IDIU'JUI
cieposit requi:eci and buy all you can. Whell the market aoes your way
even a little. )'Out base is big so that the small mow wiU
c:re:ate enoulth lldditional capstai 10 pyramid quickly. and tbeD 7'0U keep OD
pynllllidiJII untii )'OU have all the IIIODeY that 7'0U can carT)' home."
Willi= is QUite confident at the motDellt that he is about to acm- a
peat VICIOI'Y because be lw iustiiiCCIIeCied iD the 11.000 be lost
by holdiD& seven pork bellies twO days 1110 lorac with be
fmn tbe Credit Unioa aDd is htlpiq that tbe !5.000 busMis ol wbeat De
intencis 10 buy iD the liiDnliDI will rise quidcly -.11 1M ilim to repay
the loan before his wife larDs of it and onien ilim tNt of the boule apiA.
William's llltra_.,.tive friend. Loa& :. Baatis. asiu what be is aoiD&
to cio if wileat aoes down and be fiDcis bimsclf iD debt to the Credit Uaion
withtlut the meaDS to Dacit tbe obliptjcm. "'WbeD the pine pts
replies william. "tbe IOIIIb cet a-&" ""But." Lata& penista. "isn't
it true that iD lillY pme iD wbich 'P!'obabililies - iztwol81! the lonpr )'OU
piaythemore cenaiD it becomes that a seriesofloues willoc=r? ADd isn't
it aiso true that )'OU-- prepued for tile first loss. much 1-
aseriesot ta.m?"UiiliDqallof hisi:- poww. William re;Nies.
'11 you can't stud the beat, stay out of the
Mllf'tU: M.U. oace read in a booklet that c:uh aDd iuwr. prica Qaft a
tezlciency to - duriltg tile -th - or lator. This 1118de a
II ell
1
'$ impression OD ).Wws wfto raai:s the impDifWICe of this bit of
iai-.Dooa -a.t above tbe Bill of He is cur-.dy iCIII& ODe
CDBttact of October lift cattle wbich is sellin& 4 cents a pound below tbe
cash price of cattle as quoted on tbe DeWIWire in the office.
aoiDI to maile that +-cat difs-." b:8)'l Maml:'. "and it
mipt as well be me. Wbell M-.s placed tile onier with his broker. bis
recistered represatalive wiUD!eWMi to cMc:i: with the r.an:h depan
JDeDt ill Cltic:aco ior an opinioc OD the poteDtial ill Marcus trade. AltliDulh
tbe ..-ch c!.....-t was ailout to leave for a baml WPI aDCi a milk
shake for lunch. be did take tbe lime 10 re;.iy and the broker. TJ'Mium
Offen. c:alled Mucus back with the llad oews. '1D orcier to be _. of malt
inc tile +<eat ciiffel'ela. Tzaciam Aid. '"You mtzlt a... aallllicilnd sudl
thinlts as location of the cattle. diiierences iD cracie. aDd pauible problems
with c:enification for cieiiven- ill' the .a.-. Aiao. that tbe
-kent dillerenee is IIIIICie up before futures traciiDc stops ill OctoOer IIIICi 1101
aiter, it could be met iusi as well by tbe cash price clrDppia& 10 - tbe
futures prices as by the fvtUNS price risiDc to the cash. ill wbicia case.
-.ld malce 1>0 money. Ala 111a11er of !.ct. tbe c:uh price aauJd cizop 8
cents and tbe futures 4 cents anci .,.,u aauid lose. His ailarp miDc! fuDc:liol>.
1n1: in its USUAl maftllet. Man:us fel)iied. '"HJae lJ'OU a iate quote OD Novem-
ber -rile futures busilless is one tbina ana the cash is -ther-
C!OIItinued Tracium after tellinlt Marcus tllat No-oer potatoes aft limlt
"" (Marcus is short). is not wise 10 puay another nwis pme." '1 llave
to move my car. reJ!iied Marcus shrewdly. '1t's ill a loMiiD& -.
By the time be retUmed from IIIOiltg his c:u. he llad rec:er-i cielivery of
the CDIItraCt of cattle. Only then did be iunl that it - the last day or
t..diar. and the cattle cannot be Shonly tbereafter ODe of
Marcus c:mle died and two othen aft not -u. Marazs stilllw tile
remainder of his CDftllad of catl1e IIDCi lw a busy IDOI'IIiD& writizt&
letters 10 tbe Commodity Authtlrity. tbe Oaicaao M-lil
Ucbanac. Dow-Jooes.. ud the State eo- Frauds DiYiliaa biaeriy
CDI'IIpWnilllt of the fa ud lllilleadiDC c:uh prices reptiNii 011 tbe
newswiftS by an iDcDftaloetent win CIII8IWIW aDd bow lillY boD-
est trader CDuici poaibir beat a.-with such unfair rules. .NotlliDc-
lias uppemld to Mamas lillce he tocNt: cieliYery of a carload of Ollioas ODiy
to lam that tradiDc llad emied ill that rmt i'tt rore-- and his ODiDas
werelli"'Utinr; the bqs iD wbicb they were clelnwed. He did suc-
ceed in sellirut -of 10 a dealer iD burlap
as much as it CDII bizn 10 have the bap deociorized. Marc:us would like 10
tell of some other of his experieDces. but be lias to leave for court 10 filbt
tbe ticltet unjustifiably placed on his car for JW'i<in' ill the ioadiD& lODe.
luon BentoU.. has had trouble all his lile with unrusooabie people. lD
he was prepared for "Show and Tell" be- &Qt called
on. but when un!)rf:l)&red his aame was illwriabiy caliecl. In tbe Little
Learue .De was called out em every play. Policemen berd him out of traifit
to Jive him tickets. althoutth everyone else is clearly poe faster. N- he
trades CDmmociilies. He reeently opened bis third CDIDIIIOdity ecc:DUDt to ,.
place the one he bas juit closed witb U'IOtber broker wilom he is auio& for
the -purchase of com which went down 9 t:eiiiS a busDel fol
lowmr. a bearish crop ISSued two weelc$ alter the pur
chase. '"My obviously ltnew of the aDd me to buy the axn
so be or his Jl&mten CDUld bail out." declares iYIIII. his eyes blaz:izl&.
"...., if he did not It-it. be is derelict ill his ficiuc:Wy mlticmbip to me
because he should bave known it. After all. his iirm c:Wms to hne a Re-
seatrch ill OUc.qo richt i1l the Board of Tf81ie BuilciiDc.
Havinct calmeci down enougb 10 discuss his traciia& pbilolopby, iwo aalks
of objecriwos. "A $l.OOO accouot really ouaht to provide &D a..enae retun1
of sew:ral buodrecl dollan eacb 11100tb ud-51.000 or more.
After all. it woldd yield 5 petCODt ill a Sa'WiD;s &Dei LoaD witb oo risk at
all (to uy oolhizl& of tile use of a ootary public at DO cl:wte>. If YIIU dorl't
aet a cbaDce ior p:reater reward. it s fooiisb to take the tmra risk.
"You bave 10 be especially careiw of brokers. be CDOtilluu. 1'bey are
always foistio; advice oo )IOU like UlJiDI )'OU 10 use stops &Dei ob;.ca..es 10
malce sure tbat l'OU are always 1ettillc out of )'OUt positiolt - way or the
other. I bad a big profit a iew 11100tbs aao. toolt the profit ad -t into
aootber posiz:ion whicb also resulted iD a profit. but I would haw made
more JUSt stayill& with tbe first position. My broker did DOt mall:e a siD&Ie
move to stop me from SWitcbin& the posiDon. I am still waitinc ior tbe CEA
to do somethiq about it, but they -t usw.r my letters &DYiftOI'&. Three
or four yean I doubled my IIIODey iD tbe first liz -tbs of the yec.
and my broker thought that was a bia deal. but I bad a friend who
his mone during tbe same period acrvss the stteet. My irienc!'s bmlter
is qwte CDIISei'Yalin and told me tbat be really only an UIDual
)'1eic of 80 pen:eut. l figured if be only dici baH tba: well. l was c:enain
of 40 pen:ent .so 1 opeoed an accowu. In SlJite of bis vinuai guaraotee. I
lost my mcmey on my fust two tracies iD only a wtoeir.. 10 I am my
lawyer fiie a suit baseci on material misrepl'esentauon. laclr. oi suitaDility.
and cbtlliWI&."
4I7
418 WINNERS:LOSERS
E.nc Von p,,..eror i>eiieves aamg IS eve!'1-"'nlnlo;. SO ne Dues All his traciinl:
ciecisiDIU em the mazme:- tn wiDen maricets are acun, ciunng the inirequent
penocis wnen De icnOWJ WDat IS Dappe!IUIO.. When his oroiter calls him with
tr:acimE suggestion. Eric cneciu his cilans anc then ioliows the suuestJOnS
th:u A.IV"e aaeci well recellUY tgone in the ciiteCDOJ> of the broicer s
gesucm ior a ieast Otte ciay When he is aciviseci to taite a iou. &ic usualiy
replies tbat "the mari<et is ac:tillr; :ss if a reversal is about to oc:cm." When
aciVISeci to take a profit.. ric studies his clwu anci pniCiaims that "it is
. premature to liouiciate the position Oec:ause tile market is actiA& well." Be-
cause any posiao11 ti>at mows a profit has had to m well. Eric has great
diificuiry in liquidating positioiiS at a profit. &ic once rud ill a book that
priees tenti m act best just before tbey ODilapse &Dei worst just before they
rally so Eric sold the booi<.
A frienci once suaesteci that &ic cietermille objectives stops in ad
vance and place oniers at tbose poilus ill the mui<et.. but Eric prefers to use
his judgment md make dec:isioaa at poiDts at which marltet aclioD indicates
be sbouid take ection. He il DOt disturbed by the fm that the --t he
usually takes actioD is alw.,. one durillc which be ilappem to be in the
broker8Je office or 011 the telephone Ill his resistered representatiYe. "You
should Deer place stops." ill-.Eric. o-ase &her will iavariably drive
the lll&l'ket Just to your stOp, lcJIOCk you out of your positioll. and then nm
the market just to where you thoucht it would 10 in the first piacef" Whe!l
asiceci whether his -problem miJ,bt DOt be the pi-t of his Stoll'- Uld just
wilD 1nm or sells tbe lwDdrecis of coatr&CIS 11.-afY m touch off bis stDIIS
nn hi$ one or two l:DIItrllctS. &ic s:ays "You just don't the Com-
modity Furures Mirilets." He aays _this with the same baughty air that bis
:ancient ancestor. a Cartha;iman assumed when the
strnter;)' ne pianned to use &Pins! the aPIJI'08Cili111
Der-it N. Widulra .... l believes in following a stntecY of
statistical runs. Knowmg iUs own traciiDg limitaUoou. wiUch are iegion.
Deposot ioliows the advice of bis broker who is alwloys sincere &Dei ocx:asioll
aUy lucity. Whenever Deposit has a series oi sua:eues with RUII ptllitilllls.
be acies money to his aCCDIIIIt and takes iafce positions just ill tilDe for the
inevitable tenes of loues. following this. he W>thdraws _, of bis capital
in ortier to trDCie a millimum IIJDOUIIt until his brol<er ,.__, bis lllach.
'1 coulciz> 't it. sobs Deposit . ., no mooer withdrew pan of my ze.
nwning funds than be was ncbt Dine times in a row. I bad to pau ap faar
nf iUs suuestioras and take JX)IitiOIIS ill the other fj,.. only about ball as bi&
as I had taken on the way down. 0.. ODe of those five, I CDUidn 't take the
adYeniry necessary to achi...e the -profit so I baci a loa. 11>e broker claims
to be ahead lor the year but it cenainly doem't show in lilY He
cl:aims it has somethillr; to do with IDOIIeY manapmcu. but I thilllt he is
his results." Followin1 the advice oilftll Bentaken. 0.
posit is about to make a ciaim apinst the broker for the difference betwMoD
the n:salts in his ac:munt and those be be sboaid bave bad aa:ord
in2 to the broker's noc:ard.
0... o.tril:ft believes that all adversity is Wba all is laiD&
iUs "'Y. Oscar can be found telliDc of bi.s succeaes to the llllail pwp of
st'&J' men ill rnr ..au with II'"Y oo their ties wbo lpead all dar in the
because their wifts dri10e tbem from tbeir Dome. WD1111 --
kets 111 apillst binL. is not thin. So 1th:wa be ca be-
wallcinc siowlr -c the blocl.. his lips -.me ill lilent ,...,..... bopiDa
to find a miJ'ac:ulous ,_,_.,.in bis posilioDs by the time be _.,.. the
amzit. More ireqaady be CIIIIIIOt be fOUDd at all.
r I didn't have bad luck. I -'d bne ao luck at all." be tells all wilD
wiD listen. '1 was doiDc all richt tmtil I 101 into those 12 -v-.as of May
potatoes. I am asually in the bow a.- or keep in -t touch with my
broker so I know at all tilDes "'here I am. However ,lJOt bus:v &DC! 1 bad 110
time to call or - read a pa-per for Dine ciays . .&y the time I was
news that the crop - 72 J)er'Ct:'lt pater thaD bad become
k.-n to ._,.,... but me. and the market sold down 10 far that! lOt IOici
DUL So-. Suges!S that if Oscar haci pi8ced a ItO!) ill the market, be
-uld .baw suffered little. but .he is i:ousily cUuing a Dole ill the school's
oandbox in orcier to his bead into it.
Wheeil' Bcndi"' 15 irnown 10 every rezistereci representative 111 tile
i>roicel'aiP;e i>usine:ss except the younlflt anci least &Dd
wili unciouotedlr meet Dim soon. He can aiw.,-s be recop&Zeci br the na-
tun of Dis propos.ajs wilicn invoive unortilociox transactions. nuce
anci consicierai>ie ume. eifon. ana c:ost to the broire: tall wastedl. '1 ha-.e
acecss to 8.000.000 I'OUDCs of Mex:iam coffee which I ca11 piac:e anywhere
you want w1thm twelltYiour houn he con.Ucies. "if tbete is some way we
c:;m piace a hed&e 11 :md cinch tbe bi& cliiierence between the pra-
ent futures maricet anci my cash coilee. Of coune.l WO.Ud expect 110
011 the silort futures positioll because tbis is a bolla litie beQce." Or. "l am
in toueh witb a shipload of 11011quota supr beiD& brou(tbt iD by some Cuban
reiupes &lid if we ca11 ciispose of it tbrollgb ygur cash I would
be to split the profit with you." Or. "I baodle the fizulllcial affam
oi a croup ol220 bnu11 surpDDS who won't maice a move without my &a)l<.
If I a S3.000.000.how miJju- botb baleiit
a little &om it?"
Wheeler is DOt a major meaace except to bimself wileD attemJ"iD& to
crass the sueet unaicied aDd to UDSDpilisticated brolun 10 Ulllious 10 build
a profitable dieutele that !bey aceept his halluc:iDatioiiS at face waiU&. Tbis
bas bappaec! twice. 1D each cue 1111 acatullt was opeaed aDd a11 order ac
tually placeci ..mst Wheeler's cash positioos oaly to haw him disappear
into the msbt leavin& OehiDd clisCDIIIIected Uliepiaae aDd all "addreu
UDic:Down." A fellow stuciet to aslt Wheeler wby be cioes what be
cloes. but Wheeler is furti1oely slinitinc ciowD the CDrricior, eatizlc StraDp-
loolcin& anci mutteriJI& sometbiD& about cettinc the -=iusi-.e
r\&bt to marilet tbe entire Russiall outpUt of piat:iDum through a holciin&
CDIIIJIUIY be is abeut to form.
Ba"lt B-. is lalown to every broiler in the CIOUilti"Y. althou;h be iDYari-
ably GOQ busincu eiMwbere. He is aiways tbe first to aaail iD the CDUJIOII
that appears witb a finD's aciwn:isement. Wbell the rqistered
tive begins calliD& be always reacbes Barry fim, "Put
me on your market letter list lor a few IDODW." danancil8arry, aDd Jelld
me ciaiiy 1:barts on l'riee, iDtetal. "'lume coverin& mercury.
bnrilen. and ral)eteed lor the last lew years. Also. would you bave your
researcb department take a look at the spread zelalioDsilip be.- April
potatoes ud Feimw1 propue durin& the third quarter of leap years ud
let me lcDow what they bave to ray? I call be reached e'lelliniSafter 10:30.
Once this illitial amtact bar be8ll macie. the broker need have 110 CDDcen>
aDout Barry mnamin& iD touch. espeQally wbell reporu are "Wbeu
is the eoid stcnap repon on bellies CDIIIin& out aDd what cioes the faoor ez.
pect it to say?" asks &arry 011lioe one while the broker's best c!ieDt is wait
in' on hold 011 line rwo to place an orcier lor 400 shares o{ stoc:k at tbe
maritet. Witbill - miDute after the repOrt is issued Barry will be certain
to call baclt to leam tbe iicure:s and ask lor the reactioD on the floor aDd
some esamate of wbe:re the maricet will ope iD the momizl&. He would call
his IIW!I broker. of c:oune. but does not wisll to disturD him. espeQal/r
cause 8arry i>as 110 positioll iD bellies anyhow.
Barry u most iD eicience at workshops and semiDars prscted a5
busilless-i>uilciiD& cie'Yiee:s by firms. He call be easily 1 ;mzed
bv tile d02eareci notebook md c:hans be is cam'iDtt and by tbe holes iD his
shoe:s. Just as the broker pauses lor brutb belore makmg his major pJillt
.obout the enormous oppo"unity in the - m&Tket because CbaDa ucl
r-;;ena have invac:ied one another. Bany raises bis luulci ucl aslts. "How
much wbe.ot is cransponed into Kansas City by barae relalive to nil ud
how mucil cioes each ban:e hold? Also. wbel! cioes it cet too cold lor lwle
tmflic ... c1 what histoncal implications bas Ibis bad for tbe O.inv-Keme
City wheat sprudr the speaker tries to a..- Barry's qaenioas
wilhout acimittinc tbat he bas no lcDowlecice wilateW!I' of the Kuaas City
lreittht slnletUre. the well-ciressed IIIWI llittin& _. the cioor who was about
to ask how to a 110.000 accoant looks at his watch. J111tS his cbec:k
book back into his pocket. ud --
DuriDc the relftsbmu period followiJic tbe speech. Barry bas the
backed illto a eomer arltin& him wft, the -10 peste muilet did
1101 bawe "'Oume. amsiderii!J: all the pizzas that -lllicl in the lhlitecl
By the time the bnlker -pes irvin tbe CDI"IIer uci cleas the
coffee off his ruitcDat tbat Barry bas q,Uied on it. the .able aum- bar
left. BerT'J' picks up lour eopies eacil of all the Hterature. takes all of the
remainilltt cooicies and ciouchnuts. ceu his parkin& lic:Xet waiiliated. ud
leaves mutterin" about the tmproducliwity of the .-izl&.
Freftldira S#rtiltt believes tlutt is a wisdom in maims
tbat covers any conlinlencY liicely to be faced by a trader. Belt;.mizl bar bad
two articles published. one of which atteml)ts to recuacile Abseac:e makes
tne heart foncier" with "Out of sight. out of mind" ;md the other cx-
why "Bircis ol a ieather flock t01etheT is Clllll1pietely CDIIIpatible
with '"Ea!tle:s don't fioclc.."His "Tboui!Dts 011 Mamns as Appiied 10 Tradia&"
IS the ciefinjtM. worit on the subiec:t ... d lw lormed the basis for the
chapter !bat follows.
4I9
420
COMME"-ITS
" 90% of our decisions are foisted upon us by others. The
wife, children, inlaws, neighbours account for 2/3 rds
of the decision making process. So it is not surprising
that most of the individuals who invest in commodity
market will lose."
- Robert Vichas , Getting Rich in
Commodities, Currencies or Coins
Before or During the Next
Depression. Arlington House Publ.
" Most people like to think it is more productive to look
at all the technical wiggle-waggles."
- How I Made One Million Dollars Last
Year Trading Commodities
Larry Williams
Conceptual Management
Carmel Valley ca.
" You want to know what the speculator's marching song
is? BUY HIGH / SELL LOW . "
-Stanley Kroll, The Professional
Commodity Trader I974
" Rules for Money Management and Timing
I. Start with$ IO,OOO
2. no more than 50 - 60% of equity
3. At the beginning of the month throw a
dart at the board until the box gives
you a trading recommendation.
4. Liquidate your trades once your reserves
have exhausted or at the end of the
month "
- Eugene Epstein, Making Money in
Commodities. Braeger Publ. Inc.
WHAT SUCCESS AND FAILURE MEANS
Success or failure is the just result of what U have done in
the past plus what U do now. Success carries with it a great
deal of responsibility. - to U'reself and to others.
WINNEP$:LOSERS 42I
Success too suddenly can cause shock vibrations. It can
whiplash U're emotions. It can make U "schizophrenic".'rt
can make U a new person. U are suddenly wealthy. U are
dreaming right away, - "castles - yachts, Rolls-Royces,
2-3 homes, - $I,SOO gold watches" - a barrage of lovely
things.
This sudden reverberation thru U're psychic results in an
astonishing alteration of personality. The success makes
U a new person.
The old personality is lurking in the background. It
cannot cope with the new personality. Sudden wealth evokes
sudden change. It will send shock waves thru U're judgement,
self-awareness, perception and appreciation of new and old
things.
Be cautious of new success. If U have made $50 - IOO,OOO
in the last 6 months to one year, don't get excited!
It takes 6-8 years to change U're mind's behaviour patterns.
Take at least one year to value what is happening and what
has happened to U. Appreciate what. success can do to U in
the future. Use success, - do not let success use u. Apply
the same discipline that created the success - to handling
it. It wud be very sad, sad, sad, if U're success aborted
because U are not used to success. Success should and will
become as free and non-ending as the air U breathe.
If U lose that $500,000 U're going to need mouth to mouth
resuscitation.
In the beginning, success is a heavy responsibility.
Sudden success to a loser results in his feeling that every
trade is a sure thing. It's the "King Kong" syndrome.
Success feeds on itself - just as losing does. If u can
handle success, U can handle anything and winning will be
self-perpetuating.
I do not wish to describe losing anymore, at this time.
It is disgusting.
422 WINNERS:LOSERS
TABLE OF WHAT WINNERS AND LOSERS DO
WINNERS
Patiently sits on his money,
waiting for the sure-thing
trade & once in does nothing
until he shud exit the market.
Has patience.
Keeps his trading and
at:t:itude simple.
Is happy to go either
long or short.
Doesn't listen to tips.
Always looks for unusual
pressures on the market.
Digests news events
cynically.
Never quits.
Accepts the things he
cannot change, has the
courage to change the
things he can & the
wisdom to know the
difference.
Let's profits run,
cuts losses short.
Price movement trader.
A loner, or at least
independant.
LOSERS
Cannot stand to have money
lay idle. Once in the
market he cannot stand to
leave the trade alone,
overtrades as they cannot
bear to be out of a good
thing.
Impatient. Overtrades.
Watches all the wiggle-
waggles. Makes everything
complicated, impressing
himself with his intellect.
Is afraid to short markets.
Is a news monger. Wants
everyone's opinion, always
buys at top of markets when
news is most bullish. Is the
last bull to buy at the top
of the market. Easily swayed
by bull talk & bullish news.
Never wins.
Is stupid, pig-headed and
a whiner.
Cuts profits short, lets/
losses run.
Price level trader. Buys on
days of price declines and
may short on price rises.
Greedy & follow the mass
type of trader. Follows
the dictum: - misery likes
company.
Searches our rhe loaded
trades.
Is foremost a controller.
Appreciates the game being
played in the spirit of
fair, good & bad bets. Is
affected by the profitability
of the event occuring and the
costs of playing the game.
Squares up to reality &
readily admit their
fallibility.
Hungry, intent to take a
turn & know there's no
easy way of doing it.
Invariably thorough assessors
of background fundamentals &
may discuss in full every
aspect of the market with
whoever they can.
Looks for the winning edge
of a proposition & analyzes
the human element of the
market.
Can smell fear in the
market & act ruthlessly
on it, taking advantage
of it.
WINNERS:LOSERS 423
Finds high-risk trades
for excitement.
Sloppy slovenly, lazy,
immature, irresponsible,
careless, afraid, frivolous,
undisciplined.
Probability of ruin doesn't
receive the cool reflection
it merits. Generally,
unconvinced that he cannot
change the mathematical
expectation if the game by
the way he plays it.
Have an overwhelming desire
to win. They persuade
themselves that they can
win & keep going & are not
through until they are
thoroughly defeated.
Greedy, stubborn, lazy.
bury their head in the
sand.
Listen to tips, - never
analyze them properly.
Born bulls and are always
looking to buy. Early in
their trading career are
happy enough to rely on
broker's advice. If this
is initially correct,
they think it is all too
easy & take over the /
decision making themselves.
They will then find a way
to make their broker a
scapegoat.
Is not even aware of the
psychology of the market.
424 WINNERS:LOSERS
Consider buying prices on
strength as well as on
reaction. Considers sales
on sign of weakness.
After a major upswing,looks
for evidence of a top
formation before selling.
After a major decline,
looks for evidence of
bottom formation before
buying.
Lets profits run. When
:hey begin to fade
remarkably, they
liquidate.
Will regard any pronounced
loss as proof that liquid-
ation may be in order &
will protect position with
stops.
Straddles only when
straddle itself has merit.
Will test a method before
putting money on it. He will
test advice, advisor service
or broker before following
recommendations.
Will prevent a good profit
from turning into a loss.
Buys on weakness.
Sells on strength.
Buys when prices seem
low enou gh & sells
when prices seem too
high.
Cut profits quickly.
If they begin to fade,
holds tight.
With any loss, waits for
the market to come back
to enable liquidation on
favourable terms.
Straddles a loss position
to defer taking a loss.
Will follow advice of
most convincing broker
or advisory report, &
if that proves wrong,
they will try somebody
else.
Will attempt to force the
good profit into millions
by next Wednesday, but
will casually watch as
profits erode.
( Have U gotten the message who the winners and losers are? )
EFFORT & DISCIPLINE
WHAT THE WINNERS HAVE
c.ip.tin e.
VISCI'PL1NE
IS REQUIRED
w ha.:t i..h l!.e.q u.bte.d
W ha.:t t.o do
Some cU6c.ipUnaJty
CHAPTER SEVENTEEN
If there is one consistency among successful traders, it is
their disciplined and concomitant use of a good plan.
It shud be evident that no chapter in this book or any other
can make a successful trader out of anyone, if he does not
commit himself to the art of discipline and effort. Luck
affect results, but the judicious, determined application of
one's trading plan will, nine times out of ten, give u
profits, and profits which U can keep.
The trick according to Robert Vichas, Getting Rich in
CommodLtlu, CuJVt.e.n.c.iu ol!. Coin6, ol!. Vwz..i.n.B :the
Next is to hang on to the slimy lucre that always
"slides and slips through our grasping hands". He is stating
here - " real wealth acctmmtulation during protracted
period of our lives emerges only from exercising. substantial
control on our existence "

426 EFFORT
Habitual plungers, apparently, invariably go broke. However,
can U imagine what happens to the astute plunger, who is
endowed with the perseverance and patience to wait for the
golden opportunities for which his system is tailor made?
And he plunges. He reeks havoc to the markets and walks
away with huge bundles of money.
It has been said of the 25% of traders who win in any given
year, that only 2% manage their skills with discipline and
effort, in such a consistant manner that they are insured
of re-appearing year, after year. ( Remember our
thinking 2% ? It correlates, doesn't it? )
U want to do this. - Don't U? But, U must apply U're skills
in a consistant manner, self-creating an effective approach
and self-disciplining U'reself, evolving a great deal of
effort and as a result, achieving the trading plan, and
giving U'reself huge bundles of money, like the astute
plunger above.
There are I68 hrs. in the week. Roughly 20 of these hrs.
( II.9% ) are devoted to making it. If u take into considera-
tion the total number of hrs. per week, and if U are a full
time trader, do U believe these 20 hrs. merit U're full
attention? Enough time remains in the other I48 to play!
If U are involved with another livelihood, - how about
giving IO hrs. a week? Just change U're trading style.
Approach the market on medium to long term basis.
The importance of training U're mind to adapt itself to a
trading plan and to claim victory follows from the fact .
that material manifestations - like money - always trail
psychological assumptions.
If U are afraid of the market, or if u are not aware of what
is involved with charts, then there's little way that U're
psychological make-up will allow u to adhere to a disciplined
plan, no matter how great U're effort. The trader will walk
in a vicious circle, - acting like a non-starter, - if he
bucks all logic, like Taurus the Bull. /
There's more than effort involved and it is discipline, -
knowing all the successful aspects of trading and sticking
to it.
If U are a loser, the degree of ineffectualness is already
programmed into U're psychological pattern. If U wish to
become a champion, u must re-write U're program, by-passing
previously learned habits. This part requires effort, and
even discipline, to develop the appropriate discipline for
successful trading.
EFFORT 427
The winner possesses tremendous self-control, needed to
over-ride the sterile habits developed and rehearsed from
many year's of reacting to his environment. -The winner has
psychological self-mastery. It has been said that successful
speculation requires, not knowledge, training or unique insite
into human awareness - but, simply self-awareness, and
mercilessly throttling temptation to lie to oneself.
The effectiveness of any system is dependant on the degree to
which it is followed. For e.g.:- U must learn to watch the
market developing - learn to sit quietly while others panic
over the fact that they are not in and be aware of the fact
that being into yesterday's success, cud assure to-morrow's
failure. ( Read the last part of the last sentence
again and think about it.)
u must bring a healthy skeptimism to the market in the
realization that well trained scholars with a deep and abiding
interest in the field, do not find it incredibly difficult to
disagree with one another. To such affirmations, U will
remember.that even a broken clock will be rite twice a day,
and the capacity of the human mind to resist the intrusion
of new knowledge is close to infinite.
Be aware that isolating, quantifying and successfully trading
the non-random elements of the trading data U receive,
requires unusual determination and discipline. The technician
must be aware that he is trying to get more out of experience
than is in it to begin with.
Commodity futures trading has the same large challenge - the
same small promise as any all-encompassing system, such as
exists in any other discipline - be it medicine, philosophy
or law.
The present state of the statistical art in commodity futures
forecasting warns - don't look around. something's gaining
on U. It's the random walk theory - the new " King of the
Hill". Those holding that random walk model describes reality
better than any other model do not say that the trader
make money. - They merely promise him the fight of his life,
after paying for the privilege of trying. If he's going to
have the fight of his life, -if the market is random or not,
- then the trader is obliged by the mere nature of the market
to seriously apply himself to it.
In chapter 14, the all important concept of
management is thrown at u. -and, I mean thrown.
If the trader lacks tae discipline to set objectives and to
risk limits and to act when either is reached, he will be
stullified by the that befalls many traders - it is
428 EFFORT
the that can be certain, if he adopts
only a rationale trade selection and intelligently follows
the elements of his successful plan. Part of discipline is
one's involvement with money management. It is incredibly
critical. Talk to any reasonably astute person in the
business ( almost any business ) and he will agree with U,
that the discipline of money management is just simply -
essential.
I'm going to sbow U something. Do U know what
the market is like? Some say it is a maze. Do
u know bow to get out of any .maze that exists
anywbere,anytime,anywhere? Discipline will get
u out of any maze, & in this illustration, keep
one band on one wall at all times. ( That is
all u need to get in or out. ) Try it. See
what it is like to "feel" discipline.
I
I I
r--
I t l
j;;;'ftT"
J-
- r--
I

J

1
-
J I
j
-
I
WHAT TO 00 ( cii..o c..i.pline )
U my friend, are the best protector of U're wealth. U and
those with whom U align U'reself - all those who u permit


-t
EFFORT 429
to in U're world. U are the centre of U're world. U
have the rite to select U're friends and associates and U
will be successful to the degree U're able to direct and
influence them. - not them U.
U must discipline U'reself to be aware of the effect others
can have on u. As with any elements of self-mastery, U must
discipline U'reself to be careful where U trade, how U trade,
with whom U trade, whether u drink alcohol or not, and when,
and how u keep U're physical being in the shape that U feel
is required to evolve the discipline, and style to which u
wish to adhere U'reself. Do not drink during the week.
Do not put commodity trading down the list from U're other
job or going to the theatre, drinking or socializing, or
drugs, - at least put it at the same level as U're main job.
Do not stumble over the simple
11
mole-hills
11
that exist in
our lives.
Take it easy. Trade simply. Acquire patience and realize that
U cud be U're own worst enemy. Lack of patience and inability
to wait is the largest single cause of losses.
Winners train themselves to reject thoughts of losing, - at
all times. Most people fail to take control of their own
lives. They let others make the decision for them. They let
a new habit creep into their mind so subsequently they let
the bad habit rule them rather than control it.
It has been said that 6-8 yrs. are required to replace a bad
habit with a desireable one. ( 6-8 years !!! )
Strive to rid of bad habits and the bad habits of
others. Restrict those that orbit in U're world. If U find
they have bad habits, U must get to know what these bad
habits are.
If U seriously desire to accumulate large sums of money - U
must be willing to act in a courageous, decisive, civil-like
manner and this disciplining with the aforementioned
factors. Discipline U'reself also to realize that success or/
failure is the just result of what U have done in the past,
plus what U do now.
On failure, the successful trader gets up, spends a few days
healing, re-affirms what he knows and goes about the business
of adding to his store of wisdom, realizing that the quality
of persistence looms large and is virtually irreplaceable.
Simplify trading to one type or pattern and see if U are
successful with it, and trade only those markets in which
430 EFFORT
U have consistantly made money.
u have to organize what U do and then be able to do it when
U don't feel like doing it.
U never want to be in such a hurry that U can't wait around
for the few markets that are good. If U decide on medium to
long term trading, trade them quietly. Sit back and wait for
more. Stanley Kroll stated that
11
it was never his thinking
that made big money for him. It was sitting,- sitting tight.
-waiting for the right moment, - striking, - sitting and
waiting until you take profits
11
There is no better method of self-discipline than the
embarrassing and unalterable testimony of errors of judgement
plainly inscribed in U're own handwriting ( see chapt.I3 ) .
From these notes to U'reself - success will evolve.
Discipline U'reself to duplicate U're successes - concentrat-
ing on what constitutes U're success (Dru1lll!10nd's Law). I
suggest to U that U discipline U'reself to analyse what U do
right, - ( not what U do wrong ) Learn from U're successes,
not U're errors.
Don't take profits quickly for fear that they will evaporate.
Don't be reluctant to take quick losses. U must do the opposite.
- don't limit profits, and don't let losses accummulate.
SOME DISCIPLINARY RULES
Don't overtrade. When in doubt, stay out. If U wish, trade /
with the trend - not against it. Get information on the
current market picture - use charts as an additional tool.
Decide on a trading plan and follow it. Do not overtrade
U're margin. Have a " mental " risk limit for each trade.
Ignore well-meaning, but irrelevant bad advice. Remove a
portion of all profits from your accounts. Be slow to
change as long as the system U are using is fertile.
Duplicate a profitable system. Experiment cautiously, until
U are able to command U'reself to do things that U shud,
but may not want to do. Develop deep calmness. Increase
EFFORT 431
U're receptivity of intuition. Know U're sources of profitable
decision-making and refuse to talk about it to others. Focus
on the loaded trades and do not stray into marginal, or even
bad trades. As mentioned above, write down on a piece of paper
U're reason for making the trade. Once the reasons are there
in black and white U can quickly see whether U are crap-shoot-
ing or not. Don't involve U'reself with high risk trades,-
they will nickle and dime U to death. The only big money to
be made is by sitting tight on good positions. ( Even if it's
only for a day or two ) . Observe U'reself and the majority
from a disinterested and detached position,- which is a
difficult step to accomplish. Don't walk into a brokerage firm
and expect to get rich by Wednesday. Learn to look at the
market U'reslf. Study what U can and analyze
positions to make U're own decisions. Have a hobby to occupy
U're time, as cums from quietly picking the good markets
-quietly trading and quietly waiting for the market to
offer profits. ( If U have nothing to do but watch the "ticker"
tape, trading is more difficult ) . Do not anticipate reactions
to price moves and do not make trading decisions based on
margin calls. (Do not meet the margin call- get out!! )
U shud not becum entrapped with an ecstatic framework. U must
discipline U're thinking to comprehend as many relationships
as necessary - to determine whether the price of a commodity
is headed up or down, - but don't let this affect U're realiza-
tion that once a plan has been formulated U shud adhere to it
U decide on changing U're style. ( The power of self-
control and trusting in U'reself, after thorough preparation
will lead u to halycon days ) .
The above is a clear-cut verbiage, by way of undulating clear-
cut suggestions to enrapture U're grey cell matter ( U're brain),
if it hasn't by this time been freaked out. It is presented in
the manner of requiring U to be aware of the things U have to
remember. God help u ! This book is full of them. But, one
rule is simple, - U have to have discipline to get to know
all of them. However, the one starting advice is keep it
simple ...... this applies to every aspect of trading/
Some day the above paragraph will appear to U as simple. U
may be able to rhyme it off verbatim, but this takes time.
I do not hold to the fact that "loss is
inevitable". I like to think of winning,
and not worry about losing.(Drummond's Law)
But., but. the above words were spoken by an
international poker player - that loss is as
essential factor in the game and that it is to
be controlled. A winner is foremost a
.._I
432 EFFORT
EFFORT
controller. He squares up to reality, readily
adnUtting their fallibilty, but he is well
disciplined, hungry and intent to take a turn.
If U're going to be disciplined, at least be
disciplined about U're losing - CONTROL it!
WHAT IS REQUIRED
Predictive skills are not easily bestowed to the casual reader.
They are acquired through work, experience and delving deeper
and deeper into the thoughts of U're mind and how it interprets
what makes the market tick.
He who wud accomplish little,will little; he who wud
achieve much must sacrifice much; he who wud attain highly,
must sacrifice greatly. The market does not habitually shower
loose dollars on the casual player who p2ays the game.
The chartist be ready for thorough study and hard work,
and learn to develop experience. It is an art because of its
skill, and the finesse and experience of the technician are
without doubt the essential ingredients in joyful trading.
The must constantly check and re-check. He must
apply himself affectively to the market, and this requires
diligence in everything U do with U're life.
Centuries ago, Plato told all of his students to maintain
their health and physical condition at levels if
they were to be among his best students. My friend,U're
going to have to get up at 3:00A.M. and jog and give up all
booze. ( I am partly joking. )
I do not drink during the week. I do not
socialize during the week. I do not go to
bed past IO:OO P.M. during the week.(I get
up at 5:00 A.M.).I jog, I drink Perrier
water, I'm a health food nut(but I luv meat
& enjoy French Cuisine - but only on week-
ends). I make my own bread(with 2! grains).
All of this requires effort, but in time,
one becums well-disciplined & enjoys it! )
EFFORT 433
So, disipline is required and this requires effort. U can't
have one without the other.
The trader shud bring a healthy skepticism to the market
place. U have to learn to withdraw U're attention from
all distraction, whether they happen to be the hub-bub of
telephones or someone who wishes to impress U with his/her
knowledge, of what prices are doing or going to do.
u must require U'reself to attract the right information and
realize that only accomplishment comes from practise. U must
put forward great effort and not be way-laid by the psycho-
logical permutations and expressions thereof, by another
trader, who wants to tell u what he is doing. - take it with
a grain of salt - it will only clutter U're mind. Predictive
skills are not easily bestowed. Make U'reself realize that few
trade everyday and emerge winners. And, 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.
Work on the capacity to develop a winning style,
and resist deviating from the style that customar-
ily wins for U. Sticking to a winning style requires
patience and perseverance. Force U'reself to realize
that there are no short-cuts to trading success, and
no substitute for experience, knowledge and hard
work. Force U'reself not to act too quickly when
U're trying to make money, and too slowly, when
U' re trying to save money. The opposite is true.
RESULTS
U're thoughts & action will crystalize into circumstances
of wealth and financial freedom.
If the task committed to and the effort and concomittant
discipline fervently applied, this will enable U to becum
a successful trader and will encourage U to pursue U're
activities and U're trading more aggressively ..
If U play U're hand correctly with a plan in mind, U are
likely to end up with more profits than U anticipated.
434 EFFORT
u know the old saying, "the poor get poorer and the rich get
richer", -well, it's true. But, in this day and age, partic-
ularily if it's not inherited, it's diligence
and hardwork. ( And in the commodity industry, it can be
achieved honestly.) ( Those who inherit great wealth and are
not diligent will find that their life and wealth cud be
frittered away. )
Remember the big bull markets of 73-75? Well, those with
discipline and effort traded with less frequency, rode the
trends, changing their trading styles to the new forces
which entered the market. that didn't were whipped.
Those that had the required pistache, grappled the market
with both hooks, having the discipline to attack the
market as befits a pro. They discounted official reports
and proclamations made for genera 1 public consumption.
( They took a broader view of the market, in fact, an
view.)
Learn all of the above factors. In fact, learn everything
in this book. Trade, but also take 6 mths. out of U're life
and read everything u can, until U've gone crazy. Read 'til
U know. By all means do some trading, - but learn. Apply
U'reself. Get into it. Get with it. Some day with this effort
and resultant discipline, the market will be of much easier
pickings, altho' it will still require a great deal of U're
effort.
Do u know what it's like to write this damn
book ? Getting up at 4:00 A.M. everyday. I
want to trade the market. I've taken three
months off. It's hard! But, I enjoy it. I'm
getting the greatest kick out of it - almost
more than anything I've done in my life. I
cud make more money in the market during
these 3 mt.hs. , than I wud ever dream of getting_.--
from book royalties.(if it's ever published).
It is beautiful - as beautiful as what comes
from hard work_ in place,- and that's
making- money. One alteration please ..... .
almost as beautiful. I luv making money - it's
fantastic. - the fruits of my labors - great
stuff ! I don't enjoy so much having the money,
as making it. Money is good for doing things
with. " Money's what makes the wor 1 d go round".
and, it's my money I want to use to grease the
world. Too bad I can't print my own money.
CHAPTER EIGHTEEN
self awareness
THE HOLY GRAIL AND THE MOST IMPORTANT PART
OF THIS BOOK
S U.CC e.6.6 tl u S pec.u.1..a.:ti.o 1'1. IL equi..Jte.o
Wha..t 1mpa,Uw .:the Vew..i..on Ma.fU.ng PJtoc.e.o.o
Wha-t Sel.IJ- ex.a.m..i..na..t..i..on W..i..U. Reveal
T .IU1..r..6 - a.c..t.<.o n.ai. A n.a.1..y .o iA
Beha.v..i..ouJtal.. Slu:Lt6
F ea.IL
SUCCESSFUL SPECULATION REQUIRES
Most people fail to take control of their lives. They let
others make the decisions f o ~ them. Most people feel that
there is little they can do to change their lives unless
the option to do so is forced upon them. They continue to
ploc along in their old ways.
Granted, most people do not have the option to change their/
lives. But do they? Y ~ y a person has grappled with his
environment and changedit anc have becum alive with their
new life. They either do it voluntarily or some personal
or social disaster sweeps them away from their old ways,-
to some new found existence.
However, most people just trudge along and even let new
bad habits creep into their lives. Subsequently, they find
it easier to let the bad habit control them, rather than
they control it.
rc
435
..:;36 SELF
Consequently, unwanted habits tend to change slowly. It has
been said that 6-8 years are required to supplant a habit
with a new one. It is particularily hard to supplant a bad
habit.
Robert Vichas feels that " most self-imposed habits result
from fear, greed or imitation". 2% of the population think
for themselves. I2% copy the 2% and the 86% believe what
they read and hear and do what they're told.
William Morris,"How to Get Rich Slowly, but Almost Surely"
Reston Publ., suggests that" self-perception, self-awareness
through researching one's own attitudes and emotions may be
the real secret of consistent financial efectiveness ". He
claims that this is an essential pre-requisite to getting
rich. To that I wud say - at least. Morris advises that an
investor probe his inner feelings in order to determine the
market's influence on him.
Successful speculation requires not knowledge,
training, or unique insite into human affairs, but
simply self-awareness.
U must know U're strength, weaknesses, and merciless-
ly throttle the temptation to lie to U'reself. Any
approach to the market is dependant upon reality of
human weakness. If the trader can becum sensitive to the
market's effect on him, he can effectively apply his method
of trading.
Every trader needs to insulate himself from all psychological
pressure. Since many psychological facts are psychological
quirks and are not conscious, they must be brought out into
the open, whereupon the task of controlling them is easier.
I know of one trader who feels that all speculators shud have
an accounting with themselves everynite based on settlement
prices. This is a hard task, but is one way to approach the
market in the context of appreciating U're psychological /
impact towards successful speculation.
The winner must train himself to reject thoughts of losing at
all times. He must concentrate on winning (Drummond's Law)
He must forget about his failures. He must becum aware, alive.
Alive towards himself and aware of his environment.
It has been said that the majority of people are subjective
towards themselves and objective towards all others. The real
task is to be objective towards oneself and subjective towards
others.
SEL!' 437
Futures trading forces those who undertake it to examine
themselves in a very careful manner. They must test them-
selves to see if they can live in r e l a t ~ v e peace, especially
with those two constant companions - fear and greed. He must
cum to know himself more thoroughly than most people care to.
WHAT IMPAIRS THE DECISION MAKING PROCESS
Well, old habits will stop U dead in U're tracks. There's no
way u can be successful in any field if U allow self-induced
habits such as fear, greed, envy, jealousy, lazyness, -what
ever, to impair the capacity of U're brain to cope with
deciding whether ornot to apply, for example, U're specific
trading plan to the market.
Let's say U have just applied U're technique and it is
working and u suddenly develop the King Kong feeling -
greed takes over - U're mind blows fuses left and rite -
U have pyramided like crazy and oh, ooy - just as the market
is topping - U're totally committed to the market and wham!
- one week later U're bankrupt. u allowed emotion to catapult
U'reself beyond all bounds of objective reasoning.
Let U're brain run wild with emotions in the luv-bed. The
market ain't no place for the release of emotion.
When U win - stay calm. When U lose, stay calm. When U commit
U'reself to the market, stay calm. Do not allow U're brain
tissue to be shackled by the debilitating effect of emotion.
If U have had a fight with U're wife, stay out of the market.
If u are hung-over, stay out of the market. If you are on
drugs, stay out of the market. If you are not in good to
excellent physical and mental shape_, stay out of the market.
U're brain is only as good as what it is attached to and as
it lives off its host, its host must be in keen shape.
Being in good shape includes the fuel presented to the host,
in the way of food, air, climate, and impact of the environ-
ment on the host's emotion centre.
Psychological studies have shown that pressures, tensions,
anxiety, and fear seriously impair the decision-making skills.
IB
438 SELF
U may perhaps, tend to be greedy, over-eager to succeed or
rush too quickly into some risky speculative scheme; U may
hold on too long, ...... U will then act in a self-defeating
way.
Old, bad habits are constantly being re-inforced. Alto' U
may strike to remove them from U're life, U'll find that
they gradually slip back and these old and more firmly
established habits re-assert themselves.
One of the worst old habits is fear. It absolutely paralyzes
the decision-making p r o c e s s ~ Fear will cause even the most
brilliant to doubt his abilities and trade from the wrong side
of a market. Fear and a high degree of risk aversion will cause
a trader to react emotionally.
As Tagore said, " Pessimism is a form of mental dysomania. It
distains healthy nourishment and indulges in the strong drink
of denunciation and creates an artificial rejection which
thirsts for stronger draught". My friend, can U see .what prob-
ing the aspects of what affects the decision making process
reveals ? All of the dreadful bad habits that occur to nearly
everyone's psychic make-up, all these old bad habits are there,
there, there, and no one who is a loser can hope to make lots
of money if he still allows these silly annoyances to continue
to plague his enjoyment of the market, and what life has to
offer. And that is that
One last suggestion. Be wary of allowing U're knowledge and
appreciation of the market to increase until U know so much
that U know too much. U will only then cum to realize that
U can find an explanation for everything. " A speculator's
bag of tools is never over-filled until the noise of
information systems clogs the channels of clear cogitation"
- Robert Vichas. Remember the caption that ! want to put on
every page, -Ke.e.p -i..:t .6-i..mpf.e. !
WHAT SELF-EXAMINATION WILL REVEAL
The commodity markets bring out the best and the
worst in all of us and only by succeeding, we not
only become better traders, we also becum more
disciplined people. We look at life differently. We are
more tolerant of others since we have failed time and time
SELF 439
again, before we successful. We becum less concerned
for money for money's sake only. We take it as more of an
indication of our abilities.
Self-examination may lead U to the realization that U some-
times act in a self-defeating way. U may hang on too long
because U're greedy or eac;rer to succeed, or U just cannot
leave the market alone.
When the commodity trader brings his psychological make-up
into the open, examines in a very careful manner,
he must first test himself to see if he can live in relative
peace with our two constant companions - fear and greed.
Self-kpowledge can show things within ourselves which we wud
rather not see but which once aware of can lead to an inner
peace, not available by any other means.
The mature trader will recognize that judgement cannot be
reduced and it can never be eliminated. U must never rely on
solely technical approaches to the market. Any reasonable
self-examination will make U aware of the potency of U're
brain. One of its most potent forces is its capacity to
understand. Isn't that what is supposed to make the human
species so brilliant? This little brain of ours has the
amazing capacity to know itself. It goes thru a decision-
judgement making process, before coming out with a resul-t.
Only thru the capability of its facilities grown and
nourished by discipline, and effort does it have the
capacity to know its host, and employ the best means to
satisfy a happy return to itself and to its host.
( Remember this. )
( Remember also that: ) Thoughts of action will crystallize
into circumstances of wealth and financial freedom, beyond
all expectations /
One last personal comment : - I have for the last 3 years
delved into the subject of psychology. I have spent hours
in the public library, trudging tbru psychology books. I
have becum involved in group sessions. I have becum involved
with U name it, I have done it. I've
even filled my bath tub to the brim, jumped in, candles
glowing in the dark, bottle of champagne, caviar, - all the
things I like - sound of the sea roaring thru my stereo
system - stayed there, my mind flowing back into. _my life - _
I8
440 SELF
almost to my mother's womb- I was able to see my "crib",
I saw something that I threw out of my crib - even the room
I was in -
Thru all of this I've come to know more about myself.
I've cum to know my ultimate weakness. - I am not a realist.
To have a goal of making roo million dollars in commodity
futures market isn't too realistic But the funny thing
is, I know I a ~ doing it ~
Also, ( in case U're interested ) I do not know what is
"good' or "bad" . I presume that my personality is best
described as being "romantic". I won't mention any malajust-
ments I may have.
Now, I ask U ! Cud U put U're basic weakness in print and
expose it to the world ? Or, even know what U're basic
weakness is ? It takes time and a lot of probing ( I suggest
two years), but, when U know O'reself, U will appreciate
how easy it is to be honest and open about things. The only
thing U will hide is U're style and approach in making money
in the futures market. - U will never let anyone know what
U're up to. Remember, when u enter the pits with U're orders,
U're dealing with enough market activity in that space and
time without being "bracketed" by people U know.
TRANS-ACTIONAL ANALYSIS
Some authors estimate that 90% or more of our decisions are
foisted upon us by others and accounts for 2/3 rds of the
imputs into our decision making.processes.
Robert Vichas :- Getting Rich in Commodities, Currencies
or Coins, before or during the next
Depression (Arlington House Publ.)
states:-
" Some decisions are forced upon us by legis-
lative decree - taxes, prescriptions from
vitamin A to hard drugs, seat belts, census
information, conscription, investment
desisions etc."
SELF 44I
" Most people are duffers, so it shud not
surprise us that most individuals who invest
in commodity market3 do lose. The fact that
they bungle has little to do with commodity
speculation. They are willy-nillies. They
have been paying the table all their lives."
" It almost seems as if there's a conspiracy
to develop and sustain a can't do attitude
in individuals - pressures from friends,
neighbours, relatives, social contacts and
society in general create a posture of
immaturity."
Many analysts do welt in obtaining, deciphering and analyzing
information. The problem, however, centres on the trader's
thinking processes, which are sometimes coloured and dominated
by motivational factors that may have their roots in childhood
experiences.
Thru self-analysis, the trader will discover the nutritive
source of these adversaries, and tear them out mercilessly
by their roots.
Larry Williams states that " making money in the market
presumes a difficult psychological problem to many people
for two reasons. First, a natural reaction to news - it is
invariably wrong - everyday logic does not work in the
market. Second is directly related to our own and
early childhood motivation".
I quote with the
kind permission
of Tewels,Harlow,
Stone, authors of
"Commodity Futures Game. Who Wins,Who Loses,Why!"
Publ. McGraw Hill
the following treatise, presented here for easy reference
on the following three pages:
18
442
SELF
TrcutlCtJonci cnaius1:. Ont svstemati: aoproach th.t m.,. $erve as
expianatory mociei oi. tile roie oi. ieeilngs thought ancl mteraction
is in a reeen: poouia: stuo:iy." The mocie!. cn,aruo.llr cieveio!>eC
by Erich Beme. has n:.:nec t:ansactionaJ :uWyus .. nu is b.ucci ur.
the premtse that in person there are at least three difierent peopie-
the Parent. the Aciult. ll!lci tne Chiic!. Tbe Parent is tile reeorciing tn the
bram of tht! tndiviciual's lii'St five yean. The <iata in the Parent are nDl
edited and permanentiy record ali the veri>al and nonverbai acimonmuns
that the chile heard anci saw m his own parenu. The repla,- of the Parent
ts a poweriui influence throughout eve!") incitvidual's life. md the unpera-
tivcs pven in the e.rir yean Cllll De a burcien or a biessiiiJO, depencimst on
whether they have been wciated by the Aciult. The Child is the bocir oi ciata
of internal evenu that w.., reeorcied when the little person wa> ciependent
and clumsy and b.aci no voeaowary to speak o!. Because uf this condition.
l.be Child i.s composed of feelings and emouons. Ha:ris maiatains !.hat the
Adult deveio!)l as soon as a penon i>ecns finding out io: himself what is
different ai:tout life irom the concept" of life in his and
"felt concept" of life in his Child. " Tile Adult relics on a "thought COftCC1lt ...
which eu..Unes and u1)ciates the data from the Parent and Child 10 cieter
mine whether it is true and ;appllcoble.
It is important for the tracier to understand tbe implications of the Whit
= ouote at the bestmntn& of the ehaoter. Just A> tbere are im110nant
rchnion>hil"' tkwt Mte ex\crnwJ \0 the U'ildcr, o( whic:h meay i,.,_ quiln\ ,_
fiecl .:mel l.:amed. &here :JJ"e tl1.:11 take tnt<:nually .:nul
m.:tr be involuntilfY as well. The betw""n the l'.:orunt, Adult,
;and Child ;are lraciie,' .. ncJ Lhc totiil !)t:n.on may not ;alway> whi<:J.
J>ci'>On 1> I(Otnst to '""!-'ODd to 11iven
One ul the basic re:&>etl> ior thc idcntlly uf hi> Purellt,
Adult. and Child is illu.tr.:ued in the u-adcr,,..,.o lor""'"'" WIM:na
t:nten :a positiun. but dOc:. not IJliin an objective .a,_.d a :.tup. the plltl'l b in-
cumplete. When quened about thc omi>.10ns. the u-.:uier IIW)' re1-1iy
Willen it." The problem with "watchinc it" i> that it is nut"
Adult in the uaticr.lt the tr..de aoc:. b;oolly,tbc: amuun1uf...., tuk._ .. ,
.. -ill probably be cre.:ater thltn &he amount ti1.:1t wuuld b.:lvc 111ken 1111<1
the reqwred the trader to t..Jke the time to make "
.:oboutl.be value ul a COIII!tlcle pi11Q.. Jwol :&> i< i> LmJ""iblc tu lc:&<:b naviat.:t
tion in thc mid<lle of a llorm. it is impo.>ibl.: to build "" utolinoum JIUan in
the n1iddlc of" b.:ad loss. The Adult. funcuun11111.,." Jruboobility ... timattnr,
know that loucs must be piiUIIIcd in fld,anL-c. The Child wunt.5 the feelin.;
of assurance that everythine will be all without &he t>IOJn. The Chilo!
wants no truc:k with unsavory CODSCQIIIOIII:t,>. The Parent noi11ht ;et in tloe
i>y <ruouoc ma>:Jms appropnate 10 &be $UCh w. --s...,er n-1 "
m11rgm c.:tll" or some other ruie th.:tt will be by or -uu11ht."
Havin" plan oripl\lltt:d b) &he A<iult the trOJdc i. vittll $IC)l to
success. The trader must, huwever. reco;nize tb.:lt tbe telllt>t.:auun 10 tam.,..r
with tht: plan is founcil in his Cbiid and it. "'"! vuinurabilitic..
The Child is responsii>le for pullinc out" >IO!M)rder ju>t bo:lure it u elec:led
or wishin& to cancel an obiective beat use the llliltket is "IICtinlt well.- Such
direetoves from the Child ma)' be secn tn orrien marked .. ..,nee! when
eio>e" or until
The "'Y tn which the confronts re;aiit)' cives " due 10 hi>
eventual suoc:ess or Iail .. re. Tbe tracier wtth
... cl .. h is 1ooci at to v11rious market urul wndi&ions. He
learns th:>t stOJo-ioss orders mut be pj.,.,.l orre\'OCAbi) ur the <tuestion bo:
comes not wnthwr i>e will be rutned but ,..J.,tn be will be: ruined. The u
ceuiul u-a<ier bas ieamed \u c:ur>e wtth hi> of !Child!. pnm.ariiy
that what i> Willi ted '-can be: iu>t ur dented. He I&IUi contrnllcd
his teehncs I Child!. for he rCtliizes tb.:lt " vi<:llm l)i f,...r by c,...J
c:an'bc lost to &he s&ultific.ounn of lur much but ""'"" to ensure
hule.
unsuc."'Ce5SfuJ tradw L."UtJCs watb untJ,cw.wu nuaiity iu u diffetf'Wfll
w11y. He dues not depenci on hinow:lf bul ,..,,1,...,. un
ur ch.:tn&ing the """Y he views He t""d In he ..,.;.,.1iwly ,_, .. i...,
antl retentive: that is. he lctJ<i> to..,.. ano.J ,..,.,..,..,b,:r "lwt lit> hi> 1.-i. .. ,.,;
The trao.ler in this >irtwtiun ;, hy hi> Child: fur
e&am\IIC. m<Kl cao;ily 'Y"""'" tretMIIuUuwitl& ur utla.:r
wi>e. will hve dollar tftuh llfJIJnm<:hing SU !lfOfit. "'"I
50 percent losses. When commios1oru "nd t:xeeution cosu are subtl'llaeci.
the nonn:U expected path of such a traders cap;Uil is eende downw..m
slope tb..t terminates considerably shon of his c:11>4eity for self.Oeception.
If such trader elimiutes but one loss that a newly deYised filter would
not only never have permitted but would haw. reversed lor 11 profit. while
indudin& profit that was virtWIUy certain beiore a.n unfavor:&ble ne"
item Clused i1105S. his record on the tracie> becomes seven profits ud three
losses. Only " stripped of all vision. he re&SOJU. Clll quit on a system
that is 70 percent accurate. 'I'he ca,..Ory of the donWwlt Child lor mis
interprenng realiry is vinually limitless.
:-.lo maner how successful a trllde:- becomes. be stiU firuiJ it diffu:ult to
liw. in the real world. Where members of the animal kingdotD must adjust
to the extem:U environment on its terms. man can manipulate realiry over a
IJroaa rllllgc by the use of symbolism. A trader must realize th:lt desirable
qualities can be bestowed by words alone Allci that such words can be al
iixc:c:i more readily to the oa::won tlw> the OCCIISion can be IDOdiiied to fit
the actual DIC&IIing of the words. A trader does not cnioy bein; wrong. Be-
sides ruining bis credit being wrong does not build a good image
of the self. Yet mistakes must be constantly perceived Alld remembered for
no other reason than that under no other conditions can they be controlled.
Successful trading is reached. if at all. by toUowinc a series of successive
approximauon.. E.arly in the proceu ienorance is the ruie. Jlnd the trader
knows that he knows notbi!'l: Followinr; a sometimes Ions; lll>llretlticeJhip
in which the '\IOC&Duiary symbols are cquired. 11 false s.ense of competence
spreacls like 11 thin veneer and serves to entertain friends with the 11libness
ol skilis not yet acQuired. though seeming to be. Civen enough time.
p:11ience. :md the successful trader enters into thllt third
state 1n .. -hich he beiieves he knows and no more. In this stote
he is "inner directed" ..nd not "other directed .... The "other.Oi.rected"
ma.n reacu to what others beli....e about him. His roles and val11005 tend to
be cierived from what his peers expect of him. The "inner.Oirected" mac
holds to the Adult coune he lu&s set ior hinaelf. R:ather than beinc solely
rad..r-equmped, as in "othero<ilrecuon." the man reiie.
on a gyroscope that u not :ot the mercy oi whim or capnce. The successiui
ll':ader's CYfOSCOpe as fmely tuned. He re..hz.,. th:lt Without a weii.Oeveioped
he faces the same problem as the Cc:nnan Comlni&Jid ia World
ll. sn which the invasion of Sritun WOI.) pi;annecJ but never execuled.
whereas the Battle o( Brit:un w.,. execut..C but never r>lanned. Mmly
tri!de."S never move beyond the point uf UeVCiOJ>fl'lent Where they tend
to execute lracio:s tb..t ure never t>i:mneu or pllll! lr-.>clc:> lh:tt are neer
executccl.
The must uncierst11nd thllt dac:isions with luvol'llble c:cmsequences
tm..Uc hy the A<iult) huilt 1nto " "l'l>rollch only if they are
consciouly reduce<! to prine>t>ic> w1th lfNCI Traders
.
18
SELF 443
444 SELF
who buy or sell on 1mpui)oe finC "ooner or .. bow
are 50-SCi: there no "u:niiic:ant &:nrTeUallon
between good feelings and proin .. bie trades. Therefore 10 the rc:-
sult.s of emot10n::a.i tht: successiul trAder must be urc:u.srctl In gve
up wh:lt he: i1ncis most tn anterpunun.aJ
good feeimp Th" propcru;rt)' lor the tr..Uer to >uch cJ.,...,,..,...,j""''"""
b h.is:h. and is a constant tem'PUllaon 10 S$-Jill out uver th.:
of the weli..iehnecl role oi tr..ding. Good will come ..0 " ,,...,11 uf
the successi.,J J>lans that the A<iuh J&nd eae<.'\lte>.
The broker is eq..aily well iiOvi>ed to "ncierst:ond thlat he l"'> Jlecmie
lor M client. not j"st one. Perhaps the "suitJ&biliry" Nle 5huu.lcl incl&Kie not
only a financial but a behavioral matclMop ..s well. The fin.t nrlc of wrn
munication ts that when stimulus and response, in the P-A..C >Cn>e. make
Plll'llllel lines the lr1111S11Ct10n is camplemc:ntary ,;md gar wntinue in
dcfiniteiy." In other words. " transaction be""""" bNkct ""d cli.,nt nr11y
go on tndcfinitciy a. P..,.entParent. AduhAdult. Child..Chilcl. Parent
Chile!. Child-Adult. anci so on:
l. /'areru./'aJYnt
CI.IENT: Those people you have on the lloor alwaY> get the worst fill>
)>Oii>ible.
IOOUI\: Mllkes you wo'nder 'where it wiU All end. dOGn't
2. A.dult..Adult Trvuacnorr
CI.IENT: I don't know whether to buy the bellies here or wait u.ntil after
tire report.
uor.u: 111 wire Chicqo wtcl 5c:e if they lillY infumuuiou un e&IICC:tll
tiuru.
3. Pal'ftltChiJd Trvuoctimr
CUEHT (Parenl!: I see where tbe lhCIiUK overa11c in r.IJ&y -
crossed the lO.Oay moving llvcraee on the IIP"tde yesterduy unci "" I touk
a lon& po5iuon. It's off ;1 lillie tociay but the wc:elcly c:h:trt i bullwr 1111d
wi>en the weekly says up, you j!>it.don 't WOfTY .. Lruut Jill)' uclv.:n.ity in the:
dwly signal. e1oec:Wily tbe time when the"""""""! t"'nd i> up. In
fact, I think 111 scalp about JO 1>0ints on thc: u.,.icie IOdu)' 11nd louy it buc:k
on Thursd11y momin& alter the WcdPCS<ioly lmOJ&k.
ooou. (Child): RiJihL .
.;. A.dull-l'ol'ftlr TroniGCtaon
c:ur:N'T tAduh ): I know I huvc truuble the "'"" iu when the uwrkut
puurly. J want yuu to tnvmu.e n1e yuu wuu'l listt, ... , I try In
pull out t hc top.
CP:lrent l: I won't u.ny s1uu for yuu dunn.: m .. rkct la,urll.
"IDic!.. liP
11
iMia,a A. Hama.. J"m OK. to .. ,. 0.. * 1\ow. li6'7.
"/Did... o. 25.
I am very grateful to the above authors in allowing me to
print their comments on transactional analysis. They portrayed
the concept far more succinctly and effectively than I ever
cud. I alse feel very strongly that u must study transactional
analysis, and accordingly, the purchase of the book "I m O.K.
You're O.K. " by Thomas A. Harris M.D. by Avon Publ.,!?paperback
(recent price $2.25), wud be a good move.
The use of transactional analysis towards releasing U're self-
awareness to creating self-awareness will release U're psychic
for the halycon days wherein u shall be guaranteed profits in
SELF 445
commodity futures trading. Of this one factor I am sure, -
if U becum a student of transactional analysis U most
certainly will consistently reap glorious profits, year
after year and it will change U're life. It is one of those
things that can set U up for life !
BEHAVIOURAL SKILLS
One speculator I know has $50,000 in his account. He trades
only $8,000 and holds the rest in reserve. He will be around
a long time.
The prudent speculator occasionally withdraws from the market
to rest. He has the ability to sit on cash for a while. He
will never carry an open position into a major report. The
successful trader learns the causes of success as opposed to
the reasons of failure. Sorting out U're good and bad
tendencies develops deep calmness, increasing the receptivity
of intuition. Successful speculators know the source of their
profitable decision making. The importance of training the
mind to claim victory follows from the fact that material
manifestations always trail psychological assumptions.
Substance is formed by individual
and collective attitudes.
God Grant Me the Serenity to Accept
the Things I Cannot Change, the
Courage to Change the Things I Can,
and the Wisdom to Know the Difference.
Get two large pieces of paper. On one list the
behavioural skills with which u feel are U're outstanding
traits. Of course, on the other put U're behavoural skills
which U do not like.
Are u good in talking in groups of people, or are U better
in talking to just one person at a time? Are U pleasant or
do U smile artificially. What are the things U do right?
What are the things u don't do so well? When U ask U're
friends what U do rite or wrong U will be surprised how
little they will tell U, unless they are naturally open
and honest. Are U open and honest? U will find that
U're behavioural skills, altho' not too desireable,
are in fact part of U're personality. So, why change them!
~ 0
446 SELF
The only circumstance to change is if, and only if this
interferes with U're judgement making decisions in the
market place. So what if U're behavioural skills do not
make U a pleasant person to be with! Only if U're unpleas-
antries makes U unhappy and U are unhappy with U'reself.
There's nothing wrong with being a bastard (see chapt.I9)
as long as it does not adversely affect U're trading skill.
Some of U're bad behavioural skills may not be an advantage
to u. The ultimate bad behavioural skills wud be, -
laziness (do u flop into chairs) , sloppiness (do U pick
U're nose), bugging others (does U're nose get in the way),
chewing gum (the ultimate affront!), hogging the "box"
(this will paralyze others with disbelief), hogging U're
broker (why don't U try hugging him/her), being dishonest
(who needs U) , unreliable (easily out-foxed), physically
harming others (turn the other cheek) [I have even seen a
trader beat another trader with his umbrella!) - things
like that.
How do U walk? How do U carry U'reself? How do U dress?
How do U look? Do u turn people on? (Doesn't really matter.)
Be careful if people like U, - U will turn them on. And
trouble and interference with U're trading plan cud be
the result. Maybe U shud try a "Have a nice day " smile.
Some are turned on by it, and like myself, absolutely
repulsed by it. Remember, birds of a flock fly together.
The penultimate behavioural skill is knowing yourself.
" To thine own self be true, then thou canst not be false
to any man " - Shakespeare.
FEAR
As we have been saying all along, the commodity trader who
fears will be led to choose r.isky trades. He will abort.
He will buck all logic - like Taurus the Bull. It seriously
impairs the decision making process.
People respond to all kinds of fear. Fear of the future -
of uncertainties, worry and insecurity. Fear causes even
the most brilliant to abort. Most traders lose in commodities
because of fear, - fear of loss.
At times, it is not loss of money that traders fear most, but
SELF 447
the ego which can b e e ~ ~ ruthlessly exposed.
One does not fear the normal routine of losses that occur
during the normal pattern of a normal day. But no where in
the material world in our society do some people cum as near
to facing ourselves than in trading commodity futures.
There is one place where fear will work to U're advantage -
it is when U can smell fear on the part of others. The
winning trader can smell fear in the market and will act
ruthlessly on it.
In the Soybean mkt. of '77 , at the mkt. top for the year,
the newswires were broadcasting "scary" up-limit days for
4-5 days. The floor traders were "scared". The ruthless
trader wud have star.ted to short the market. He smelt fear.
A grand exodus of longs in a bear snap denotes panic and fear.
A ruthless trader might buy as he smells the fear. However,
he/she must make sure he/she knows what he/she is doing.
Fear can work both for U and against u. Obviate all fear
from U're personal life and sop up and take advantage of
the fear that others have. In this context, isolate and
destroy all your bad habits which affect your trading, but
ruthlessly take advantage of the bad habits of others.
(in the market place, that is.)
Don't be a liberal. People are responsible for their own
mistakes and ways.
" They make their own bed and they
can lie in it. "
- an old Scottish saying.
CHAPTER NINETEEN
necessary
personality traits
U MA.Y NOT LIKE THIS
Some of U will hate.this chapter.
By this time U will have become aware of whether U are a
winner or a loser. - U've been through the previous chapters
and U have some inkling now. (If U haven't an inkling from
U're commodity trading activities.)
Maybe by now U hate me. (I hope so,- I want to aggrevate U!)
I've told U what winners and losers are and what's required
to become a winner or to be a winner - namely, effort,
discipline, self-awareness and a well-executed plan.
That's a heavy enough game in itself. But now we are going
to quickly talk of the necessary personality traits compatible
with a consistent winning format, and this U won't like.
It was stated in chapt.I7 that it takes a minimum 6-8 years
to change one's behavioural patterns and here U're faced
with the dilema of ' what am I going to do if I'm not a
winner?'.
God help u. ( - U need it. ) U can have the best trading
technique in the world and blow it because of who U are
and what U are. /
( Are u beginning to hate me? U're going to hate me even more.)
U're going to have to devote 90% of the time U devote to
commodity trading to non-technical things - namely, changing
to some degree U're personality make-up.
What a task !
448
HERE WE GO
There's no way U can change U're personality. U're born with
it - I But what a task u have if U do not have at
least some inkling of some of the necessary personality traits
that make up the fantastic commodity trader ! - who consist-
ently makes and keeps his money.
U may not be able to change U'reself, but, please, at least
be aware of the personality traits which U do have, and, -
please, please, be aware of those personality traits which U
shud, shall we say, try to lick off the plate.
That's a terrible analogy- isn't it? - " Lick off the plate!"
- but this is a rough game and to some degree U must have a
rough personality.
One aspect of this book is to grind away at U - not being
too pleasant. Only showing U some things to give U some fun
or entertainment, or to make this book light and frivilous,
in order to sell well ( my publishers won't like that! ) -
but to just grind away !
I've this style on purpose.
Making U're grey cell matter twitch
and twitter. I can't teach u very
much if I'm too nice. It is necessary
to prod. It's what I've been trying
to do in this book. - hammer away at
u. There's so much information in this
book to almost freak U out, but at the
same time telling u to grapple from it
that which U are inclined to employ,
with a few suggestions from myself,
for successful trading, for making
lots of money.
I've tried to be a bastard. Because, that's what u have to
be ---a bastard. That's right ....... a bastard.
( At least almost a bastard.)
It involves disciplining U'reself and applying U'reself to
the market. U have to be a bastard. U cannot be a wonderful
ct.ap. U cannot be a wonderful person. Leave this for the
other part of U're life. By all means have cocktails with
U're broker or anyone else in the business. By all means
socialize, and smile and be nice. But, during market hours,
retract within U'reself. Put the blinkers on and be almost
cold, - by all means polite. Any, really, don't be rude.
But be a bastard.
I9
449
450
Do not take any crap u'reself.
We're talking of money here, - U're money.
When U're fooling around with U're money - remember it's
U're money U're fooling around It's a very important
rule. Let the brokerage firm know that it's U're money they
are dealing with, - not just ordinary money. Let the market
know that. Got that? - U're money. U'rrrrrrrrrre money.
Do U ever notice how pleasant people can be they're
trying to get U're money from U ? ( except when they're
physically robbing U - at least that kind of robbery is
honest.). When anybody's nice, in the business world-
Watch out! U're money is at stake.
Don't slip into U're' old bahavioural patterns, if u have
them. of being a nice guy or gal. Save that for the dinner-
table or the bed-chambre.
Remember, U cannot be a nice guy in this business.
But, I repeat, do not be rude. Nothing is gained by being
rude and, be fair, but never go more than I/2 way. And,
don't be "pushy" -who needs U! The only thing people need
U for in this business is U're money
Have I been haranging enough ? This chapter is not meant to
be that pleasant. It wud be rough enough to change old
personality traits, but so is losing all U're money rough
Rougher than this book cud ever be. I want U to take a quick
look at Herbert Hoyle and friends in chapt. I6. pg.4I3. These
characters have the worst personality traits in commodity
trading ever Brokers hate them. Everybody hates
them. God help U if U're one of them.
Most people are born losers. They learn losing habits during '
youth and never put any sustained effort to change their live's
pattern. Success or failure is the just result of what U have/
done in the past plus what U do now.
The situation for the loser is analogous to the teacher whose
successful students invariably say " I got an 'A' "
whereas the loser says "He gave me an "A'". Many of these
students grow up to becum commodity traders. They blame
everyone but themselves.
Losers misjudge everything, distort facts and panic. Remember,
the reason the ship goes down is because there's a hole in it.
The self-deluged high !lier invisages himself as striding
into the broker's office, consulting the teletype briefly,
proceeding with the trade while onlookers lionize him in
astonishment and amazement.
Losers are absolutely paranoid about exposing their thoughts
about themselves to others. They cann9t admit their own
failure. Mind U, they can fail but they will not admit it.
Guess who's buying at the top of the market and selling at
the bottom:- of the market- why , it's the greedy, follow
the mass type of traders. - that's right. The greedy guy.
If U're one of them, forget it. Go away from the market -
good-bye ! and U say good-bye - to U're money.
At least so far, I've been telling u personality traits U
shud not have. Take a pad and pencil. Review these bad
personality traits, but put down on paper the complete
opposite. And, those personality traits U shud have.-
( Afraid of a little effort ? ) - the complete opposite
to the above except that u shud be to some degree - a
bad guy - that is - not that all nice.
I am noticing a trend in the thinking-of the commodity trade
advisors and they are beginning to suggest that the trader
shud be to some extent, a bastard. I'm glad to see this,
because I agree. (obviously)
A comment: - I have just read that the volume of commodity
trading last year in total value reached I.2 trillion
dollars. That's right: - trillion ! There's a lot of people
getting into the game. The door is wide open for many
unscrupulous brokers. My friend, Be a bastard. Be careful.
"caveat emptor" be very, very careful who U're dealing
with. Deal only with a "clearing member of an exchange",
as a starter. At least that's my suggestion.
Man's mind is limited only because he chooses to deny
himself the possibility of creating or innovating, of
iocating alternatives, disciplining himself, of working
hard. My father taught me - that the power of man's mind
is infinite and its potential is scarcely tapped. I agree.
u have to have confidence in U're mind. Acknowledge that
U can do whatever U wish to do and decide on it and do it.
It may take a bit of time, but it can happen.
The successful commodity trader can be a loner. I am one.
I am not a great leader. I wud not make a great politician.
I respect myself and others too much for that.
I9
45I
452
When I trade I have to be isolated. I have to put my blinkers
on. I cannot trade when there is hub-bub, babble and noise
around me. I don't belong with the herd. Accordingly, if I
am short-term trading I have to have an area all to myself
and walls around me. I have had ticker-tapes in my horne. I
have had office spaces to myself ( & a door literally broken
down by someone who had to get to me) . I ha.ro sat in rooms
with other traders, with ear-phones on (I'm known by my
earphones) and listening to music with my ears full of wet
kleenex. Imagine - both wet kleenex and earphones! And, I
cud still hear the babble.
I change my phone and move I fear
somewhat the publishing of this book. I cud suddenly becum
an "expert" - maybe invited to address gatherings or meet
other "experts". I don't want that "crap" -remember, I'm
a loner. I don't want to handle other people's money and
I've no need to becurn a broker.
When I change to medium or long term trading, I revert
sometimes to my home desk. I apply myself to the market
and other activities in an isolated manner. I direct terse
communication by phone with a minimum of chit-chat with the
broker. I want a broker who will give me no advice other than
it's going to be a sunny day. I do not wish any information,
unless asked for. I feel that the best broker is a female
broker - they're less likely to be full of horse-shit. They're
friendly and I love that female voice on the phone.
I know of one prominent broker who locks himself in a room
and refuses to talk to his staff during market hours. ( I
don't know how he goes to the bathroom. A potty maybe.)
Signals were given thru the window by hand, so no one cud
reach him.
I know of another broker who grabs the phone and runs to a
closet, and opens it just enough so he can see the ticker
board, and stays there all day, with pen flashlite in hand.
I do not suggest that U becum a loner. I'm attempting to
make a point.
A lot of successful traders are bachelors. If U have a
haranguing wife or partner to cum home to,- what can U do?
Well, I suggest U then show her/him this book and chapters
on money management and planning and if U both decide to
accept a plan then it shud be easier for U - knowing what U
are doing and doing it correctly. It enables U to see the
lite.
Some traders make good short term trades, - put the blinkers
on - are disciplined and they can do it. Other traders lose
because they do not have the necessary personality traits.
They may allow the broker, consultants, and others to interfere
with ~ h e decision making process.
The brokers/ consultants must harmonize to achieve what U
want. Dialogue is appropriate if the mutual goal is enlighten-
ment. And, this is best achieved outside of market hours.
The successful trader has perserverance. He gets up, after
failing, re-affirms what he knows and goes about the business
of adding to his store of wisdom. He realizes that the study
of psychology exceeds the statistics of market data in
importance.
The study of psychology begins with the self, then others.
The successful trader has the enlightenment to claim victory,
focusing sharply on goals and pursues the fulfillment of his
needs with energy and direction, making his/her own decisions,
controlling his/her life, property, decide what he/she wishes
to protect and then proceeds to safeguard it, willingly
defending his/her territory - not letting others take advantage
of him. He asserts himself.
Winners never quit. ( Quitters never win.
He is confident. He fights his weaknesses, having common sense
and a mathematical approach to trading. He is not afraid to
admit mistakes and re-covers immediately with a positive
determination to succeed the next day. He buys every book in
the business and subscribesto one or two good services. He
takes a vacation, regularily. He gets away form the market to
recharge his battery. Maybe he changes his style, like I
suggest, to fit the market. Above all he is relaxed - almost
bored, yet he is relentless in his committment to the market,
if he wishes to make a great deal of money.
$5 to 20,000 /yr. wud keep a lot of people happy. some need
$IOO,OOO, - some millions. Different strokes for different
folks.
" Cynics survive" - the cynic recognizes that additional
rules can be introduced into the game and takes them into
account, realizing that commodity markets do not differ
that much from other markets, except that it's one of the
last to be brought under the destructive wings of government
He is cynical about what he reads in the newspapers, what he
sees on T.V. - cynical and distrusting of anybody in the
I9
453
454
c o ~ ~ o d i t y futures business and cynical to anybody who happens
to be nice to him/her, especially if it is becoming aware that
he is making money.
Just wait 'till U start to make money. Let's say that in the
last 3 mths. U have turned $5,000 into $50-!20,000. Can U
imagine what happens? The broker knows. The margin man knows.
The secretaries know. The people who handle the computer
printouts know. The "clearing"memebers head office may know,
and most certainly will know if this pattern continues. A
consistant winner sticks out like a sore-thumb. He becurns a
live one. There will be lots of money in U're account. U will
be amazed by the subtle instances of prodding, probing, -all
to the purpose of making U move that money, and maybe to churn
trades, to make more money. An avalanche will hit U,
( eventually ) . People in the business and other traders will
swamp right over U and drive U right into the wall, when they
find out U're making money. The processmay take a year or two,
but they will do it.
I see no way of keeping U're trading patterns secret. U have
to becurn a bastard and jump around and do whatever U can to
let as few people as possible know what is happening to U're
account. ( U will devise U're own ways. )
I have one firm rule. ( It's never been broken ! ) I never,
never tell anybody how well I am doing. I used to tell people
how bad I was doing, just to keep them happy. ( And they wud
leave me alone ! ) But, now I've stopped that. I don't let
anyone know what I'm doing. Not even the broker I'm dealing
with. Perhaps I have accounts in other houses, - perhaps I
don't. I pretend I 'm stingy (that's the fun part).
Let no one know what you are doing, why, when, or how.
{except U're spouse?)
That's why this book is so full
of information. Take U're pick of
approach.
Jump from one approach to the other, if U so wish.
That's what I do. - to keep myself stimulated and to apply
my technique to the kind of market I am dealing with and to
keep everyone guessing. Be flexible. But do not be flexible
on the one factor: - do not let anyone know what U're doing,
except possibly U're wife, and then she must be tight-lipped,
and possibly mind her own business. Remember, too many cooks
in the kitchen spoils the broth. But, how about a team effort
from U're spouse? Get her/him to study this book or a
book like it. How about that?
The hardest game in the world is keeping U're money. Don't
be ruined by all the "yahoos" and losers, who cud influence
U're trading.
The successful commodity trader has one outstanding personality
trait: - he knows what's going on. His mind is inquisitive.
He's trying to appreciate ( not necessarily know) why things
are doing what they do. This is the application of fundamentals
to the market place. He knows the fundamental forces, being
alert to the quick changes in supply and demand. And, he
applies this to his technical analysis. He knows what price
movements are "noise" and what are genuine. He sniffs around,
just like a weasel - never letting anyone know he's a weasel.
Never let anyone inside the commodity business get inside u.
They will destroy U're trading. Never let anyone in the
business influence u,
Be aloof - hardcore and no fooling around - including sexual
hanky-panky with anyone even remotely connected with the
business, including secretaries. u will hanky-panky U'reself
right out of profits.
Bye for now. We'll see U in the next chapter, when we will
discuss who trades and how. Hopefully by the time U have
finished section three of this book U will have becum rather
astute in the all important facet of psychology in the market
without which U would have no hope in hell of even having
the remote possibility of making lots of money, and doing it
year after year after year. Have fun. But take a break. The
next chapter is a long one.
l9
455
456
WHO TRADES &HOW
KNa"'' YOUR TRADER
Ke;t;Ue. o 6 F -<..6 h
c.e.a,b-6-i. 6-i.c.o.:Uo n
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da.y


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be.g-i.nn-i.ng
CHAPTER nIENTY
TRADES 457
THE KETTLE OF FISH
Two million Americans speculate in commodity futures contracts
which in 1977 had a contract value of 1.2 Trillion dollars.
One half contracted on the Chicago Board of Trade, - between
1/4 & I/3rd on the Chicago Mercantile, - and, the eleven other
commodity exchanges absorb the remaining business. The C.B.O.T.
is 30 years old & the Mercantile is 57.
The kinds of traders who make up the kettle of fish are
astounding in their variability and approach to the market.
The bald, unyielding fact is that all traders as a group
possess no basic or special forecasting skill. Their styles
are based mainly on the search for minor, intermediate and
major trends and they constantly probe for such trends. Once
aboard a trend, each trader operates in a somewhat different
fashion, possibly pyramiding aggressively or conservatively,
liquidating part of the position periodically, maybe taking
short turns in the market, and some successfully.
U have people who are trend buckers, as apposed to being
trend followers. There are countless active business and
professional people who devote part of their time to trading
futures. Engineers and lawyers dominate this group. Some
frequent brokerage houses for an hour or two a day and some
operate exclusively on the phone. Others rely on newspapers,
and charts, trading only a few good plays a year. This mish-
mash of traders hold 46% of the value of all contracts, and
the astounding result is that their gross profits are zero
and potential losses occur when commissions are included.
Some are successful. Very few consistently make money, year
after year. Some have a good score in a particular year and
go underground or overseas, arising from the adverse tax
consequences that result from their success. The Riviera
houses many successful commodity traders and their families.
The Commodity Exchange Authority study indicates that
speculators most often trade on the long side of any
commodity. The U.S. of Agriculture survey of 8,783
reported " the chances for success in the grain futures
trading does not differ greatly from one occupation to the
other .... " Special knowledge of the commodity had little
effect on the outcome of speculative trading ... and there's no
evidence that the largest size classes (big money) include a
higher proportion of successful traders than with smaller
average positions.
The average speculator is a male,45 yrs. old, earns $35,000
yr., trades contracts in 2's or 3's, and more than likely
458 WHO TRADES
resides in California, Illinois, N.Y., Texas, Iowa, or Ohio.
are college graduates, mainly male: one third are
professional persons, while IS% are feeders and
processors. Over-all, the average transaction spans no more
than IO days, and approx. 98 \ of contracts are offset prior
to the time when delivery must be made or accepted. The trade
on balance is short and the speculator is long.
The following tables are submitted for U're perusal:-
.-Aggregate profits a.nd losses of specula.tors a.nd ratio of profits u, losses, by grain and occupational
. All grains Wbea.t Corn
Occup&uonal group
I
Profits Losses Ratio Profits Losses Ratio Profits Losses
Business managers: DoUar1 DoUara DoUara DoUara DoUara DoUcra
Grain business.-------------- 210,200 743,600 0.28 219,665 587, 135 0.37 67, 959 169,668
Other --------------------
866, 100 5,466,600 16 469,706 4,323,944 .11 651,926 894,M2
ProfessionaL. __ ._. _____ ---- _____
190,200 1,094,700 . 17 140,425 836,440 17 78,694 219, 192
SemiprofessionaL---------------- 6,500 61,300 .11 4, 711 53,972 . 09 2, 9&4 9,505
Cieric&l. __________ _ ------ _____
44, 100 277,800 16 45,421 214, 101 21 17, 810 74,&49
Farmers --------------------
180,500 I, 372;100 . 13 187,886 1, 162,210 . 16 63,232 204, 164
Manual workers. ___ ------------- 97,400 460,900 21 64, 714 382,299 17 66, 188 92,455
Retired------------------------
1,566,800 15 205, 151 1, 203,813 . 17 120, 059 351,317
lJnknolVD
228, 500 914,400 .25 170,648 647,706 . 26 115, 161 206,910
All speculators _. ____
2. 064. soo Ill 958, 200 1
. 17 1. so8. 40719 411, 620 1 16 11, 183, 993 ,2, 222, 6021
Oats I
Rye
Occupational group
l
Profits Losses RAtio Profits Losses
Business m&nagers: Dollara DoUara DoUara DoUcra
Grain business ____ . _. _. _ _ ____ __ _
12,273 39,885 0. 31 12,918 56, 756
Other.--------------------------------------
51,512 365,990 . 14 93,095 362, 868
ProfessionaL . --. ______ _____ _. ___ .
11, 520 65, 115 18 58,534 92,306
Semiprofessional ____ __ ----- _________ ____ _
2, 843 4,068 70 383 4, 366
Clerical . ---------------------------------------
2,933 15,075 19 3,669 15,556
Fannen ----------------------------------------
9, 824 72, 611 14 14,370 58,234
Manual workers __ ______ ._. ____________ ._
5,528 31,969 17 13,476 34,470
Retired. ________ ____ __ -----_. __ _________ _____
13, 187 108, 195 12
67,
88,341 lJnknowo __________________________________________
14,418 69,224 -21 29,46 112, 941
All speculators. _______ ------------ ___________
124, o38 1 772, 132 i . 1s 1 293,04.2 1 s25, 83s 1
Source: U.S. Department of AJfieulture, Technicud BuUerin 1001.
Dow Jones-Irwin guide to commodities trading
grouJ
RAtio
0.-t
7os
.36
.
.
3
. ,.
.3-4

. :
Ratio
-
o. r
..
,I
.0\
24
r
..
. :
::If
:3!
-
WHO TRADES 459
AN ANALYSIS OF SPECu.wATIYE TRADING .IN GRAIN FUTURES
.. -Occupa.tional distritndicm of all trader: in sample
Occupation Wheat Corn Oats Rye
All
grains
1
---
--- -----
Num- Num- Num- Num- Nv.m-
Business managers, grain business: ba- ba- ba- ba- ba-
Country grain buswess .. 114 65 33 21 133
Terminal and subterminal grain busi-
ness----------------------------
158 107 44 38 183
Total -------------------------
272 172 17 59 316
====
====
==-===
Business managers, other:
Wholesalers -_------------.----
112 44 16 18 131
Retailers. __ -------------.------_---
937 452 201 179 1, 044
Bankers __
16 5 4 3 19
Miscellaneous other than trade 733 364 161 143 824
Reai estate, insurance, securities ______
749 427 178 130 885
Capitalists and financiers _____________
44 19 5 4 50
Business re agriculture -------------
105 73 33 27 134
TotaL _ _- -- - - - -- -- - - -- ---
2, 696 1, 384 598 504 3,087
Professional:
Accountants and auditors ____________
80 35 15 10 91
Artists, actors, and musicians _________
24 11 1 1 26
Clergymen._. __ __ --------------- JO 7 4 3 12
Educators-------------------------
53 30 9 9 58
Dentists ______ --- __ ----. ___ -----.--_ 73 26 12 11 77
Engineers and architects. _ -- _ 105 55 17 20 120
Lawyers and judges _________________
111 56 20 17 129
Physicians and surgeons ______________
133 82 24 27 152
Professional occupations, n. o. c 88 52 17 16 103
Total ____________________________
677 354 119 114 768
=
miK!ofessional:
miprofessional occupations ----_ 74 30 12 11 83
Students--------------------------
15 4 2 3 19
Se
Total ____________________________
89 34 14 14 102
c lerical:
Clerical and kindred occ:dations ______ 225 114 38 41 262
Sales persans and k.indre occupations. 146 66 25 18 168
Inspectors, estimators, etc ----- 102 50 22 23 119
Municipal and State employees . 3 2
------
3
Federal employees _ --.---- 2 2 1
------
2
TotaL ___ _. _ . ___ - -.- -- 478 234 86 82 554
F armers:
Fanners, generaL ______ ----------. 779 365 150 121 900
Farmers, specialty----_---. __ .------- 118 47 19 16 128
Total -------------------------
897 412 169 137 1,028
t The numbers o! traders in the "All grains" column generally are not the
sums of the figures for the individual grains because many traders traded in more
than 1 grain.
Source: U.S. Department of Agriculture, TechnicDl No. 1001.
Dow Jones-Irwin guide to commodities trading
20
460 W:-10 TR.:t..DES
BULLETIN 1001, U.S. DEPT. OF AGRICULTURE
-Occupational di.Jtribution of all tradert in sample-Con.
Occupation 'Wheat Corn Oats nye
All
grains I
--------
'Num- Num- Num- Num- Num-
Ma.nual workers: ber ber ber ber ber
Skilled and semiskilled _. 680 377 134 liS 777
Laborers and unskilled __ ___ ._ 155 75 27 25 171
Touu --------------------------
835 452 161 140 948
Retired:
Professional. _____ _______ ---- _____
28 13 5 4 32
______ 1
------
1
ClericaL __ ------ -----_---------
10 7 4 12
Business __ ----- _____ ____
292 144 48 37 3.29
Connected with grain business 44 28 13 11 50
--------------------------
35 17 4 7 38
Farmers --------------------------
175 112 43 33 '218
Previous connectioD unknown 222 143 62 46 265
Government employees. __ _ _. __
8 4 1 3 9
Total.---------------------------
815 468 180 141 954
Unknown:
Status llnascertainable ____ ____
735 396 176
112.
971
Unemployed, former occupation un-
known.--------------------------
47 22 6 10 54
Total.---------------------------
782 418 182 122 1, 025
====== ======
ToW, nonbedgers _ ---- ____ ____
7, 541 3,928 1, 586 1, 313 8, 782

Processor hedgers------------------ 44 15 7 5 47
Grain merch&nts, terminaL___________ 45 22 17 13 49
Grain merchants, subterminaL........ 10 8 3 3
Grain merchants, country____________ 23 16 10 6 32
ToW -------------------------- 122 61 371 27 140
ToW, all traden; __________________ 7, 663 j3.m 1, 623 j1. 340 js. 922
United States Department of AJ;Ticu1ture, Cirt:sUar No. 391.
Dow Jones-Irwin Guide to COmmodity Trading
WHO TRADES 461
A.."' ANALYSIS OF SPECuLATIVE IN GR.UN Fti'TURES
.-Nwmber of speculative trader.<; with profits and teith losses,
and percent with profits, by grain and major occupational group
Traders with-
I
I Percentage
Commodity and occupational
I
Total with
group
profits
Profits Losses
WRE: .... T
Business Number Number: Number Percent
Gr&ir:. S3 189 272 30. 5
Other ____________________
702 1, 993. 2,695 26. 0
ProfessionaL _._. __ : ________
179 498 677 26. 4
SemiprofessionaL._. __ ;.. ____ ---
1
27 64 91 29.7
Clerical _______________________
130 349 479 27. 1
FarrDers---------------------
200 697 897 22.3
workers. __ .----._----_ 214 621 835 25. 6
Retired ___ _____ _---. 240 576 816
I
29. 4
Unk.Down ------. __ _. -----. 270 509
I
779 34. 7
TotaL _----_.--------.
2,045 5, 49G
!
7,541
I.
27. 1
CORN
Business
Grain businc,;s _____________
76 96 172 44.2
Other------------------
577 806 1, 383 41. 7
Professional __ ._. _______ .--.
133 221 354 37.G
Semiprofe,;sionaL. __ _______
16 20 36 44.4
Cieri cal . _______ ___________
76 159 235 32.3
Farmers----------------------
151 261 412 36. 7
Manual workers . _ . ____ ___
163 289 452 36. 1
Retired _. ____ . _________ ---
189 280 469 40.3
Unknown. ________ ___________
144 271 41!1 34. 7
TotaL. ___ ._ .. ______ _
1. 525 2,403 3, 928 38. 8
..
OATS
n usi ness manal(ers:
Grain busin,ss ....... _. _
1
23 54 77 29.9
Other_ ______ _ _ _ _______
223 374 597 37.4
____ _ .. _______
4.') 74
I
119 37. R
SemJprofes:;IOn!l.l. _ . _____ . _ _ .
1
7 7 14 50. 0
ClericaL---. __ ._ ... _ . _ . _____
37 50 87 42.5
Farmers---------------------
57 112 169 33. 7
l'.ianual workers .... _._ . _ ... 53 108
I
16) 32. 9
Retired .............. ti9 111 180 38. 3
Unknown . ___ ... _ . __ . 75 107
I
182 41.2
TotaL - .. ---- . -----
589 997 1, 586 37. 1
'
Rl"&
Business
Grain IJUl;ines!'. ---- _ _. ___ 22 37 59 37.3
Other ____________________
201 303 504 39.9
ProfessionaL ----- 36 78 114 31. 6
Semiprofe!:;l;ionnt" .. ___ ___ j
2 12 ]-I 14.3
ClericaL __ _. __ _._
1
33 49 82 40.2
Farmers---------------------
43 94 137
I
31. 4
Manual workers. __ ___________ !
52 88 140 37. l
Source: U.S. Department of Agriculture, TechniCltl Bulletin 1001.
Dow Jones-Irwin Guide to Commodity Trading
20
462 WHO TRADES
An investor's approach to the market depends a great deal on
his personality and age. These factors are covered in other
chapters, but suffice it here to mention two interesting
items.
one: - It is said that " only 5% of the population think for
themselves, IO% copy the 5%, & 85% beleive what they
read & hear and do what they are told". -Robert Vichas
two: - In the conclusion of the best selling "Playboy's
Investment Guide" - "Those persons who have created fortunes
rather than inheriting them are not as a rule terribly
intelligent, well-educated or hard workers .. Most are
simply intelligent enough to admit that brains, knowledge
and diligence has little to do with speculative success "
The two above quotations seem to contradict
each other. They are submitted only to
illustrate how easy it is to take an
opposing approach to any topic and do it
with authority. I cannot wait to have
my book published, when others speaking
with stringent authority will be calling
me a "nit-wit". I'm looking forward to the
attack. I will not attack back. I will simply
go to the market place and presumably make
some money ... and lots of it. (Hopefully)
(At least I'm honest enough in admitting
CLASSIFICATION
that I too make mistakes, and I use the
word presumably as well as hopefully)
GENERAL
There are two general classes of traders.
I. The Speculator
a) Public Speculator
b) Professional Speculator
i) floor trader
ii) scalper
iii) day trader
WHO TRADES 463
iv) position trader
v) spreader or arbitrageuer
2. The hedger
SPECIFIC
SHORT TERM TRADER
The short term trader's time horizon is extremely limited.
He is the day trader, the scalper, or the floor trader.
DAY TRADER: - The public has a fervor to day trading and
short term trades. If they can, they will go into a brokerage
office with their prized technique and attempt to take a
score from the market on a daily basis. It has been said that
most day traders do not in the long run consistently make
money. I agree, because most traders cannot successfully
trade every day. I have seen some traders, using rather large
sums of equity, involving themselves on an ad hoc basis, in
many, many contracts, in many different commodities and at
the end of the day close themselves out, expecting to win
some, lose some and are quite happy to have made a small
profit on a day's activity.
Some traders are successful with day trading. One simple
guideline for them is to trade within the confines of a
congestion, or within the congestion of an upward sloping
channel, and trading off each channel line.
oFf'SEI
_rt !_It- _;
offSE I
I
I
464 WHO
Some prefer to reduce risk by day trading from one side of
the market only, usually with the trend.
Unfortunately, there are many unsophisticated day traders.
They usually liquidate only the day trades that go in the
right direction and maintain over-nite positions that were
wrong, or they becum banged around so much by watching the
box, that they do not know which direction the market will
take, and begin to outguess the system which they are using
and outguess the market.
However, there are advantages to day trading, but I tend to
recommend it only on a part time basis, just to entertain
one's self. As U know, I like to jump from one of my trading
styles to another.
Certainly a day trade-r, if he is in profits for the day,
will find it easier to sleep, than do other traders,
because he is not in the market overnite. To-morrow has a
new, bright horizon. Markets do not sleep over-nite. The
day trader can digest the next day's market action by the
day's activity itself. He has the advantage of operating
while the market is active. He certainly is not affected
by important gov't reports. Day trading does furnish more
possibilities to stretch risk capital. Some brokerage firms
require less security deposits for day traders because risk
exposure is reduced. Some will ignore U're account balance
as long as U are not "debit". Whether it is an advantage or
disadvantage, - u can swing big numbers with less capital.
To day trade suggests that "chart action be recorded in finer
detail than for longer trades." P&L charting is advanta-
geous because if U play with it enough U can develop such a
detailed approach!
SCALPER: - There are scalpers who operate to take a small
turn in the market. The successful ones are very humble,
astute volume watchers. Some use point and figure charts
and scalping can be fun when prices trend well. i.e. when
they fluctuate within a fairly well dilineated channel.
A lot of profits are generated by bucking the trend within
the channel.
Some traders scalp from a "distance" by placing the order
into the market in advance and as soon as the prices hit and
prices have shifted away from that point, the broker will be
instructed to take "x" points from the market.
A professional scalper derives profits from trading dips and
buldges of varying time lengths. It has been said that
WHO TRADES 465
recognizing price trends is the most important requirement
for successful scalping, but there's nothing stopping a
professional scalper from opposing the short term trend.
The definition of scalping is enlarged to cover not only
those who trade with the smallest dips and bulges but those
who trade up to a few days. In the well travelled markets,
professional scalping tends to specialize into three
distinguishable classes:-
I. unit change scalpers - stands to buy one
tick below last sale, or one tick above
it, almost invariably ending the trading
session in zero net position.
2. day trading scalpers - who concentrate
on,dips and buldges of greater than unit
change.
3. day to day scalpers - who occasionally
hold a market position overnite.
The point here is that many traders beleive that scalping
involves just the floor trader and unit change traders, but
rather, scalping involves that person who expects to take a
turn with the market either on intra o ~ day-to-day, or up to
2-3 day basis .. ( like me I occasionally)
THE FLOOR TRADER
This is basically U' re unit change trader
1
whose marvellous
function is in providing liquidity in the market. This poor
chap has to face all the hub-bub in the ring. If U look at
the faces of floor traders, most of them are young. I don't /
know if this means that the older ones are worn out or have
made their money and run or they have burnt themselves out
financially. Talk to U're broker someday about the floor
trader. If he's a knowledgeable broker u will find the topic
fascinating. I feel that an entire book cud be written about
them. If done with a sense of humour it cud be a best seller
with the trade.
Sometimes the floor traders will sense that there are a number
of stop-orders which can be activated by a good day's move in
that direction. At this time, the individual traders on the
466 w"'HO TP.ADES
floor may attempt to force the situation to push the price
to the point where stop orders are activated. Then, as they
are activated, they reverse their position and make a second
profit on the rebound away from the "stops"
Floor traders often play little games with the big trader
whose pattern of trading can be recognized. This is another
reason why I am inconsistent in my trading styles.
Sometimes I play with thern .. B e l ~ e v e i t or not, one day for
a glorious 20 minutes, I controlled the soybean market.
The story goes like this: - I entered an "at market" order
to buy 400, 000 bus. . The market had been very quiet up to that
point. Amazingly, the mkt. shot up 7-8, whereupon I sold Nat
mkt." my 400,000 plus sold another 400,000, reversing myself.
(a net total execution "at mkt." of 800,000 bus.) (This is
called "taking a popper".) and the market immediately went
back down to the area where I first bought. U guesses it!
Once again I reversed myself, at 800,000 bus. "at mkt.",
net long 400,000 bus. and prices went back up 7-8. I did
this round trip four times, until .finally I said to hell with
it, and stayed with the major trend and was net long. I will
never forget what happened: - the market went up the prerequisite
7-8 and sat there and didn't move for almost half an hour.
The pit must have been dead silent - who was this character
who came in every 5 mins. with 800,000 bus. "at mkt." ? It
waited for me to enter the market, but I didn't and then
finally took off and went up throughout the rest of the day.
Now, do u see how the psychology of the market can affect the
trading pit itself? The floor traders are no fools. They back
off when something unusual hits the pits. However, the amazing
thing is that I was filled with a I I/2 range each time.
What liquidity!
THE LONG TERM TRADER
This chap [ "chip" for female ] is perhaps the most interesting
of all traders. This chap possesses all the virtues of the
successful trader. His time horizon is months to years in span.
He awaits good plays- perhaps 2-3 per year., sometimes holding
on and rolling contracts, waiting maybe 2-3 years. (e.g. copper)
He has the capital to withstand adverse market reactions. He
may accummulate in a bottom formation, but rarely distributes
within the narrow confines of a market top. He is always long
W'rlO TRI>.DES 467
gone before the top formation has occured. He may enter the
market a little late and may leave a little early. He may
or may not pyramid as ~ h e market goes as he anticipated. He
does not sit and watch the "box" or the ticker-tape. He has
researched thoroughly. His research may have included only
a few mental gymnastics. Particularily the older traders
are adept with sniffing out the good plays for the year.
They're wise, old men and they don't fool around. For some
people there's not enough action in long-term trading. My
friend, one of the basis for U're trading plan must be to
parlay at least I/3 of U're thinking approaches and market
attack on the long term basis plan, if U absolutely must be
more active than long-term trading portrays. I waited 2 yrs.
for the soybean mkt. of '77 & I've waited 4 yrs. for the
silver and gold mkts. of '78. These things take time. In the
interim I like to jump around with occasional day-trades, -
occasional scalping _and some short-term runs, especially
bear correction "snaps", if I can catch one.
For medium to long term trading approach based on simple
logical formats, I recommend Bruce Gould Box I6, Seattle,
Washington 98III. ( He will do some of the thinking for U.)
It is not uncommon for the long-term trader to pull in
hundreds of thousands to millions of dollars per year, and
just trading I or 2 commodities once or twice. Wud U be
satisfied with that kind of income ? - someday ?
Pourquoi-Pas?
THE LARGE TRADER
The large speculator shows a profit in IS out of IB years,
even tho' he accounts for 2% of open interest. His profits
are virtually 3 times the average loss of the small trader.
The consistency of the profit making capacity of the large
speculator is impressive. It is not uncommon for him to
make 3-25,000 per month.
Large traders, however, tend to use the markets as trading
markets, rather than trending markets, and rely more heavily
on the presence of negative serial correlations, for they
tend to sell certain rallies and buy certain declines. Large
traders are consistent winners, but they are short-term
oriented as a group. Of course, individuals of this group
may have the prerequisite that their approach be long term.
But as a group the large traders are short-term oriented,
468 \:HO T?ADES
- that period being of a few days to weeks, making use of
the various buldges in the market.
There is a fair amount of data available for the analysis of
"smart money", since the large trader must present to the
appropriate exchange a position report, on the contracts
which they holdovernite. For instance, if U have more than
200,000 bus of soybeans U must report the fact to the
C.B.O.T.
Unfortunately, this information is made available to the
public usually too late and too infrequently to be helpful
in market analysis.
Large speculators tend to be on the same side of the market
as the small traders and opposite that of the hedger. However,
they think nothing of taking short term snaps against the
main trend. Many huge traders do not take advantage of the
short-term snaps, but rather, since that have the capital to
withstand a move against them. they take the long term
approaches, making the decision based on fundamentals. He
does his own heavy research, accummulates his position and
then dumps and walks away maybe 2-3 months later.
He may hear that there's a shortage of something, and he will
do everything he can to get all the information he needs.
( Maybe with the help of a private staff - or his firm's staff.)
This guy makes possibly $500,000 to millions a year.
Many of the large traders main source of income is from
futures trading.
The large trader tends to trade in nearby futures, altho'
some have a tendency to do better in more distant ones.
THE EXPERIENCED) SUCCESSFUL TRADER
There are basically two kinds of successful traders.
I. big huge trader
2. the technical trader
WHO TRADES 469
The huge trader has the capital to withstand a move against
him and his research is based mainly on fundamentals. He
strikes, accummulates heavily. His contracts must be "recorded".
He walks away from the market I-3 months later.
The technical trader simply searches for a live market and
uses straight technical analysis and may not get in right
at the top or bottom, but sandwiches himself in the middle,
taking not too many contracts on, but being able to analyze
these markets and knows the profits he wants and may be in
and out on one day or in for a week or two. He may make from
3-25,000 dollars per month. The huge trader usually makes a
minimum of $500,000 per year.
Great speculators have one thing in common and that is the
realization -that the study of psychology exceeds statistics
in importance. Even .the technical trader knows the value or
psychology in the market and of himself, because, without
this understanding he cannot apply his technical analysis.
The study of psychology begins with the self, then with others.
The experienced, successful trader has some simplistic rules
and realizations by which he functions:-
One is that he appreciates that his first
loss is usually the cheapest. A sharp trader
is not likely to short a market during a
technical reaction following a major
upside breakout.
He may look to buy a market when prices
wander lower and there appears to be a
lack of interest and speculators get bored
with their holdings and throw them out.
Most seasoned traders avoid positioning
markets in anticipation of breakouts. Some
feel that they're better off waiting for the
the markets to tell them what to do. Some,
however, do take positions in markets in
anticipation of the breakout, but this
approach is of only minor attraction to
these traders. What they consider important
is the added confidence enjoyed in markets
that they have operationally anticipated,
and, as a result of this they have the courage
to pyramid.
Experienced professional traders may find
it difficult to follow more than 3 commodities
at one time, whether a fundamental or technical
~ 7 0 \.;rHO TRADES
analysis is used.
The experienced speculator will not risk a
great portion of his capital on a single trade.
The successful trader feels that he must outguess
to-morrow's price changes and appreciates that
it will depend to some degree on to-morrow's
news, or anticipated news. To most traders, it
is a matter of pure chance whether to-morrow's
news will be bullish or bearish. He realizes
that it is impossible to develop a set of
rules to serve as a guide to all traders, under
all circumstances, under all conditions. He
hopes only to succeed in the long run by being
able to. recognize and develop his behavioural
skills ..
Successful traders usually apply the 30% stop
rule. i.e. he will not invest more than 30% of
the money he has committed to the market for
margin purposes.
The winning speculator knows his sources of his
profitable decision making. However, he may
refuse to talk about it.
The prudent speculator will never have positions
during a vacation and he will occasionally
withdraw from the market to rest.
R e r n ~ ~ e r that only 2 % of traders are successful in a consistent
manner that assures their appearance year after year. What the
few can do, the many cannot accomplish. However, the professional
trader makes important money 4-5 years out of six.
Most successful traders have been bloodied at least once
before achieving success, but all have tried again. In the
growth process, the quality of persistance loomes large and
is virtually irreplacable. Winners first of all decide to
/
claim victory. They focus sharply on goals. They pursue fulfill-
mentof their needs with energy and direction. Winners train
themselves to reject thoughts of losing at all times. Even the
best speculator considers himself fortunate to be right on most
trades. and to some extent, even to make profits during most
years.
May I respectfully suggest that U copy the following approach,
which to me makes the perfect trader.
WHO TRADES 47I
" I know of an engineer, who dabbled his way
to considerable wealth. He required nearly
5 yrs. to stabalize his first million dollars,
and climbed to I2 million in another three"
-Robert Vichas
The engineer " dabbled" his way to considerable wealth, but
it took 8 yrs. It took him 5 yrs. to create and keep his first
million. Too many traders try to accummulate their first million
their first year, if not by next Wednesday.
THE PROFESSIONAL TRADER
Well, folks, presumably this is where I cum in. I'm a profess-
ional. I devote all of my working hours to commodity futures
trading. I do not moon-lite with anything else. Why shud I?
My everyday business involves commodity dealings.
I have developed special representatives in critical areas.
( I tend to take their comments with a g r a ~ n of salt.) I have
a string of correspondents and I try to develop first hand
information, all of which I keep to myself.
If I do not see a risk I wish to take I don't take it. I will
take a rest form the market, take a vacation,- write a book
or something and recharge perspective.
I luv to await the golden opportunities that manifests itself
nearly every week, but certainly several times a year. I
always feel there's a train leaving every day. However, I'm
not that an astute trader to be on time for every one.
Occasionally I will pick a train that leaves on a certain d a ~
but normally I anticipate one leaving perhaps a day or two
away, or even months away, or years away. I scalp, I day trade,
I position trade, - applying all techniques to the situation
that seems appropriate, if I am capable of it at the moment.
I am never right all the time.
Let me show u a little photocopy , of
one wk 's day trading, wherein very obviously
I was incompetent that Wk. Special note:- I
had some personal problems at that time & shud
not have traded at all!!!
4 7 2 \iHO 'I'?.hDES
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If I make a mistake it's usually because I fooled
around with P&L charting, by outguessing it, or
allowed ( which is nearly always the case), some
extraneous factor - in a bad mood perhaps to
influence me.It's always the babble of the other
guy which interferes with my trading, if a mistake
occurs. Always! And it puts me in a bad mood.
Successful professionals presumably are confident. We fight
our weaknesses. We know ourselves well - very well. We
probably have common sense- but most definitely we have a
rnehodical approach to trading.
I do not gamble, or go after the ephemeral rainbow in the sky.
I repeat, I avoid gambling- I hate go to Las Vegas
for reasons other than gambling. I go to study the scene. I
stick to black-jack.
~ ~ 0 TRADES 473
I approach the market when the odds are in my favour. I make
mistakes and admit them ( got to play the humble role.) But,
I'm always amazed at my ability to recover and develop a
positive determination to succeed the next day. Presumably,
we are realists, ( I fall down here? ) . However, when the
general public becums aware that an upper price trend is in
progress, I prepare to exit - maybe a month or two down the
road, but I'm getting ready as soon as the prices have commenced
their trend. But I assure U, I judiciously apply P&L charting
and study very, very carefully the fundamentals, and stringently
enforce money management rules. I am incredibly disciplined
when I attempt this tack. Above all I am happy and having fun
and enjoy the market.
I know that as long as commodity futures are trading that I
will be there, probably for as long as I live. I will always
be there, but U will never see me. Perhaps a few of U will
some day get to meet me. U may meet me, but U will not meet
my market action or not know when I'm entering or exiting the
market. It's part of my style, of being a professional.
( I think.)
It takes a minimum of 5 year's experience to becum a
professional. The next time U see U're doctor, dentist,
accountant or lawyer, ask how long it takes to get the
"feel" of his profession. He will probably say
11
5-IO years".
With the IO years I agree.
THE TECHNICAL TRADER
I guess this trader is amply covered in chapters one thru
nine.
He is presented here in appreciation that there are two schools
of thought in the approach to commodity market analysis. O n e ~
of course, is the fundamental trader and the other, is, of
course the technical trader.
The technical trader is a wonder-worm. He wiggles his way
thru such a maze of lines, circles, triangles, - diggle-
daggles. No human brain is capable of coping with all of the
elements in technical analysis that have mushroomed in the
last decade. That is why, at the top of every page, I wud
like to put
11
Keep It Simple. ) - please, please, keep it
simple.
474 WHO TRADES
Technical analysis is fun, but it is deadly dangerous, -
because the technical trader easily slips in to the charts
as if it were portraying the market, rather than the market
portraying the charts. It puts technical analysis before
chart action. He becums so engrossed that he eventually does
not know what the market is actually doing. He eventually
goes home cross-eyed at nite. He may still be cross-eyed,
still looking at his charts at 4:00 A.M. - not knowing what
to do. Perhaps the best advice is to do nothing at this
juncture.
Very few fervent chart readers consistently make profits,
because their trading decisions evolve from the chart itself,
rather than a basic trading plan. They let the charts decide
the rather than the trading plan demanding from the
chart certain prerequisites.
One must trade only from a trading plan. Charts are only an
adjunct to the plan. It is not unusual for a technical trader
to abort an excellent position prematurely on the basis of
his interpretations of the wiggle-waggles.
It has been said the winners in commodity circles generally
fall into one or two categories.
I. flamboyant plunger
2. the bookish recluse
u do not have to be one of the two above in order to win. The
point here is that these two groups win only by the judicious
application of technique. The non-flamboyant plunger and the
plarngoyant non-bookish extrovert can be a winner provided he
sticks to his tried and true game plan. However, sadly, most
inveterate plungers have foolish, weak application of technique
and they envisage their fortunes to blossom within a few months,
forgetting about next Wednesday. This plunger inevitably ends
up by losing most of their speculative capital in one or two
transactions. These plungers are just out to make a quick
killing. It is precisely this type of person that is easily
out-maneuvered by strong hands. Strong hands are not
in a killing, to-day,as they know the commodity market will
be there to-morrow. It is the self-deluged high-flyer who
envisages himself striding into the broker's office, commanding
a glorious extract from the market place and from all those
around him. It is quite a site. It is quite exciting. Usually
the other traders in the office have an innate feeling that
before long this person will bomb out. Some wish he wud.
In money management, plunging is the cardinal sin. Often, the
pyramiding will in most cases end by establishing a position
tvHO TRADES 4 7 5
similiar to plunging. I admit, there are moments in the market
when one cud bite the bullet and commit horrendous amounts of
capital to the execution. - Fine, by all means do it, if U
can pinpoint those very few trades a month, a year, to employ
this attack. With this approach, the fallacy develops that
one shud and cud heavily strike on so many, many occasions.
And, one loses the of waiting for these rite moments
by assuming they occur frequently, which they don't. I never
shake so much as when I commit myself above the 30% equity
rule, to perhaps IOO%. I never strike hard unless I'm right
at the "box". Often I strike only once or twice a year. -
sometimes more. After plunging, I effect a mental stop and if
I am not happy by the end of the day, I am long gone. The
market shud go my way, or I have acted only on close. Only
then do I place a stop in the market the next day, after
opening, sufficient to cover commissions plus allocating
for bad fills. ( The usually goes, at least momentarily
in the rite direction the next day.) This is the one and only
time that I employ actual stops in the market. All other stops
are "mental". Rarely do I hold a plunging position more than
two days, because I do not regard plunging as a medium or long
term trading method. If I am into a good thing, I get on the
30 % rule as soon as possible, and within two days.
THE TREND BUCKER
There is the trader who is a trend bucker as apposed to a
trend follower. It is considered a dangerous and a more
difficult game to play. It is only dangerous to the extent
where the trader gets stubborn. However, trend bucking is
more difficult but can be as profitable. The ultimate trend
bucker is the trader who happens to be the ultimate seller
in a bull market. What a winner he is l
Trend bucking must be done by a specific criteria, such as
trend channel walls, and P&L outer channel lines, "x" dots
or distance from "dot" (chapt. 9) .
Generally speaking, trend buckers luv using those trend lines
against the major trend, (see illust. next page),
and, -selling, buying news, going against the
news, following the old dictum -" buy rumour, sell news "
Trend bucking involves scalping and day trading and over-nite
positioning.
476 \\THO TR1..DES
will start to
short for small
scalps, maybe to
bottom trend
line
THE II GAP II MAN
A good "gap" man can convert those blank spaces on the chart
into cash in his account. Gap man are always jumping into
the areas where gaps are closed, and always interpreting
certain gaps as meaning such and such.
Gap men and women are beautiful people. All the more power to
them.
If u understand gaps, as well as simple basic phenomenon such
as vol., O.I., and chart patterns and a few wiggle-waggles,
- being a good gap man/woman will considerably enhance U're
profits in the market place. I feel that a good gap man has /
as much insite into the market as anyone. But, what constitutes
a good gap man I don't know. Talk to a gap man. It is simplistic
and I like it.
By all means commit to heart the various types of gaps and
what they mean. They are quite important. (see chapt.23)
WHO TRADES 477
THE TRADE
Suffice it to say, these are the people who actually utilize
commodities in which u trade.
They tend to be short in the market. They form a prerequisite
function of a hedger. These firms constitute the "trade",
employ analysts whose function is not to speculate in the
futures market, only to analyze price movements, employing
hedges by selling/buying commodities against the commodity
which they are using. These people are supposed to be pros,
but like all experts, who do not put their own capital on
the line ( like a genuine civil servant ) their credentials
have more validity than the results of their market trading.
One of.the largest grain co.'s in America went bust, recently.
So much for salaried- experts
( I don't wish to state that all experts are bummers, but
rather that they tend to be. God help me some day if I
becum an expert. If I do, I will probably be in mental
traction, on heavy tranquillizers, booze, yahooing around,
relying on selling my expertise to a firm and to the market
place, rather than extracting from the market place what
I wish.) Our gov'ts are full of experts and look what they are
doing to us.
My friend, forget not that futures markets exist solely for
the trade and farmer, producers and whatever, passing on their
risks to others - U & I - the risk taker, - the speculator.
The trade and farmers on average account for 58% of total O.I.
of all futures contracts. The trade on balance is short.
During a market rise the trade customarily buys heavily in the
cash and sells moderately in the futures.
I refer U to books "A,G,L,N,O," in the bibliography for excellent
coverage on the topic of the hedge trader. Maybe U're public
library has one of these books.
I shall present here for your quick perusal, some exhibits
which portray how hedgers approach the market and how they
think.
Points of \'icw In Dcvdopin:: Pnlic:icR
"""Primary
S!,;.rliu;.' ""'guide
to , purpose
cxpo<<.:d J><;ition
r
I
L
,.
j ..
I.
t
!
1:.
f
l
. --..
.,.,
.,-!
. :. . ;,
.I :
Net
positioo
control
(inventory risk )I
l. F utiy ht-dJ,!'cd (ttm nt"l
J-cKIIIOn) l:uJ!t" wnlumc
b.su- opc:r.alon
Partial ),t-ric:e (con-
stan!. 1101 net

[:&amplt:s:
L..i!o ba.\c. J.cdrr onl)
!C:&loOilaJ C'cumulalaon
3. \'ril.le b.=d
or
net position)
Exanples: Hcdquar-
ters m:.anaated Jredr.c;
dis.crcaU,nary
;thin limits
4.
crte ,-ariaftC'e'S 10
profir from prier
IWU>p)
Cydial
position takinJ; lt:&J'r-
in, inlo the wind;
special position taking
situatJOa
Cross po:;ition'
(total commitment
factors- a
larger market")
1. lurno"'eT
witl1t'mt net
2. Srm::ad,Hs::, and
arhitrorR<
H,'lll:t' t:C"r!o\ treT
Lirn Law
C. 11-dJtt: "'-"""naJ
srorar.c-
Ux: or futures to ccon-
omin c.ash tied up in
in.,na1orie1. or to
sbonen expowre with.
out CU:"!'ent
lh,.,.,.hout
DilltJ:arcJ bu!.iiK:i.;
rw!!'t'ds; stri;ht SJJeCU
lation
Procurement
tool
(time and cost)
1. Take dehvcry on
futures markeu to J!:CI
nf:."t"dc:d JOOCh
2. Lnclt it- marw:in
thrnur.l io-<VStinl
,.w (lo cover
a sale C"Otnmitmenl J
3. Alsurc repurchase o!
tcnJporar;l,_ liquidated
Lilobasc:sto<lu
(. Antieipate ac-
cumulotion by ,...,.
chose ol new crop
futures
S. Use fu1ures lo attain
1ars:c.:1 expc.sure when
Ktuals not 'ailable
e. Pin doWTI allraclive
msl lor anticipoted
needs
7. lle.ocb oul. speculote
rcJnlleso of commer
c:ial needs
Marketins
tool
(time and price)
1. aetu&b on
futures rnarkel
2. Sell (utura to lock in
realu:tlon en aoods in
in.,entory
S. Sell lo
price for ant.cipated
product ton
4. Cover risks or.
pric:ed sales. requirr-
rnents contracts. or
price of deJi.,.
cry"
S. Liquidate unwanted
rislt b1 oelhn futures
wben cash ""on'l move
6. Sell futures lardJCr
abud thon tua4
coD be booked ill IM
mari<et
Profit margins
and
incentives I
1. Lot. k in mra:.au
ac"'uah .,.c buus:ht or
sold on formuJ,. trice 10
be basc.-d on latt-r fu-
tures q'IOiattor"
1:. Deal in haw. hhis CICJ'W'o
ers a -.,ci" a .. v.nuaent ot
.,.a.b.ed PJ'I....-)
3. Ute price or marcrn tar
lo determine: hn-
much busineu ill bP
dolle. in c:k-cidin:
bow much to llorc or
ptae:eSS
. Pin dOW!! other half of
a c:uh commnd,ty trade
in futures.. awam.-,s:. "P'
ponunity to fuUill witb
actuals
5. Buy low, sell bilh.
wbercYer U.e OIJPO"'u
ily p .... nts it.ell- .u
cub. all futiPH. OJ
mis inriucima dtsaehon-
ary J'C)Sition
1
This column assumes a commercial operation in which all decisions are based on cash market considerations. The net cash positions (or portions of them)
are tlcn hedged in futures.
'This column assumes that added positions y.-iJl be undertaken simply because they can be hedged.
'The c-olumn for profit marsins and incenti\'es relates to operations in which the primary focus is not on protection from general price swings, but on eam
ings from residuals and differentials (basis), or e"en from deliberate position taking.
'Includes earninp. of storage: by holding deliverable CASh product a;;ainst short futures. This is sometimes referred to as "cash and carry."
SOURCE: H!nry B. Arthur, Commodity Futures as a Busineu Management Tool, Di,'ision of Research, Graduate School of Business Aciministratior., Har-
vard Ca."D'!:.ridge, Mass., 1971, pp. 336-337.
Commercial Uses of Futures Markets
Type of Use
HEDGING
QUASI HEDGING
OR
rJUCE SETTING
Nature of Openitioo
Buy Hedge: the purchase
of futures against a for-
ward sale of actuals.
Sell Hedge: the sale of
futures against the owner-
ship of actuals.
Buy Versus Fi:red Selling
Price.
Buy futures to cover input
requirements for a product
whose selling price is fixed
or relatively stable.
Sell Versus Fi:red Cost.
Sell futures when it affords
an attractive selling basis
relative to fixed or rela
tivcly stable costs.
Example
A silverware manufacturer books orders for his product at a set price for delivery io
six months. He may buy an equivalent silver futures position as a hedge, prior to ac-
tually purchasing the spot silver from a bullion dealer. \\'b::n he ultimately does buy
his actual silver, he will simultaneously sell out his long futures hedge positioo.
The operator of a country grain elevator buys soybeans from lo::al farmers at harvest
time. To protect himself against Joss due to price decline in the period before he is
able to sell these soybeans, the operator hedges by selling (short) Chicago soybean
futures. When he ultimately sells his cash soybeans, he will sirrrtlltaneously cover his
short futures position.
A bottler who uses sugar as an ingredient in the manufacture of a soft drink, sold for
10 per bottle, buys forward delivery domestic sugar futures when 'it affords him a
reasonable cost-price basis for this sugar.
A farmer, who sees com prices have risen sharply, sells new crop futures short, even
before he plants his seed. This assures him an acceptable price basis on the corre-
sponding portion of his forthcoming new crop.
A plywood manufacturer sells plywood futures short, at wide premiums over actuals.
He calculates that the existing selling provides a substantial "cushion .. against
foreseeable changes in his raw materic.l costs.
Source: The Commodity Futures Market Guide - Stanley Kroll
WHO TRADES 479
It has been said that there are two classes of commodity
traders ...... speculators and the trade. (industry-hedgers)
The speculator trades to make profits, and the trade trades
to protect profits. It's that simple.
The trade, hedger buys and sells futures as part of his
marketing and merchandizing business. He may sell futures
to hedge his risk on commodities owned but not yet sold,
or he may buy futures to cover delivery committments where
he doesn't yet own the required actual commodity. The
hedging function then naturally focuses on the role of
transfering the risk of drastic inventory price changes to
other holders in the futures market - the speculator.
However,the other side of the transaction might very well
be taken by another hedger, who was offsetting as opposite
risk or was liquidating another hedge, as a result of a change
in his position in the cash market. The traditional risk
transfer concept of hedging has evolved into a dynamic concept
of risk management which accepts the maximization of expected
return as well as the position of merely minimizing risk.
Hedging is now viewed as an important management tool, which
facilitates buying and selling decisions and gives greater
freedom for business actions in markets not only dominated
by the necessity of carrying inventories from one period of
time to another but also in non-storage markets.
The first axiom of hedging is that cash and futures tend to
move in the same direction. The second general principle is
that the price of ~ ~ e cash commodity and the futures price
must becum equal, in the delivery month.
There is a theory around that states that most losers are
small traders and that the safest position in the market is
one directly opposite to the market trend, and accordingly,
the hedger cums to play. Many hedgers lose however, merely
by this very nature of hedging. In fact, the hedger's losses
as he opposes a market trend feed the financial pot on which /
speculators draw for profits.
Hedging activity accounts for the largest share of positions
held in commodity futures trading. However, not all the trade
is truly hedger. Many operators are sometimes hedgers and
sometime speculator .
Just because U are a hedger will not then mean that U will
make money. Hedging is not for the speculator, but it is an
interesting bag of tricks and the trader shud be aware of
the psychology - philosophy of the hedging process.
So there U are.
20
480 WHO TFADES
THE EXCHANGE MBMBER
The exchange member means just that - he/she is a member of
an exchange where U're contract is traded, and wherein he/she
owns a "seat". ( Surely U have heard of the "seat".)
These traders are the traders with the penultimate capabilities,
facilities, freedom of choice, and source information.
They pay very little commissions and are on or near the trading
floor at all times. Even when on vacation, it has been said
he rarely fails to make a trade.
They are the most active participants on the floor on an
individual basis. They scalp, they day trade, they long
term trade. An exchange member may scalp for a few points.
I respect his ability in doing this. They will day trade.
One exchange member a few years ago took the entire up-limit
"pool" of silver in one bite. He was prive to his firm's
computer calculations and researchers' data and he was happy
with the situation. Within minutes, silver was down limit.
He day traded IOO's of contracts and reportedly made
SI,OOO,OOO with this little one day bite. An extremely rare
event, but these things can happen.
Exchange members might do things like accummulate millions
of bus. soybeans, expecting a big move. They may work at it
for 6 mths. to a year.
Their capability and astuteness are a sure thing. I have not
heard of too many exchange members of note, breaking their
back completely, but, if they do they return fighting. If I
cud ask to be any other type of trader, I wud ask to be an
exchange member, except that the environment may interfere
with my trading. I don't have to be one, but to be rite in
the thick of things wud be quite fantastic.
THE FEMALE TRADER
5% of players are women. Aside from the instances of joint
ownership, very few accounts are retained in the name of
women.
How do they trade? They seem to prefer extremes, either
excessive risk taking or over-conservativism. Females appear
~ ~ 0 TRADES 48!
less risk sensitive in judging individual trades. But, those
who do adopt middle-of-the-road policies tend to overall
success.
In judging individual cases, winning traders emerge in every
category. (Source:- Robert Vichas, Getting Rich in Commodities
THE SMALL TRADER
The small trader seldom approaches the expectation of the
game in the spirit of fair, good, and bad bets. He is
determined by the profitability of the event occuring.
He is concerned with the ratio of gain to loss and the costs
of playing the game. In his desire to play a speculative game
to the hilt in which results that are either good or bad
occur quickly, the probability of ruin does not receive the
cool reflection it deserves and the small speculator remains
generally unconvinced that he cannot change the mathematical
expectations of the game by the way he plays the game.
Remember, that of the 25% who may win in any given year, only
2 % manage their skills in a consistent manner that assures
their re-appearance year after year.
Small traders, rather than acting consistently on the wrong
side, are better described as operating haphazardly.
The small trader is impatient, he runs his losses, he's afraid
to short markets and he listens to tips - is a newsmonger.
He fears the market. He aborts easily. He will be led to choose
risky trades. He will buck all logic - charts, fundamentals,
advice, trends, futures prices, information, - like Taurus
the Bull. He raps with other traders as they circumnambulate /
in the same circle. He walks and talks like a non-starter.
Small traders are less successful on the short side of the
market. They have a predilection for trading in distant months.
The small trader tends to rely on long term trend following
methods for profits, in which they assume that the tendency
of a rising market is to continue to rise, and that the
tendency of a falling market is to continue to fall. They
buy strength and sell weakness. This enables the small trader
to reap good profits in years such trend are of great frequency.
~ e small trader will becum whiplashed in non-trending markets.
482 wnO TRADES
Also he becums whiplashed by employing techniques such as
point & figure charting, moving averages in markets that are
topping, bottoming, as the moving averages criss-cross each
or whatever, and prices girate in congestions.
The small trader is not a good non-trending type trader.
He's mish-mashed to death in congestions areas.
Psychologically, the small trader does not anticipate a
great change in his habits, and only " I2% consider the
possibility of discontinuing trading as a result of losing
money". ( Source:- Commodity Futures Game. Tewels,Harlow
& Stone. McGraw Hill )
THE AVERAGE TRADER
The average speculator is 45 yrs. old, earns $35,000 per year,
trades in 2's and 3's , resides in California, Illinois, N.Y.,
Texas, Iowa, Ohio. Roughly 2/3rds are college graduates, mainly
male. I/3rd are professional people.
The bald unyielding fact is that most traders as a group possess
no special forecasting skills.
The average speculator has the expectation of losing money,
with losses over a reasonable period equalling commissions.
The average trader does not require a history of profits to
continue trading. His needs may be met by merely playing the
game. They may continue to trade because they continue to feel
they can forecast prices.
He works with second or third hand information received after
it has already been scrutinized and acted upon by large
and other professionals. He has no special representative in
critical areas - no string of correspondents. Rarely is he
trained as an economist or trader. He cannot approach the
market with consistent success, because his everyday business
does not involve commodity dealings.
WrlO T R ~ E S 483
THE PUBLIC TRADER
Most styles are based on the search for minor, intermediate
and major trends. The public speculator is constantly probing
for such trends. Once aboard a trend, each operates in a
somewhat different fashion, one aggressively pyramiding, the
other pyramiding conservatively. Another may periodically
liquidate part of his position, whereas another may decide
that trend bucking is his bag of tricks, as opposed to being
a trend follower.
The public speculator does not like being short. Basically,
he is usually long in the market. He is psychologically more
equipped to be a bull than a bear for the understandable
reason that the price cannot go below zero on the downside
but the sky is the limit on the upside.
The public speculator usually has a fervour for day-trading
and short term trades. lt takes considerable discipline for
him to becum involved in the basics of long term trading.
The public speculator cannot leave the market alone. He has
a clear tendency to cut his profits short and letting losses
run. He buys on days of price declines and sells on price
rises. This action indicates that public traders are
predominate price level traders ( U shud be price movement
trader.)
When the general public learns about an opportunity, they are
invariably wrong in their interpretation of the news event.
Everyday logic does not work in the market. That is why
attornies and doctors are the biggest pidgeons in brokerage
circles. These men are trained to act in logical sequence
patterns.
The vast majority of investors, altho' optimistic, have a
high degree of risk aversion and react more emotionally to
market events. Emotions are the enemy of the public speculator,
especially fear. The public speculator is attracted to the
market in times of ernbullient excitement and are less inclined
to be bearish for they tend to buy and sell with the news
rather than against it. They frequently buy on the first
reaction of a topping formation because it is cheaper. The
concept of contrarian opinion holds to the analysis of the
public speculator ( see chapt. 5) The final blow-off in the
market is stimulated by those buyers who have finally crossed
the psychological threshold, convinced that a bull market is
now, at last, in full swing.
The public speculator always misjudges events and distorts
facts and panics easily. The public speculator's marching
song is " Buy High - Sell The Low "
484 WHO TP.ADES
The public speculator is frequently a poor student of the
commodity or has recently begun commodity trading. He has
limited resources and has a tendency to over-trade. At the
first sign of problems, they frequently must liquidate their
positions, rarely having the resources to withstand even a
moderately adverse price reaction.
They base their action on hot market tips, rumours and
hunches, because they know their positions are based on
shaky grounds. They are frequently out to make a quick killing,
that is, they are plungers. Unfortunately they ignore the
prime prerequisite of money management and operate without a
written down trading plan. They are not aware of the importance
of limiting risk relative to risk capital. They ignore reality.
As in all speculative endeavours, losses will occur. The public
speculator does not take this into account. They do not take
into account the fact that trading with minimum margins in
futures trading, that judgement has to be accurate to within
very fine tuning, which is extremely difficult to obtain with
regards to forecasting prices. The public speculator does not
realize that he has to be able to forecast price and to be
aware of market movement.
THE BEGINNING SPECULATOR
This trader moves usually from the stock market or some other
investment media to the commodity markets, because he realizes
that's where the action is. Or, he may no longer have enough
money to maintain a stock account.
I have great compassion for the beginning trader. We all were
one at one time. I began commodity trading by giving $!2,000
to a leading brokerage firm, by way of a managed account. /
Within two weeks, the $!2,000 had catapulted to $!8,000 and
within four days I received a cheque for what was left in my
account, of $2.81 and my broker went on a holiday. (A
standard procedure when U're broker has blown U out of money,
he goes on vacation, he made so much money and to get away from
his disgruntled clients.) At that moment I became interested
in commodity futures trading. I was astounded that the
experts did not know what they were doing. (They still don't.)
Every beginning trader will go thru some special experience
that he/she remembers for the rest of his/her life.
1-.'HO TRADES 485
!1any beginning traders do not have the fight in them to
continue trading after their broker or advisory service
has gone thru their money. If U are a beginning trader,
I recommend four things:-
I. Obtain as much information about what
constitutes a good broker. There's some
information in this book. Be careful of
fancy circulars, - get U're information
from books (library?). And learn how to
becum a good client. Lots in this book
for that.
2. Subsribe to Bruce Gould, Box I6, Seattle,
Washington 98III for basic fundamental
and technical analysis and concomitant
wisdomGet back issues,especiallY- Vol.I.
3. Employ P&L charting along with Bruce
Gould's approach, but do not fiddle
with it too much. Then analyze all market
tops and bottoms and congestion areas, in
the commodity u are intersted in,for, if
possible the last two years(see U're broker?)
using P&L charting, to see when to take
profits or enter the market. But be careful,
do not becum an expert. ( P&L charting:-
I invented the damn thing & have yet to
consider myself an expert yet, in spite of
5 yrs. using it.)
Read this book carefully. And continue to
refer to the chapts. on trend, congestion,
market reversals, for guidance in determining
market movements ...... know the basics of
vol. O.I. cash, basis, odds.
4. Do not enter the market for at least 6 mths.
Learn the rules of money managment to know /
market plans that u feel easy with. Do not
paper trade. Paper trading gives U too much
confidence. U must trade in real market
experience. Just analyze the markets. U will
follow some markets and P&L charting will
enable U to know the feel of market congestions,
market trends, and market turnarounds. U will
recognize them. If U must trade in this 6 mth's
period, trade medium to long term, possibly
following Bruce Gould's suggestions.
One last little suggestion:- make a precise of this book. Shud
take u 3 mths .
486 WHO TRADES
Look, if U've got $IO,OOO, if U've got $5,000 , realize that
at this very moment U have got $IO,OOO or $5,000 . At least
U've got some money. Don't be in a position 6 mths. from now
in having only $I,OOO left. If U take U're time, plod along,
keep things simple, and quietly adjust U'reself to the market,
U shud be able to quietly over the next five years create
$I,OOO,OOO , either before or after tax.
Take U're time. Remember, that the predominant characteristic
of the beginning trader is his impatience. He wants his fortune
by next Wednesday. He shakes loose easily from the market. He
does not have self-control and discipline.
Take it easy. Take U're time. Gad! There's no better advice
I can give U.
Write U're plan down, and write down the reasons each time U
trade ..
The market will be here after 6 rnths. - just make sure U are
too! If U blow U'reself out before then, then U have only
U' reself to blame. Don't walk away disgusted with commodity
trading. Too many do. They are so foolish.
My friend, we're nearing the end of my book, accept for
items of interest and data in the appendices. Please do
not put U'self in the position of making $200,000 in 2-3
months, and losing it in one week. Be wary of day-trading
U'reself into $90,000 profit one day and losing $I50,000
the next. I wud like to think of U once having read this
book to be making on a consistent basis, year after year
good money. Wud U do that for me? I put a lot of work into
this book, U know. I wud like to actually think of U
making lots and lots of money.
Be wary of those around u. Be wary of U'reself.
Whatever u do, I am with u. Particularily if U win.
APPENDIX
A
advice for the individual
practical trading hints
chart patterns
seasonal &cyclical patterns
thoughts
CHAPTER TWENTY-ONE
ADVICE FOR THE INDIVIDUAL
the following tid-bits of advice
have been selected at random and
are listed as such.
It shud prove useful to u, as an
occasional quick reference.
If U see no risk u wish to take - get out of the market
for a while - take a vacation - regain perspective.
( If U can't get out, U shudn't trade commodities. )
It is better that U're money shud lay idle until U
are convinced.
Don't be intimidated or impressed by sudden runs in the
market - they may just be "stops" being run. - runaway
markets are not that common. ( But bear cracks can be
very frightening to the longs. )
Over-trading is one of the worst sins that can be made
trade too often and be the broker's best friend, trade
less often to be your own true friend.
buy only on down days, sell only on up days .... herd
instinct almost forces us to buy on up days, while the
law of probability tells us that up days are more likely
to be followed by down days, especially if it is the
hhird or fourth day of the move. ( Don't fall for those
sucker plays. ) ( the above is re: uptrend )
dialogue is appropriate if the mutual goal is enlightenment
Unless the work of U're broker, consultants harmonizes
to achieve what U want, they are not only useless to U,
but their opinions can interfer with U're decision making
process.
487
488 ;..pvrc:::
It is no trick at all to be right on the markets. ( U
can always find lots of early bulls and bears. ) Men
who can both be right and sir tight are uncommon.
Sit tight. It is only after the operator has firmly
grasped this fact that he can make big money. Be patient.
There are I68 hours in a week. Roughly 20 of these hours
are devoted to making it. Don't U believe those 20 hours
merit U're full attention ? Enough time remains in the
other I48 for play ( or other work) .
"and the poor get poorer" .... if U learn to withdraw
U're attention from all distraction -- whether they may
happen to be of hub-bub, telephones, - noise U can't
stash and to concentrate on one thing --- namely, commodity
futures trading - U will learn how to attract the right
information. But accomplishment does require practise.
Taking profits too soon and waiting to buy at a predetermined
area, such as an additional 50% can be good or bad advice .
U can fall into the trap of missing a winning bull in order
to buy cheaper, or u can be resolved to wait for the market
to cum to U even if it means never boarding the bull.
If U are stopped out of a position, do not err in the opposite
direction and reverse the position. Analyze each dealing
on its own merits.
Accidental successes usually turn into accidental failures.
Planned successes denotes planning, not failing. (Don't forget.)
Good sports die broke .....
There are no sure things. Stay out of traps.
Traders sleep, markets don't, or is it, markets sleep
trader's don't ? .
Try to learn what news is significant and what is not.
- use a panic exodus or entry as a trading
opportunity, especially if it is against
a strong trend.
- don't be worried.
However, don't buy a bull market that
won't act on bullish news, & don't sell
a bear market that won't act on bearish
news.
------- -- ------
ADVICE 489
These days there is a penchant for placing undue faith in
the abilities of people with official credentials. They
trade on the cult of expertise which is impervious to the
idea of performance. If a professional has real credentials
then even a record of consistant failure will not be held
against him. " The analyst can be only as good as his
market " pretty sweepingly absolves him from having to earn
his keep. Exactly how a professional receives his credentials
is a mystery, but performance generally has little to do with
it. If every analyst flipped a coin in order to arrive at his
recommendations, some wud compile truly impressive records.
Brokers are on the firing line far more than analysts. For
them, the kind of luck that is particularily useful is making
money for the customer in the early stages. If a broker can
hit.a couple of good markets, and turn $5,000 into $20,000
the customer wil-l be hooked.
Never try to reduce trading to a purely mechanical exercise
Mechanicalness must be displaced with awareness.
Generally, the best policy after accepting a loss is to
stand aside.
A broker's office is the worst place to evaluate market
activity. Rumours flourish and emotions reign. News is
over-emphasized and misinterpreted. The trader is much
better off to rely on his charts.
Rarely buck a runaway market.
- any major trend, up or down, tends to start
slowly and then accelerate sharply as the
momentum of buying and selling accelerates.
It is at this juncture errors start to creep
in. Almost invariably, trends in commodities/
exceed one's wildest dreams or any chart
prediction. If a market is not in a major
trend, investors shud try to sell on strength
and buy on wealness. Experience will show
whether the market is in a true trend or merely
a trading range.
490 ADVICE
Don't run the losses ..... unfortunately, many unsophisticated
day traders develop the practise of liquidating only their
day trades that go in the right direction and maintain positions
that were wrong. There is a natural preference to taking
profits quickly for fear they will evaporate. There's also
a natural reluctance to take quick losses. We usually act too
quickly when we're trying to make money and too slowly when
we're trying to protect our money.
If U have missed an enormous bull run, don't be over-awed by
widespread bull talk. Look to sell. The market will very likely
go down much faster, as stop-loss selling snow-balls.
Don't listen to tips .... always look for unusual pressures on
the market.
If a market turns quiet, don't forget that speculators can
be very Often U will see the market wander lower
on lack of interest and speculators get bored with their
holdings and throw it out. Look to buy on this type of
behaviour.
Don't trade too heavily in context with U're plan liability.
Never meet a margin call liquidate
Don't ( never ) straddle to avoid taking a loss --- .
The trader shud be certain that his rules are not out of
date for each commodity he is following.
Decide on a trading plan and follow it !
Have a trading plan that has proved profitable in the past.
ADVICE 49I
~ e m o v e a portion of all profits from V
1
re accounts
I I I
Use only mental stops and stick to them. Do not put in a
stop order unless the market is very near U're price. Just
buy or sell at the market, if the price hits U're mental stop.
( Not everyone agrees with me on this . )
Know U-
1
re broker and his brokerage firm.
Pick an ecperienced broker. -
Deal only with a firm that is a clearing menilier of-
an exchange.
Only commit 30 % of U
1
re operating capital at any one time.
Trade only in big vol:ume commodities. These markets are large
enough to prevent manipulation.
Try to stick to U.S. Exchanges.
Think independantly .. avoid the herd instinct. The herd
is often ( always ) wrong.
The market has only one top per year. In looking for a top,
give the market plenty of time to dance around, or else look
for sharp break in an uptrend line. ( And watch out for those
inverted "v" 's and island reversals. )
In general, the more prices rise, the more likely they are to
continue to rise. If U ever have to bet blind, bet that the
market will continue its chosen path.
Remember how unimportant most trading days are in the life
of a major move.
492 ADVICE
I want to be rich, but I never want to be in such a hurry
that I can't wait around for a few markets ( sometimes
months, sometimes years ) that are good markets and trade
them quietly and then sit back and ~ a i t for a few more.
I wud rather trade quiet markets which are starting their
moves than the widely fluctuating markets where no one
knows what will happen. Significant price moves take time
to develop. They do not cum overnite.
However, what can really be of value is the ability to
successfully trade fluctuating markets. This ability, no
one can ever take away from u.
When U get sharp upward momentum, and a correction (which
is natural ) expect further momentum.
DON'T WALK INTO A BROKERAGE FIRM AND EXPECT TO GET RICH
BY WEDNESDAY.
An old adage dictum
take positions along the
path of least resistance.
Note the prices in supermarkets, whether its featured
and how people are buying it. U develop some idea on
what the market is doing without the formal framework
of a model.
Remember that as more and more market participants
( 2.5 million in I977 ) attempt to predicate every action
on chart rules, the accumulative effect of those 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 penetrations of trend
lines and other fo.rmations.
ADVICE 493
If U're a day trader, watching the price ticks, remember
that any series of up-ticks or down-ticks wud give the
trader no more information about his next position than
wud a series of heads to the better on a coin flip. These
small random fluctuations are called noise and account
for 75 % of all new prices coming across the ticker.
It is a meaningless fluctuation that characterizes a market
at rest. (However, an experienced "tick" listener, mite,
just mite, know better.)
News information available to everyone has little or no
value. The futures market has an uncanny ability to discount
future events well before they are cognized by the very many.
By the time the majority learns a piece of news, it is
already too late. It is after the fact. The majority is
always wrong. ( Sell the news, buy the rumour: )
If U do not have more than $1-2,000 ; pool U're resources
with five others, form an investment club and get a good
broker.
No better system reigns than to write out each
trade before hand.
One way of reducing risk for inexperienced day traders is
to trade from one side of the market. Trading both long
and short in one day will probably blow out all brain fuses
of all but most hardened traders. Remember, U can swing
some pretty good no's with day trading.
Too many people master one technique, then want to begin
experimenting with others. When U have found a winning style,
stick to it. /
U have to organize what U do and then be able to do it
when u don't feel like it.
Keep U'reself in shape physically. ( It will help the mental
state, which is enough of a problem without having a derelict
host within which to function ! )
- good nutrition and constant
- good exercise and constant
- good sleep . ( mix that up to stir things s bit )
494 ADVICE
No alcohol during Sunday, Monday, Tuesday, Wednesday, and
Thursday. An absolute cardinal rule.
And for God's sake, no marijuana !!!
- it's fat soluble, and one toke
will last to varying degrees
30 days in the fatty tissue of
brain cells ( absolutely murdurous.)
and, this includes any mood altering
chemicals whether prescribed or not.
Check it out !
Watch out for a trend, when market opinion seems one sided.
A good rule cud be to confine U're trading to situations of
unusual appeal.
Let us not becum elated when we pluck a few thousand from
the market. Don't believe that happy days are here, with a
few lucky shots.
Nothing can bring U peace, but the triumph of principles.
The prudent speculator will never have positions during
a vacation.
Becum a price movement trader rather than a price level
trader . ( except, perhaps for 50 % retracements. )
Never let U're bag of tools be overfilled until the noise/
of information systems clog the channel of clear cogitation.
A trader's greatest mistake is watching the market and
making decisions based on possible reactions to price
moves.
Take five years to create and stabalize U're first million
dollars then climb to I2 million in another three.
ADVICE 495
~ h e chart purist who does not wish to know anything about
the fundamentals of the market seems to represent too extreme
a view for the successful long term price forecasting.
A sharp trader is not likely to short a market during a
technical reaction following a major upside breakout, out
of a congestion.
Take a broad view of the market, in fact an international
view, and be willing to temporarily discard some old concepts
when there are unusual market patterns. be flexible.
Identify
both major and minor Price trends.
- both major and minor support and resistance
levels.
- trend channels, if there is one.
- major trend lines
- congestion areas
- seasonals, odds and basis.
Do not initiate or liquidate a position due to impatience
or boredom.
As the equity in U're account increases, do not commensurately
increase the size of the position. ( Unless it is part of
U're trading plan. ) Diversify into other markets, or take
some money home.
A market will rarely penetrate an important overhead resistance
level on the first attempt. Even if it does go through, it shud
pull back at least to :the breakout point.
In a major downtrend, sell on a minor rally into overhead
resistance or on a 50 % retracement of the last down-leg.
( and vica versa in a major uptrend. )
496 ADVICE
A minor trend rarely lasts more than seven trading days.
Buy downflags in a major uptrend and sell upflags in a major
downtrend, especially if the flag is five or more days old.
Do not buy an upflag in an uptrend, espcially if a top is
suspected.
A major move frequently runs three " legs " .
Do not overlook seasonals.
Do not allow a few successful trades to build overconfidence
and undermine meticulous care with respect to U're trading
plan. This is the most deadly, destructive force that afflicts
nearly every trader I know. ( There are exceptions, but few
and far between. )
Quiet, weak markets are good markets to sell. They ordinarily
develop into declining markets. But when a market has gone
through the stages of quiet and weak to active and declining
then on to semi-panic or panic, it shud be bought freely.
When vica versa, a quiet and firm market develops into
activity and strength, then into excitement, it sh ud be sold
with great confidence.
Do U want to know my s e c r e ~ weapon ?
Well, here it is :
Guard Your Secret
Do not expatiate on failure or associate with those who do. Strive to
feel and feed a sense of victory. Prating about your investments only
scatters energy. It invites negative expressions from people who are envious,
stupid, or just plain z.eroes or even minuses. Success must be continually
fed. You starve the creature when you fail to keep private: mettters private:.
Source
an excellent book
Getting Rich In Commodities Currencies,
or coins, Before or During the Next
Depression. by Robert Vichas
ADVICE 497
U want to make a great deal of money,
well,
final feel of advice.
KEEP THINGS SIMPLE.
- that applies to every aspect of U're trading
- U're market and research approach
- U're timing and price objective
studies.
finally,
in this world, one thing counts,
In the bank,
money,
large amounts
( Fagin, Oliver twist. )
After you have been trading sometime, it is good advice to
read one chapter of this book a week, especially the technical
chapters. I do !
. Make a list of the things you want to buy in this world
and read it weekly
. Make a graph for a wall which portrays the money you are
making j losing on a 'closed out' basis, daily .
498
CHAPTER TWENTY-TWO
PRACTICAL TRADING HINTS

If the market does not act as it shud on opening
e.g. call for higher opening , and it doesn't do this
then the market is weak. and vica versa.
Morning Buldge - 70 % of the time there is a price buldge
up or down during the first hour of trading. This is even
truer if the previous day's action has been very strong or
very weak. Be careful of buying strength during the first
hour of trading especially following a strong close the
previous day ( unless of course, u have a genuine runaway
market, which does not occur that often.) Opening prices
often are a good distance away from the previous day's
close, as the gap will almost always be filled during the
day if u just have the patience to wait. On a daily basis,
the first I & I/2 hours of trading can usually be divided
into three I/2 hour segments. Purchases or sales during the
third segment are not as likely to be as correct as purchases
sales made during the #I or #2 .
U buy on opening if U feel it is about to stage a good rally
( otherwise U never, never buy on opening ) e.g. if the
commodity closed at its low or close to the low the day before
( these conditions do exist ) and its almost a sure thing
that prices will get clobbered the following morning with a
buldge on opening, where the lows of the day are often
established. ( the reverse is true for selling)
r up ?
opening
r
HINTS 499
U will find that the third day of a rally usually makes a
short term top. Any time prices have moved up for three days
in a row ( especially in congestions ) , odds are 80 %
for a down move on the fourth and fifth day unless
the market is a runaway, which always has only one day down
or in the reverse.
If prices close five days up or down in a row,
we have a major move signal. Such a display of strength means
a further move in that direction is ahead. e.g. five days
down, - expect lower prices. This does not mean the major
move will continue on the sixth day. With regards to trading
ranges, if prices move in the same direction five days in a
row, there's plenty of pent-up buying or selling in the
market and be prepared for a great deal more action.
Each commodity seems to have a peculiar cycle common to it
for that contract life. e.g. Silver '78 seems to be congesting
&/or forming a medium term top/bottom every 8-9 days.
Strange, isn't it ? But a commodity will undulate with a
fairly constant ~ y t h y m . Check it out for U'reself. Simply
count the number of days between each important low to low
and important high to low on the chart for any given commodity
and see if U can cum up with its present cycle.
When u are searching for a stop-point ( if U must have one,
apart from a mental one ) U must realize that others are
doing the same thing. The rest of the traders will usually
place stops slightly below/above s.lpport/resistance areas
or just outside trend lines. So, when U're placing U're
own stop give sum consideration to where u assume the other
stops will be, with the pre.'11ise " if U 're going to get me,
U're going to have to take a lot of people along first.
Subscribe to Bruce Gould.see pg. 485
Some traders base their stops on time basis. i.e. for example,
the commodity must start its projected move in four days or
theres an indication that something isn't right. This trader
uses a IO day time rule for major positions and occasionally,
if I am firmly and heavily committed - one day !
One silly rule of thumb, but fairly workable and certainly
projectable and especially if U feel U have entered the market
at the proper price , is to place the stop under long positions
at I & I/2 limit move , and over short positions at two limit
moves. And, then place time 'stops'.
22
500 PRACTI=AL HINTS
This trader tracks wheat, corn, beans and bean products,
cattle, hogs, bellies, gold, silver, copper, cotton. I
do not like broilers, eggs,plywood, lumber, potatoes,
cocoa, coffee, orange juice, sugar unles on a long term
basis, waiting for the right moment for big moves. I see
little point is using P&L charting on something I'm not
going to be trading short to medium term, unless I am
in it. Conventional charting will do.
middle of the range close and the narrow range day :
the narrow range day occurs after several wider
range days, but both of these patterns demonstrate
indecisiveness, while action during the next day
or two may show signs of decisiveness.
After an extended day move up, on high volume, the next
day or two are usually narrow range day on low volume,
while the market catches up, often forming a pennant or
flag, or very short term congestion. A good opportunity
for a quick trend buck or getting on board the up move.
Be careful of these high volume days near projected market
tops. Be careful of buying the next day or two. ( watch
the "dots (chapt.9) . High volume days on bear cracks usually
begets more of the some, unless it has been an end-run out
of a congestion.
One widely known rule concernsthe extent of a price reaction.
In intermediate and short-term trends, a 50 % retracement is
considered as objective. The extent to which prices reach this
mid-point tests the degree of strength or weakness of the play.
Sometimes the rule works well. Often it is difficult to
pin-point.
Rarely place an order for execution on opening ( exc. the above
Wait for a few minutes and let the market try to settle down
or if U can, put in a stop-limit.
PRACTICAL 50!
o=ten u will see the general market wander lower on a long
term basis, on lack of interest and speculators get bored
of their holdings and throw it out. Look to buy on this
type of behaviour. Don't trade too heavily, in context
with U're plan liability.
Use a panic exodus or entry as a trading opportunity,
especially if it is against a strong trend, except don't
buy just near projected tops.
Imagine a trading-range where the volume is high at the
lower end of their trading-range, but low as prices approach
the upper end of the range. Does this action signal a
strong or weak market ? This action shows support buying
entering every time the prices churn in the lower quartile
of the range. Obviously, some traders perceive the commodity
as a good bargain at the lower prices. This action must
be interpreted as bullish.
On an intra-day basis, volume study requires
dediGating more time and attention to the market
than traders can spare. The same rules apply intra-day
as on daily volume day analysis. e.g. during the opening
on heavy market,volume accummulates from the overnite orders,
generated by factors widely known. After the opening, the
market can be counted on to trade down a spell. On the other
hand, if the market opens lower, with heavy volume, anticipate
prices to rise, on a frequent basis during the mid-morning
session.
Also, let's say that prices have been trading up
during the day on heavy volume and run into resistance during
the closing hour of trading and prices falter. A wall of sellers
have stalled prices - even tho' they may fluctuate during the
last minutes of trading. Reckon on lower opening prices the
next day. With a contra-position, prices subside on heavy
volume, but the downtrend is stalled in the last hour of/
trading on good volume . - buyers have crossed swords with
sellers towards the end of the trading session with prospects
for a higher opening the next day.
502 PRACT:CAL HINTS
With regards to gaps ( which are not closed during the trading
session). - if the gap stays open, and for e.g. the gap is up
and not up limit, if prices have run into resistance, then
there's a heavy wall of sellers, even tho' volume may be heavy
, moderate or light, and even tho' prices may fluctuate,
possibly e v e n ~ n the high of the day on close , reckon on
lower opening prices the next day ( especially if against a
channel line in P&L charting.).
Bull markets appear in a manner similiar to the pattern
followed by nature for most living things - It consists of a
slow start - gradual acceleration in growth that terminates
at maturity.
Stay away from high risk trades. They will nickle and dime
U to death.
Remember that volume dry-ups at times signal the termination
of counter-trends. These quiet periods are generally splendid
times to enter the market. e.g. counter-trend dry-up from a
major up trend ... buy .
Pull backs and consolidations last from 5 to 20 days.
A note on Key Reversal Days: - a sell signal in a bull
market has little significance with the reversal day, unless
we have seen climatic action and an extended price move of
from approx. 5-6 months duration.
One way of reducing risks for day traders is to day trade
from one side of the market. If the intermediate trend is
ascending, prices will work back and forth through this
upslanting channel . - forego opportunities to short.
Only accept trades from the long side.
PRACTICAL 503
Period of Time- Price Reversal
- a phenomenon popular with technicians.
Often conforms to a pattern for a commodity with a sizeable
speculative following. The commodity volume pattern is heavier
volume during the opening and closing minutes of trading with
fairly uniform activity between. Such a pattern offers many
profitable scalping opportunities as well as frequently
enabling one to enter at opportune times. If a market opens
higher on pretty heavy volume, usually the market will then
settle back for a while, and, conversely, if the market
opens lower on pretty heavy volume, usually the market will
firm up for a while.
In the context of the aforegoing volume action
pattern, there are two types of higher or lower closings.
I. where prices continue to rise ( expect higher
opening the following day ) or fall right up to
the close.
2. where prices stop rising I falling in roughly the
last IS minutes to an hour of trading, but during
that time fluctuate at or near the high/lows
of the day. After an up day stalled with pretty
heavy volume in last I/2 hour or so, supply has
caught up with demand and lower prices may be
anticipated the next day, on
Have U ever heard of Tuesday Reversals ? Well, each day of the
week has to some extent a distinct pattern, believe it or not.
Keep the following in mind and see if it happens.
Monday : is a trend following day, and usually
confirms friday action.
Tuesday : sharp reversals occur often on this day.
Wednesday : is a trend following day
Thursday : another reversal day
Friday : is the strongest market day of the week .
. Start small : - if U are new to commodities and even if U have
$ IO,OOO - 25,000 , use $5,000 maximum to get started with,
trying on only one contract at a time, or better still use
the mini-contracts. (ask U're broker). And, before U do this,
precise this book, itemizing each page's message. in U're own
handwriting, and study for at least six months, while charting
one commodity. It will take U at least a year or two of actual
trading to gain even the slightest "feel" of what futures are
about. Take one year to create a profit of _$!0,000 to $20,000
and be happy. Start small.
504 PRACTICAL HINTS
- A suggestion : with large numbers of contracts, do not
put entire position on at once. If U trade in fifty contacts
of pork bellies, u may want to do it in installments of
ten contracts at a time, five times. It's not a bad idea
to let the market verify that initial position before
putting on the full position
- a little note on trend lines : when prices break thru a
medium to long term trend line and trade outside of the
trend line for two or three days, it's usually a good
trading signal that the trend line has been passed thru.
Of course, U now look for a trend line in the opposite
direction. But, this is a handy little tool to further
assess the validity of trend lines
- a certain hint is to watch the magnitude of market chan e.
When y a sma ler amount each
day, it cud be a signal for an uptrend. _en t e mar et
~ e s up each day-: but in smaller aintr"unts, it's hi r
bet that a downtrend is at hand.
'spikes' often mark resistance/support.
'spike' resistance
'spike' support
- on page 232, where we are talking of 'crests', please note
that 'crests' provide support/resistance and could also be
added to 'types' of resistance as mentioned on page 336, as
well as the 'spikes' above, giving five types of support,
resistance. Also see pages 168 - !73 !
- the following is an illustration of very, very, very
typical tops for any commodity. See page 254 for a
discussion of why I feel that most markets have normal
graphic tops and are identifiable. There is that last
bull leap, with prices closing at the top of the range
for the day or at the bottom, and the following day U
get the reversal, then very soon there is the reaction
back up, volume is lighter, a pall sets over the market,
there is a pause, then boom, good-bye, the bull is over,
if only temporarily. Watch for this And keep this page
and page 254 handy in your mind when U suspect a top.
These patterns happen again & again & again.And keep a
weather eye on a downside 2-day line, per page 360 !
~
1 ---
f-
-----== -
. ~ . -
- a group of closes ( s.or more ) can act as support/resistance.
In the silver chart, prices close within a box, within 5 of
each other. Call it a cluster of closes, if U will.
. : ..
. -
~
~ . ~ .
. .I
23
505
CHAPTER TWENTY-THREE
CHART PATTERNS
506 CHART
I I I I I i
I I I I I I
I I I I
. I I
I I O<dl. TOP I . :
I
I ---;:[.. '-- I I I
OOUBI.E 80T11)1ot
I I
I
: ONE
1
DAY I
ISL.ANO REVERSAL.
Source : Commodity Research Bureau.
I
!
I I I ,. i I I
CHART PATTERNS 507
I
I
Source Commodity Research Bureau.
508 CHART ? A T T E R ~ S
In the reading of any chart formation,
it is important that the underlying
explanation of what is happening is
held in mind. Random-walk, trending,
discounting and the floor and ceilings
for each commodity all help in the
interpretation of charts and help
prevent some of the more spurious
reasoning that can come from technical
study. 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 seem to
produce worthwhile results. Whatever
one believes is being measured - this
entire approach is built on the
assumption that certain repetitive
patterns of price action will often
occur before significant price
movements.
Much of what U will learn in this
chapter is common knowledge, brandished
by those who fancy themselves as
technicians. Imitators have embalmed
in their brain three or four basic
chart patterns. At least it is
good as a repartee for chin-wags.
I
11
111
CHART PATTERNS 509
PATTERNS USUALLY A CONTINUATION
.oimple.
M c.e.ruu.n.g
d e..o c. e.n.d<.n.g
PATTERNS USUALLY A REVERSAL
" V" 6 o Jtma.ti.o rL6
m ~ p l e . top, bottom
he.a.d a.1td .o hou..e.d.Vt
Jtoun.de.d bottom
6W bottom
.V...ta.n.d Jte.v e.Ma6
k.e.y Jte.ve.Ma..t da.y pa.tte.Jtn.
tv.Jo da.y Jte.ve.Ma pa.tte.Jtn.
CONTINUATION OR REVERSAL PATTERNS
we.dge..o
Jt e.c.ta.n.g .e.e..o
.0 e.Jt p e.n.t h e.a.d
ttUa..n.g..te..o
OTHER PATTERNS
ga.p.o
tJt e.n.c:.iLi.n. e..o
tJte.n.d c.ha.n.n.e6
Jt e..o .<stan c. e., .o uppoJtt
5!0 CHART PATTERNS
I PATTERNS USUALLY A CONTINUATION
simple
ascending
descending
Market is coiling.
Which direction
will it spring ?
Market is trying to
go t h r o u g h ~ top .
Market is trying to
break thru on the
downside.
Triangular formations occur with great frequency, because after
a substantial rise or decline, price fluctuations are apt to be
wide and hectic in reflection of the market's struggle to adjust
CHART PATTERNS SII
to the new price level and then will gradually simmer down.
(Volume is greatest at the congestion area's, triangles's conception
and then will gradually ebb to the congestion's breakout . ) The
triangle is the only or most common pattern that turns up as
both continuation and reversal patterns.
Triangles usually mark the mid-point of a move. Some chartists
believe that the extent of the breakout from the triangle will
be a minimum of the vertical side distance from the apex.
i [_-
r? same as "a" ?
,.
apex
Triangles frequently becum part of other more important chart
formations.
Often, a double top or bottom (discussion to follow) may be
really a large triangle. An ascending triangle resembles a
double top.
Of the three triangles, the ascending and descending triangles
are the most reliable. Namely, an upt. rend with an ascending
triangle is the most reliable pattern to follow, or in a downtrend
the descending triangle is the most reliable.
Triangles generally develop as a consolidation pattern, that is
a temporary interuption in the trend, but on occasion develops
as a trend reversal.
Triangles are fairly reliable, especially when no more than
three or four oscillations occur before the breakout.
SIMPLE TRIANGLE
the symmetrical, equilateral, simple triangle does not
indicate the direction likely to be taken by the
ultimately emerging trend.
if the simple triangle is to be considered as a possible
price reversal, it must have sufficient broadening of scope
and be of long duration.
will last two weeks to a month.
512 CHARZ PATTERNS
~ ~ e closer ~ ~ e price gets to the apex, the less significance
the triangle will have. Watch ou:t for end-runs. (chapt. 7) .
A seemingly valid move will not violate either line of the
triangle past the last third to quarter of the triangle.
usually mark the mid-point of a move.
target
) triangle
I bottom
this is the least dependable triangle. It merely foretells
that a substantial move out of the congestion may occur.
can be depicted as a coil, as the apex is approached. The
trading r a n ~ e narrows and like a coil wound tighter and
tighter, prices finally snap through the confines of the
triangle. Trading volume diminishes as the apex is approached ..
SYMMETRICAl
TRIANGLE
tl..
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Symmetrica I triangle ( Source : Commod.i ty Pe:rspecti ve
327 S.LaSalle Chic.Ill.60604 }
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5!4 CHART PATTERNS
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ASCENVING TRIANGLE
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Upward Slanting Triangle
5!6 CEART PATTERNS
the side o: the triangle which slopes does so in an
upward fashion
ascending triangle is normally bullish. It is usually
found when the market is trying to go through a previous
top. Time after time, prices have banged against the
same resistance level only to be thrown back.
In an uptrend, an ascending triangle is the most reliable
pattern to follow for a continuation of an uptrend. If the
prior trend is up, this favours the emergence of trend in
the same direction. However, in the above illustration,
U can see that it signaled a move against a downtrend.
Usually the s l o ~ indicates direction of the ultimate
move out of the .triangle. The support area is the uptrend
line, - the slope of the ascending triangle and will exhibit
a tendency to breakout on the upside.
the highs of the triangle are pretty well the same price
and the isolated lows are coming up against it, so the top
of the triangle is always flat and the bottom of the triangle
is acute and slanting to it.
again, the closer U get to the apex, the less reliable the
movement is except that a close above the top flat line wud
be bullish. The bottom line m u ~ t not be broken if it is, it
is a bearish signal.
VESCENV1NG TRIANGLE
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. Downward Slanting Triangle
it is formed by price swings similiar to the aseending
triangle. In this case, each swing up ends with a lower
high point while support continues to develop at the same
approximate price on each reaction. Since the high of each
move continuously moves lower, it is an indication that
selling is becuming more aggressive and that prices will
eventually break out of the formation on the downside.
the descending triangle is normally bearish.
2.3
5I8 CF.hRT PATTERNS
descending triangle is the most reliable formation to
follow in a major downtrend.
FLAGS ANV PENNANTS
I

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pennant
flag
indications of trend continuance:- usually volume shud
subside as apex is approached.
a flag's boundary line remains equidistant, while a
pennant's lines converge.
they usually slant downwards in an upmarket, upward in a
down market. The fact that flags, pennants ( & wedges ) /
slope against the prevailing trend makes sense when realized
that a consolidation area is often simply area of price
corrective action caused by a market sprint which overran
the price level that cud then be supported by the law of
supply and demand. ( corrective action is by implication
trend countering. )
Volume is greatest at the congestion area's - flag, pennant's
conception and will gradually ebb to the breakout and volume
shud be smaller during the formation of the flag/pennant
than during the move that preceded it.
CHART PATTERNS 5I9
they mark the mid-point of a prevailing move and are usually
continuation rather than reversal formations.
these patterns tend to form rather quickly and characteristic
of-sharp moves and are fairly easy to recognize. After a
steep, precipitous move, prices consolidate as profits are
taken and the move simmers down and all traders take stock
of the situation and the flag/pennant unfurls.
they never last long, often four or five days, and after the
flag/pennant is formed, the move is abruptly resumed,
carrying to new high/lows.
they seldom persist longer than two weeks.
a downsloped flag/pennant is more likely to break out
on the upside while an upward sloped flag/pennant is more
likely to turn downwards.
many chartists rank flags/pennants among the most dependable
technical signals, particularily with reference to the
direction of the impending move.
no important differences reign between a flag and pennant.
CAUTION
their significance must be attached to a composite
evaluation of
I. the resistance level of the
congestion area.
2. the level and location of activity
in this area.
3. the relation of this area to trend
lines and trend channels.
4. chart price objectives.
23
520 PATTEPJ'lS
beware of a flag/pennant which does not have a reduced
volume. U may be seeing a change in trend.
flags unfurl frequently in a surging commodity and are
important in reversal chart analsis.
when a flag or pennant occur after a gentle market move,
the orthodox technician will obediently try to visualize
another pattern.
----- ---j- .... - -
--.-------- -- .... tt.
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pennant flag
C"rlART P A T T E ~ ~ S 52I
Reprinted with permission oi Commodit\ Researc.h Bureau. Inc.
'lSD
! 1974
itt-----
pennant
522 CHART
I I REVERSAL ( USUALLY )
" V " FORMATIONS
An important and tricky formation , the "v" exists in both
an upright and inverted form. Tricky because it is one half
of an " m " or " w " and means that the trend has suddenly
reversed without warning or time enough to take early advantage
of the sudden change. When it is first moulded, the natural
tendency is to wait, to determine whether the " v " (bottom)
or " ./\ " (top-inverted "v" ) will again be tested to create a
double bottom or top.
These spearhead situations exist where a trend, which probably
has been steepening, abruptly reverses in one day, typically
accompanied by a large gap on either side.
The
11
V
11
pattern is by far the most hazardous because it constitutes
an irrevocable about face with no warning and to board a trend
emerging from a "v" is most difficult since the spectre of a
double pattern is a distinct possibility. The
11
v
11
is characteristic
of a market that is emotionally fuled way beyond the bounds of
rationale values.
CHART PATTERNS
5.23
lnverted-V and V- formations
chart -from: Commodity Perspective
327 S.LaSalle Chic. Ill. 60604
524 CHART PATTERNS
MUL TTPLE TOPS , BOTTOM.S
The " rn " or " w " formations are also known as double tops
and bottoms, and triple tops and bottoms.
These p ~ t t e r n s form when successive highs and lows stop at
approximately the same level. A double top shud be considered
complete only after the decline from the second peak carries
prices below the first stopping point. Short range double tops
form within 8 to IO weeks, and long range double tops develop
over much longer intervals. For psychological reasons, round
numbers are often likely areas for long-range double tops.
Because double tops and bottoms signal sizeable trend changes,
they are well worth watching for, altho' the formation is not
very common. The importance of awaiting a confirming breakout
on the downside following the second top cannot be over
emphasized.
In consdering multiple tops and bottoms, a multiple top is
actually a resistance area. To analyse whether it's going to
go through - take a look at volume. First, prices tend to move
in the direction of increasing volume. In a double top, volume
is frequently lower at the second top than the first top and
support on the bottom side is broken when prices penetrate the
area of the previous low, the valley formed by the middle
part of " m " .
The triple bottom which is similiar in appearance to the " m "
formed at the top, materializes less frequently in intermediate
and long term trends. It may pop up often during periods of
consolidation and the third bottom will be accompanied by low
volume. The conclusive test is that the bottom support area
endures and volume and open interest picks up as prices thrust
through the previously established high.
Triple top is similarily characteristic to the double top.
Triple tops cannot be anticipated. The third time a top is tested
price may catapult into high ground. A triple top will look more
like a double bottom as the original long term trend deregrinates
upwards.
Even during its formation, a double top or bottom is not easily
distinguishable. It may really be a large triangle during its
formation. An ascending triangle resembles a double top. An
ascending triangle predicts probable direction of prices on
breakout. Volume shud pick up on'each rally as the apex is
neared.
CHART PATTERNS
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526 CEART ? ~ T T E R N S
HEAD a.nd SHOULDERS
- is very important because it usually indicates a major
trend reversal.
Here the market has thrust up, gone down a bit, then thrust
still higher, once again it goes down a bit, then thrusts even
higher than its last peak, - at least tries to, as the "head"
prevails - too much selling pressure and it falls back to a
starting place and U have a " H & S " ( head and shoulder )
The right shoulder is usually on a smaller volume than occured
during the left shoulder. After a right shoulder has formed, the
chartist will try to trace a line horizontally at the base of
the H&S to create the neckline. The minimal move following a
major H&S reversalforrnation will approximate the distance from
the tip of the head to the neckline. The slope of the neckline
may influence the extent of the price move. A downward sloping
neckline will likely carry prices lower than wud the same top
formation with a neckline slanted upwards. The downward tipped
neck-line carries a more bearish implication than an upward
sloping neckiine.
If there is a significant breakthrough of the neckline, prices
will often make a return move to the neckline or at least an
attempt, before the major move gets underway.
The two shoulders need not be of identical size, altho' they shud
be smaller than the head. A market is considered especially weak
if the rally forming the right shoulder is unable to carry as
far as the top of the left shoulder. The H&S sometimes develop a
series of multiple shoulders, but is less common than the simple
formation.
H&S occur in both bull and bear markets and are the basic reversal
formation. It is usually sited as the most common chart formation
because most chartists have been programmed to identify every
third assortment as a "H&S" . " Reinach " , as mentioned in_...:the
excellent book Getting rich in commodities, currencies,of coins,
before or during the next depression , by Robert Vichas, Arlington
House Publishers , has classified twenty seven clear-cut,
H & S patterns !
CHART PATTERNS 52i
Reprinted with permission of Commodity Reseirch Bureau
Head and Shoulder
528 CHART PATTERNS
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PATTERNS 529
ROUNVEV BOTTOM , TOP
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!I'his formation depicts a fairly long st..-uggle between buyers
and sellers, until the of buyers determine trend
direction. These patterns, also known as saucers or bowls, are
often harbingers of sizeable price moves. They are uncommon /
formations and develop in relatively thin markets, volume
decreasing as prices reach the top or bottom increasing as
prices turn in the direction of the final move.
With a round top , ( scallop, saucer ) it is a gradual reversal
of trend. This type of formation is accompanied by minor price
swings, creating a scallop effect.
530 CHART PATTERNS
One difficulty about rounded bottoms ( besides the fact that a
six month wait is like sixty years for most traders ) is that as
they wend their way down, a spurt of buying activity, for several
days may give the impression that the long awaited trend has
commenced. Afterwards, prices will drop back to approximately
the same level. These eruptions can tempt an eager trader.
Reprinted with perminion of Commodity Burnu. Inc ..
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Saucer Bottom
CHART PATTERNS 53!
HAT BOTTOM
Also known as dormant bottom. It represents a long standing
inactive period, accompanied by low volume activity. The few
buyers, sellers resist allowing prices to move far in either
direction. This state of affairs can continue for some time.
, I : : . . ; : : : ! ct.
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Flat bottom (Source: Commodity Research Bureau, Inc., One Liberty
Plaza, !'>lew York, N.Y. 10006.)
532 CHART PATTERHS
;th.er .. c. a/te. tlvte.c.
such as
1SLANV REVERSALS
the island reversal
the key reversal day
the two-day reversal
This formation isno ted for being one of the more dependable
forecasts of future price movements, which are always away from
the island, the opposite direction from the trend that created
the island. It is a trading range, separated by an exhaustion
gap on one side and a break-away gap on the other. If an island
is neutralized by the right hand gap being filled in a few days
or a week later, then it is no longer valid.
The island can consist of a single day or of several days, and
the entire formation is closely related to the daily and weekly
reversal phenomena. The key difference is simply that, following
the gap to the island area, prices hold for one or several days
before buying ( or selling ) power disappears between
sessions. Like the daily and weekly reversals, the island
formation frequently occurs on relatively high volume and the
subsequent trend change can occur suddenly or develop over a
period of time.
( On the bottom side, the attempt to maintain a thrust into lower
prices is done by either a high or low volume. )
Island reversals do not occur very often, but when u do see them
U shud consider the possibility that a change in price is
forthcoming.
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CHART PATTERNS 533
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534 CHART PATTERNS
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CHART PATTERNS 535
KEY REVERSAL VAY PATTERN
This is formed by a trading range that beseiges new high
prices ( in an uptrend reversal ) , but then surprisingly
closes below the previous day's settlement price, oris simply
one where prices sell off substantially and reverse and close
up for the day.
Has a reliability of 70 %
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Altho' some major trends have turned on one-day it is
generally considered more as an indication of a
interruption to a major trend - or the turning of a minor
trend.In either case, it is a red flag a sign that the
momentum o: the trend has slackened.
A more valid key reversal day is when prices exceeded the previous
day's range both in high and low prices and closed lower than the
precious day's low ( in a top ) or higher than the previous day's
high in a bottom.
Trading volume is an important consideration. Valid one-day
reversals have unusually high trading volume.
/
In a one-day reversal the new high or low price is reached early
in the trading session. This extreme level is then moved quickly
a war from and not seen a. gain during the trading session.
An even stronger confirmation is its' association with an
a 'exhaustion " gap. A gap is simply a price range where no trading
takes place. In an upmove, it results when the lowest price of the
CHART PATTERNS 53i
day is higher than highest price of the previous day.
A relatively wide gap at the end of a long price move can signal
the of that move. If it is followed the next day by
a one-day reversal, both formations are mutually substantiated.
A sell signal in a bull market has little significance unless we
have seen climactic action and an extended price move of from
five to six month's duration.
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53 8 CHART PATTERNS
TWO VAY REVERSAL PATTERN
This pattern arises at the end of a trend. Generally a 2-day
reversal originates as a key reversal, a foin into new territory
( either high or low , but instead of closing near the bottom
of the range, prices settle at the high of the range. In a 2-day
reversal top, during the next day's trading, the highest price
is tested again in a top, but prices close at opposite end of the
range. r
When prices head sharply lower, perhaps down limit or just off
sharply, but the following morning, the next day's prices open
a good deal higher than the previous day's close, it gives a
2-day reversal to the upside. r
Such an unusual display of strength is
of a key reversal for the market. What happens is that prices
fail to follow through with the previous day's slide. This type
of action is unusual since lower prices forecast lower openings
about 85 t of the time. Lower prices with a substantially
higher opening is a pretty sure thing that a new move has begun
to the upside. It is particularily significant if prices close
down the limit and the next day open slightly up. Limit moves
shud beget more limit moves.
Reversal patterns (Source: Commodity Research Bureau, Inc., One
Ubeny Plaza, New York, N.Y. 10006.)
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CHART PATTERNS 539
540 CHART PATTERNS
Ill PATTERNS EITHER REVERSAL OR CONTINUATION
V1AMONVS
are infrequently seen
of high-volume tops
There is nothing exotic or about identifying the
diamond ; but a certain amount is in the eye of the beholder.
Once recognized, many chartists place a stop order to close out
longs or go short when the price drops through the lower right-
hand side of the formation.
Because of its' rarity, there is little statistical evidence on
the reliability of diamond formations. U see a rising
market turning diamond-shaped on high volume, be cautious with
bullish positions.
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Reprinted w1th permisston of Commodny Research Bureau, Inc.
C:-ih.RT PA'l..E.RNS 54!
WEVGES , RECTANGLES .
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OCT. NOV. OEC:. JAN. I FEB. I MAR.,., APR. MAY _,l
infrequently seen
the longer the rectangle took to develop the more
will be the ultimate result
the minimum anticipated price objective equals the height
of the rectangle
the top or bottom of the rectangle need not be perfectly
horizontal
has a long history of use by chartists
because it takes at least two points to define each line,
the rectangle is not built in a day.
to trade :
I. Inside rectangle - any time after the fourth turn
in prices, a short sale can be made when prices
approach top of formation & buy when prices reach
bottom of rectangle.
2. Take initial position on stop when prices-finally
punch their way out. (As with other formations, a
good rule of thumb for defining a breakout is at
least 3 % of the price at the edge of the breakout.)
gradual reduction in volume during its development
the rectangle is neuter .. it carries no implications for the
direction of the eventual price move out out of the formation.
it can mark a price reversal as well as a pause that simply
refreshes the existing trend. .
542 CHART PATTERNS
SER'PEI\rr HEAV
the long neck of the snake, with a long head as prices
turn sideway for _a while, and then make a move further
upwards or downwards.
a rather frequent phenomenon
to trade :
- short term trading within the confines of
the congestion channel of the head or the
neck.
- trade on stop once prices exit the head.
-

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CHART PATTERNS 543
IV OTHER PATTERNS
GAPS
On a bar chart, a price gap is simply an empty space. The price
tracks of some commodities are full of gaps, thin markets ) , in
which case they mean relatively little.
Other commodities rarely gap ( heavily traded - great liquidity
When they do, the gap is a meaningful chart pattern and is
prognostic.
Some gaps are closed during the same trading session or within
a few days - while others may not be closed for weeks or months.
A good " gap man " can convert these blank spaces into cash in
his/her account. Gap afficionados point out that the ability of
the market to " jump " price levels certainly must signify a
powerful underlying trend. However, many gaps result purely from
the coincidental fact that some significant development occured
after a market had closed ; and that had the news becurn known
during trading hours, no gap wud have appeared. Also, by the time
it becums apparent that a gap isn't going to be filled, the
subsequent move may be over.
THERE ARE FIVE KINDS OF GAPS
I. opening gap
2. pattern gap
3. breakaway gap
4. runaway gap
5. exhaustion gap
I. Opening gap
- is usually formed during the first half hour
of trading and subsequently filled. It has little
meaning for anyone but a day trader.
( All gaps are continually being filled sooner or
later, except breakaways, and the logical place
to buy or sell is in the middle of the gap.)
- most opening gaps are filled.
544 CHART PATTERNS
runaway
2. Pattern, Common Gap
- is usually formed in a market with small volume.
When the number of actual sales during any trading session
is small, the bids and offers change many times before an
actual trade is consumated. As prices fluctuate over a period
of days, these gaps will be formed and subsequently filled
in. By " filled in " is meant that prices will eventually
trade in the price level which was originally skipped and
left blank in the chart. The common pattern gap has no
particular significance; however, it can be a possibly
forerunner of more volatile impending price action. They occur
when prices are forming one of the f a m i l i a ~ patterns with
which bar chartists deal.
3. Breakaway Gap
Brtokowoy
90P
CHART PATTERNS 545
My favourite ! and one
of my key tools ! )
- is what it's name implies - a gap
formed as prices break away from a
chart pattern or congestion area, as
prices suddenly explode out of the
congestion formation, leaving behind
an empty area in which no trading has
taken place for a considerable length
of t ~ e , ( or in which no trading will
ever take place ) The breakaway marks
the advancement of a major move and is
usually accompanied by marked expansion of volume and are
generally wider than any of the pattern gaps which precede
them.
Concerning the issue of false break-outs through trendlines
or support resistance lines, a breakout does not penetrate the
trendline by caracoling through it, but by leap-frogging it.
(The regularity of this occurence posits that when prices gap
above, below intermediate trend lines, that the trend has been
reversed. )
Breakaways flaunt themselves at the termination of either
bottoms or tops, and very frequently after consummated topping
action. Normally the downside gap is more strung out. The longer
the gap, the greater the expectancy that the ensuing move will
be extensive.
Attendant run-away and exhaustion gaps often follow the
unvailing of a downside breakaway gap, especially after a small
topping configuration, which is thereby trailed by more run-away
gaps on the downside.
Prices move out of trading areas on the direction of the most
or largest gaps.
546 ?ATTERNS
3. Runaway Gap
Continuation Gap )
l
r'
Runaway
90P
- is a mid-move phenomenon. Prices have
pushed higher or lower in orderly
fashion, and then suddenly gap with a
surge of buying or selling power. The
extent to which prices will carry
beyond the continuation gap is roughly
equal to the distance from the last
congestion or pattern to the gap.
Accordingly, gaps appear following an already
substantial price moye, and prices then skip upwards (E.G.) in
leaps and bounds, as trading volume accelerates, suggesting that
market progression still has a substantial distance to rise.
Runaway gaps are easy to identify in retrospect. Runaway gaps
are sometimes misinterpreted as exhaustion gaps.
4. Exhaustion Gaps
- signals the last violent plunge of
a long price move. Its' most important
identifying characteristic is its width
the widest of gaps
Exhaustion gaps pose special trading
problems because the most specific
characteristic that sets them apart
from runaway gaps is the fact that a sudden dramatic reversal
follows the appearance of an exhaustion gap. When prices open with
a wide gap and then seem to go nowhere despite extremely high
volume, an exhaustion gap shud be suspected.
During the latter stage of a bull move, an exhaustion gap wud
begin just like a runaway gap, opening higher than the previous
day's high, but the day's high wud not be sustained, a situation
in which many buyers and many sellers cause prices to skip until
profit taking creates a congestion area, running headlong into a
wall of sellers, and prices bounce off the barrier and towards the
close, prices wud begin to decline and possibly retracing itself
far enough to fill in the exhaustion gap.and below the
previous day's close. (a key reversal gap).
CHART PATTERNS 547
It does not necessarily mean the market has exhausted
itself .. the long run trend may still stand in tact, or some
time may relapse before changing in course.
The key reversal gap, however, is likely to attract additional
liquidation of an up-move and stimulate new counter-trend
positions, and very likely signify the termination of the existing
price trend.
A major top reversal from a bull market usually takes less time
to develop than does a major bottom formation, an
extended market.
An exhaustion gap seldom paces out alone in the precipitous move.
At least one runaway gap precedes it. Obviously, therefore, after
the first runaway each subsequent gap becums suspect.
There is a popular that all gaps must be filled. No rule
states when they will be closed. Exhaustion gaps are usually fairly
quickly filled.
Runaway gaps require more time. ( They may never be stoppered if
the contract expires.)
TRENVLINES
Needless to say there is a whole chapter on this subject, -
it's so deadly important, ana must be considered as a chart
pattern, as well as shud trend channels.
Look what happens when prices penetrate trendlines in the
following examples.
548
s:s .
.... . ... .
' .... 1
.. ----.. --- .. -- l

"-----1 ,.,.CED....--13-R""'O""'t""'L_ERS _ __,'
-= !'lAY '74 I
.. .. "';. ; . . .. ..... J :-
:.:;:i.;
. Downtrend source: commodi.ty Perspective
327 S.LaSalle Chic.Ill.60604
0::1
c t9o7
260
NEW YORK SILVER
270
OE:CEMBER
:?60
zso
:?40


210
200

Source:Trading in
Commodities.
Grainger
Apl Sep 0::! lob
19&8
c
280
Z70
260
so
240
230
Courtesy: Investment Reserr:h
Bar chart: New York silver (December 1968).
Trendlines
' I
! - . -------
----- -- -- - .. , .. - . - ... ,..... , .... , ' ! - ' :'' i ! '

. ;:,. :-:
'itiS5S ',J.'Zlll' JS2 lilJ'l'll lociSZ221S
U ptrcnd Chart from Commodity Per$;pecti ve
327 S.LaSalle Chic. Ill. 60604
549
I ; j
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FEB. I
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u
APR.
Trendlines
Nir I '- : _. 1111 ll _ .
:' :'Jlnn. : " . JJ " nr
550
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NOV.
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,-
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SOYBEAri MEAL JULY 1578-CHI.
lAC>< MClllON1Al 7000'()1NT\
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27 I 1t ,, 16 )Q ,. 21 I, 251 %l
JULY AUG. SEPT. f OCT. f NOV. DC.
Trendlines
Here ' s a trend channel

'
-;
I I I I t f I I I 1

There are some more in the above. Can U
find them ?
Chart From: IBEX Chart Services Box 693 2420 Ist Ave. Seattle Wash.98I2I
55!
552 PATTERNS
RESISTANCE , SUPPORT
Reprinted with permission of Commodtty Rf:'search Bureau
-;-1-i
1
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1
: :::; :: ::: : : 1: . :_..:: j= :11
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,-Zf
Refer to chapter on congestions!
Support and resistance levels
are unquestionably among the
most important of all techni-
cal considerations. They are
areas which prices
to have difficulty moving beyond.
CHART PATTERNS 553
There are three basic categories .
also see pg.504
I. Congestion areas.
2. Areas at which previous advances/declines
were turned back e.g. trend lines.
3. Transformed support,resistance levels.
i.e. former highs that have been penetrated
and turned into support levels.( also former
lows that have been penetrated.)
The effect of support and resistance levels approaches the
mystical at times. One of the most remarkable aspects is their
tenacity. Another mentionable aspect of these levels is their
chameleon-like ability to change roles. That is to say, an old
support level, once clearly violated, will tend to act as
resistance in later rallies, and vica versa.
And, remember the discussion on break-away gaps that prices will
often jump them, leaving gaps, providing a possible bona-fide
extended move.
The strength of support/resistance levels can be roughly gauged
by the number of times they have shown themselves, and the more
valid is any move away from them or correspondingly, the more
valid is any move through them, especially if they are "jumped"
Another measure of strength of these levels is the amount of
trading which has taken place there. A level established over
many days of high volume trading within a narrow price range will
have more horsepower than a one-day spike. A support level can be
viewed as a reservoir of buying. However, frequent price attacks
on a support level can " use up " enough of this buying that the
price simply plows on through. The strength of these levels is
related to the amount of " work " that is done there.
( Resistance levels are a mirror image of the same rationale ) .
23
554
SEASONAL
AND
CYCLICAL
TENDENCIES
CHAPTER TWENTY-FOUR
SEASONAL & CYCLICAL 555
WE THREE BASIC GROUPS OF COMMODITIES
I. Industrial
copper, lumber, silver, pkywood
2. Agricultural
pork bellies, hogs, cattle, & all grains
3. Perishables
eggs, potatoes
INDUSTRIAL COMMODITIES tend to produce the longest trend cycles
due to their relative stability of supply and demand. are
more subject to longer term business and economic eye les and
to the shorter term viscisitudes 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 occurs
around the same time each year. Altho' current marketing activities
can distort historical patterns, they are generally valid.
PERISHABLE COMMODITIES tend to fluctuate in the shortest term
cycles.
According to the concept of "structural theories" (chapt. II)
we have two kinds of price movements.
I. Seasonal price movement
2. Time cycle price movement.
The SEASONAL PRICE MOVEMENTS affect
all grains
cotton
cocoa
coffee
orange juice
potatoes
24
556
~ h e TIME CYCLJCAL MARKETS include
pork bellies
hogs
cattle
eggs
broilers
chickens
choice steers
The world sugar and metals ( gold, silver, copper, platinum,
paladium ) are neither seasonal nor cyclical.
Alt!8 the major metals and sugar do fluctuate around time cycles
and with seasonal patterns, one must always be on guard for the
possibility that the cycle might turn into a super-cycle.This is
where technical analysis wud be a useful tool. Gold purchased in
November of the last ten years wud have given a profit.
Some notes on time cyclical markets.
historical studies reveal that July pork bellies
prices tend to rise from March Ist to sometime
before March 22nd Pig Crop Report.
Buy Aug. Bellies on Oct. Ist of each year which
promises to be a year of declining slaughter
and sell them on Oct. Ist of each year which
promises to be one of increasing slaughter.
pork bellies usually have large moves that begin
in Aug. and the last week of October .
. pork bellies present good selling opportunities
in May of each year.
. eggs normally make a real dip in price in May
. eggs have a nice base from which to rise in late
June to the end of December.
broilers usually get moving to the upside in January.
SEASONAL & CYCLICAL 557
NOTES ON SEASONAL TENDENCIES.
Perhaps one of the greatest tools around ( besides "odds" chap.S
is the use of seasonals in detecting market positions in advance
of their price movement, by using past seasonals as a guide. All
agricultural and timber product commodities have a seasonal price
cycle. The price usually advances during the spring and declines
during harvest months when supply is abundant and advances with
the onset of winter. These life cycle commodities have prices
which move in relatively predictable cycles. A rule of thumb states
that seasonals are usually at their lowest price just after harvest
and their highest price six months after harvest. However,
the seasonal patterns, sometimes do not work because of enormous
exports.
In line in our discussion of seasonal price all
commodities will be herein discussed. However, the reader must
be able to isolate the industrial from agricultural from perishables
and be able to distinguish each of those three categories as to
whether , as previously mentioned, it is either strictly seasonal
or time cycle or both, or neither.
Whenever possible, it is helpful to buy or sell in line with an
observable seasonal pattern. For e.g. if soybean meal prices have
advanced during the fall and early winter for eight of the past
ten years, and if there is reason to believe this pattern will be
repeated, then one has a supporting argument for purchases indicated
by technical analysis. However, the seasonal itself must not be
viewed as an completely independant basis for trading.
SOME MORE NOTES ON SEASONAL TENDENCIES.
we know that wheat is usually low in July and
high in January.
wheat is usually a good buy on June Ist,
Oct. Ist, Dec. Ist.
wheat presents good selling opportunities in
May of each year .
. Dec. Wheat has risen 90 % of the time in Oct .
. buy March wheat on Oct. Ist Sell on Dec. Ist.
corn is usually high in July and low in Jan.
corn sets up a buying point in March.
558 S:SASO!-:JG & CYCLICAL
Dec. Corn has risen only IO % during the month
of Oct.
. Jan platinum has risen roo % of the time during
the month of September.
. there is a seasonal tendency for soybean meal
to rally during May-June.
March Sugar has risen only 20 % of the time
during September .
. orange juice invariably starts a strong rally
during the first two weeks of Oct. There's always
a fall hurricane or something so s nee Sept. & Oct.
arethe usual hurricane months, the speculator is
ready with at least one hurricane scare to push
orange juice futures above summer levels. If there
isn't a hurricane there's a freeze or a threat of
one in November.So buy March O.J. in the summer.
Potatoes have a seasonal tendency to begin rallying
on Sept. Ist and becum a sell around mid-March the
following year. At least once every growing season
there is a real potatoe crop scare. Early frost,
blight, or something to ruin the "Maine" potatoe
crop. If U had bought May potatoes about Sept. Ist
U cud have made substantial profits during the
next four months.
cocoa sees selling in early August.
buy May Soybeans Feb. ISth sell April I5th.
There is a correlation between Winnipeg May
Flaxseed and Chicago May Beans. Nearly every
year, while there is a major spring advance in
beans, it is preceded by an advance in Flaxseed
between Jan 2nd and Feb ISth . If this does not
occur, there's no large net advance in .the price
of beans between Feb. ISth and April ISth. ~
SEASONll & CYCLICAL 559
THE ?Or..LO\GNG IS h L!ST OF TABLES.
I. Seasonal patterns of cash prices.
2. a commodity category table.
3. theoretical buying dates.
4. list o! when certain commodities are harvested.
5. major illustrations of seasonal patterns.
I. LIST OF NORMAL SEASONAL PATTERNS OF CASH
Seasonal Pattern of Spot Commodity Prlcesl
Commodity High l..ow
Barley May June
Broilers July December
Cattle April November
Cocoa December-January September
May March
coffee January-February April, November (double bottom)
Com August November-December
Cotton July December
Cottonseed Meal March December
cottonseed 011 June October
Eggs November March-April
Flaxseed May October-November
Hogs June November
Oats (January) May August
Pork Bellies July November
Potatoes June-July October
Propane February June
Rye February July-August
Soybeans (January) April June, October (double bottom)
Soybean Oil July October
soybean Meal April December
sugar (World) September March
Wheat January, May August-September
Wool December June
l Some c:ommodltlu, aucl\ as tile malala, de not nave cl .. rty defined Maaonal prtca pan.ma.
More than tna usual number ot axcaotlons to lila Muonal oatlam.
TMM ;rains have ottan bean aut>jact to al\arp reactions In February (known as tile Fel:lruary
l:lraak) at1ar wlllcl\ a ;ooct rally aometlmas IIU oc:currael.
courtesy: 'Modern Commodity Futures Trading'
by G. Gold commodity Research Bureau N.Y.
560 SEASONAL & CYCLICAL
2. b CATEGORY TABLE.
Commodity Category Table
Broilers X
Cattle
Cocoa
Coffee
Copper
Com X
Cotton X
Eggs
Flaxseed X
Hides X
Oats
Orange Julc:e
Palladium
Platinum
Pork Bellies
Potatoes
Rye X
Sliver
Soybeans X
Soybean Meal
Soybean Oll X
Sugar
Wheat X
Wool
X
X
X
X
X
X
X
X
X
x
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
c
0..,
':CD
==
CD-
C.:
E"'
o.C

5e
cce
:ELL.
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
)(
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Major Use
c
0
a
_e
CD :::0
e ,
_c
c 0
<(.)
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
courtesy
'Modern commodity Futures Trading'
by G.Gold Commodity Research Bureau N.Y.
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
SEASONAL & CYCLICAL 56I
3. EXAMPLES OF TrlEORETICAL BUYING DATES.
Theoretical
Buying Oate
Cocoa September 25th
March 15th
Soybeans October 1st
Soybean Meal October 5th
March Wheat . June 15th
"The Voice from the Tomb"
They are:
BUY
Wheat
February 22nd
July 1st
November 28th
No. of
Uquidate Times Profitable
November 30th 13 out of 15 years
May 15th 8 out of 10 years
(no liquidation dates given but figures did
indicate advances at some time atter the
initial date.)
February 5th
January 15th
SELL
January 1 Oth
May lOth
8 out of 1 1 years
12 out of 14 years
September 1Oth
-----------------------------------------------------
Com
March 1st May 20th
June 25th August lOth
These dates are still believed to be used by some traders as sign-
posts for trading directions.
Courtesy 'Modern Commodity Futures Trading'
by G. Gold Commodity Research Bureau N.Y.
24
562 SEASO!\AL & CYCLICAL
4. LIST OF WHEN CERTAIN COMMODITIES ARE H..'h...RVESTED.
rye around july
oats around july
beans around Sept. to November
cotton around Sept. to October
cocoas around Sept. to November
wheat
May thru to August
corn Oct. or Nov. thru to Dec.
barley July thru to Sept.
potatoes around Sept. Oct.
24
SEASONAL & CYCLICAL 563
5. ILLUSTRATIONS OF SEASONAL PATTERNS.
EGG CASH SEASONAL
wholesale price of shell eggs. extra lar9e at Chicago, 1955-1967)
May June Ju I y Aug. Sept. Oct. Nov. Dee. Jan. Feb. Mar. Apr.
POTATO CASH SEASONAL
(wholesale price of potatoes, white eastern, at New York, 1961-1967)
s.o

3.0
September
Courtesy Dow-Jones Irwin Guide To Commodity Trading
564 SEASONAL & CYCLICAL
c:
0
1-
...
Ci
CORN CASH SEASONAL
(monthly average price of No.3 yellow corn at Chicago, January 1956-Dec:ember 19671
1.30
1.20
1 . 1 0 ~ - - ~ - - ~ - - ~ - - - - ~ - - ~ - - ~ - - ~ ~ - - . _ - - ~ __ _. __ ~ - - ~
Nov. Dee. Jan. Feb. /IAar. Apr. May June July Aug. Sept. Oct.
SOYBEAN MEAL CASH SEASONAL
(average price of soybean meal, 44 percent protein, at Chic:apo, 195>1967)
$71.00...-----------------------------,
July
70.00
69.00
~ 68.00
.E
December
0
0
67.00
March
66.00
October
November
Courtesy Dow-Jones Irwin Guide to Commodity Trading
34.00
33.00
32.00
"t3 31 .00
c:
:::>
t:.
..
&>
c..
"'
c
~ 30.00
29.00
28.00
27.00
SEASONAL & CYCLICAL 565
PORK BELLIES CASH SEASONAL
!monthly cash average price of Chicago pork bellies, 1949 through 19581
September
March
December
October
November
2 6 . 0 0 ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
Courtesy
Dow-Jones Irwin Guide to Commodity Trading
566 & CYCLICAL
2.82
2.81
2.80
2.79
2.78
2.77
2.76
2.75
2.74
2.73
2.72
2.71
2.70
2.69
2.68
2.67
2.66
2.65
2.64
2.63
2.62
2.61
2.60
SOYBEANS CASH SEASONAL
(No.1 yellow. average monthly cash price at Chicago 1960-1970)
Oc:t. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept.
Cash seasonal pattern is well known and is reflected in the of the various options.
Courtesy
Dow-Jones Irwin Guide to Commodity Trading
Comment:
SEASONAL & CYCLICAL 567
A can get a reliable indication of
important cycles simply by counting the number
of days between each important low on the chart
for any given commodity. for e.g. pork bellies
often make some sort of bottom attempt every
25 days and that silver seems to swing in twelve
day cycles. ( trading days.) The trader, if he
wishes to use these commodity cycles as some sort
of guide,shud at best, take the existing contract
of the nearest month and count the days between
important lows and highs for that commodity for
that contract life. This shud enable him/her to
capture the cycle undulation for that time period
particularily if the market forces are constant
with no new sudden blazing fundamental aberration
of long effect.
The following is an interesting quotation:
" The Grain Exchange designates the month for which contracts may be
traded. Five months have been so designated for corn,wheat, & oats.
These months are Dec. March, May, July and Sept. December represents
the end of the harvest season for corn and the beginning of winter
storage for all grains as navigation closes on the Great Lakes.
Southern hemisphere crops are coming to market in volume by March,
making it a important month for many grains. May is the "clean-up"
month to harvest for small grains as well as the month when
navigation again opens on the Great Lakes and when naturally dried
corn, which has been stored at country points thuout the great grain-
producing areas of the midwest, falls below IS % moisture. July is
the month of heavy movement of winter wheat, with a fair amount of
oats and barley. Setp. is a month when new crop soybeans start corning
to markets in the southern parts of the u.s ..... seven trading months
have been disignated for soybeans. Nov. replaces Dec. because the
harvest is completed earlier than for corn. January has beea added
because substantial amounts of beans have been marketed for that month.
This also makes contracts expiring every other month for beans from
Nov. thru July. August has been added to provide a "clean-up" period
prior to new crop harvest in September in southern regions.
From a speech by J.M.Ragsdale, via Johnson, Harvey Freeman,
and Bruce Gould )
24
568
CHAPTER TWENTY-FIVE
thoughts
Being into yesterday's success is assuring
to-morrow's failure.
Winning is self-perpetuating.
Commodities usually return to a profitable price.
As a chartist, U have lots of company.
There are literally thousands of people charting
exactly the same movements U are.
Law of Momentum:
Once a trend has commenced it tends to endure at
least until a significant counter force intervenes.
Experienced traders appreciate that the first loss
is usually the cheapest.
The majority of men are subjective toward themselves
and objective towards all others - terribly objective
sometimes. The real task is to be objective towards
oneself and subjective to all others.
- Soren & Kirkegaard" I847"
It was never my thinking that made the big money
for me. It was Sitting ..... my sitting tight.
- Stanley Kroll
Keep things simple.
A price at rest teads to stay at rest. A price in motion
tends to stay in motion, are the essential tenents
of the sharp, sharp trader.
l(
.Loss is inevitable - the essential factor is to contro111
it. A winner is forem ost a controller. J
Take positions along the line of least resistance.
- old adage dictum.
569
Even the best speculators consider themselves fortunate
be rigt.t on most trades or even to make significant
profits during most years.
There is some old saying that will justify almost any
action or lack of action.
Money is easier to make than it is to keep.
Winners never quit, and quitters never win.
God grant me the serenity to accept the things that
I cannot change, the courage to change the things
I can and the wisdom to know the difference.
Human nature is more bullishly than bearishly inclined.
The greater the following, the less golden the opportunity
The smaller the following the more golden the
opportunity.
A shivering economic fact is that a government panacea
designed to cure or correct a condition will
instead inevitableyfurther aggrevate that condition.
The basic tenant of the chartist is .... a trend
until it stops.
Any approach must be regarded as unprofitable until
it has proved otherwise.
Even the strongest powers of empathy in the world are
not going to tell U what the price is going to be,
if the price is beyond the control of human will.
Only 5% of us becum financially independant by age
65. 80% of 65 year olds have less than $600
in the bank.
He who wud accomplish little, must sacrifice little.
He who wud achieve much, must sacrifice much, he
who wud attain highly, must sacrifice greatly.
A speculator's bag of tools is never overfilled until
the noise of information systems clogs the channel
of clear cogitation.
A professional cannot score profit by buying and
selling with the public.
25
570 THOUGHTS
What the few can do, the many cannot accomplish.
Man's mind is limited only because he either prefers
to deny himself the possibility of creating, of
innovation, or of locating or else
he is stymied by burdensome bureaucracies that
incinerate incentive, impale initiative and incubate
incompetence.
When interpreting official manifestations,
" cynics survive "
The solution to government meddling is government
control.
It is safe to say that the major reason for the office
of internal audit and inspection of the U.S.D.A. is
the fact that "Uncle Sam " has moved from the role
of referee to that of player in the market place.
If all the areas of individual creativity were
pre-empted by the planned collective, our society
wud face extinction.
As the cartoonist suggested when he depicted one
Russian beaurocrat speaking to another, When
all the world is communist, where will we get wheat? "
I don't think we have ever seen a completely free
market.,in the history of the world. For centuries
individuals attempted to manipulate for their own
benefit. To-day governments are attempting to
manipulate our markets and for their own benefit.
More than I900 years later ( Rome , we still permit
our lives to be governed by the whims of government.
Acts of government do not create wealth, they redistribute
wealth.
Restating Emerson's words "
to the wheel of fortune.
The governments chain us
"
After a shot of government intervention, markets
energetically re-assert themselves.
Accidental successes usually turn into accidental
failures.
J

THOUGHTS 57I
Success or failure is the just result of what U
have done in the past plus what U do now.
There are I68 hours in a week. Roughly 20 of these hours
are devoted to making it. Don't U believe those 20
hours merit U're full attention ? Enough time remains
in the other I48 for play.
ll
1
The great speculators in the past - that{')
the study of psychology exceeds
importance.
We are our own worst enemies. Our lack of patience
and inability to wait are the largest single cause
for losses.
There is big money to be made in commodities ... and
it is not unusual for traders to make big profits -
what is unusual is being successful for a long
period of time.
The advantage of trading in market congestion is that
u increase the probability of profitable trades
consistently. tho' not so spectacularily as in a
" straightaway " and will also reduce the risk
of loss.
Good sports die broke.
Markets sleep, traders don't.
25
.......
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r.i==.:: ::
!
- : l



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'Point and Line
jl
Char'Ting' l
- ,.,. - -I
e.g December Silver '78 {,tiD
Day #I
#2
#3
#4
#5
6
7
#8
#9
#IO
#II
#I2
HIGH
583.50
589.50
592.30
591.00
588.00
595.50
603.00
604.00
60!.00
595.90
600.50
604.50
LOW
570.80
581.50
585.50
585.60
582.50
582.50
595.00
599.50
59I.50
591.00
588.00
595.50
CLOSE
582.80
589.00
586.70
588.30
584.10
594.30
595.80
603.70
593.50
592.70
598.70
599.20
579.00
586.60
588.20
588.30
584.90
590.80
597.90
602.40
595.33
593.20
595.70
599.70
DOT
584.6
587.7
587.1
588
591.2
597
598.5
597
594.8
596.2
O.K. Here's how you do it ! The market has closed on day #I and we
have a high 583.50 and a low of 570.80 and a closing price of_
582.80 . So we add all those numbers together and divide that
number by three, in effect an average of the high,low closing price.
( 583.50 + 570.80 + 582.80 1737.10 ] divided by three= 579.00 )
O.K. you do that for the next three days, days #2,#3,
aay #2 is 589.50+581.50+589.00 [1760.00] divide by 3 = 586.60
day #3 is 592.30+585.50+586.70 [1764.50) divided by 3= 588.2
Guess what? You take the average prices of the last three day's,
(day #I 579.00, day #2 586.6 , day #3 588.2), add them. all tnqether,
divide by three , ( 579.00 + 586.60 + 588.20 divided by 3 = 584.6 )
and U've got the dot !
cont'd next page.
573
In effect the dot in point and line charting can be defined as
average of the high/low/close of the last three days.
Sound ? Not really. In fact it's simple, simple ,simple.
Time yourself. Femernber, it's what you do with those dots,
counts.
The publication of the above formula is intended for personal
use of the purchaser ox this book, and that purchaser is to be
one person only, and that person and that person only is to
use point and line charting to assist his or her personal trading
activities only. Permission is not granted to use any material
relating to the above formula, or the formula itself, in any
commercial venture or profit, except as it relates to the
purchaser's private commodity trading account. The above formula
is copyrighted.
This author rounds out the numbers past the decimal,
i,e. 588.I6 becurns 588.2
5" 8y. too
I
TRADING HOURS
COMMODITY EXCHANGE
CEI'>TRAJ. TINE
BJU77SH I'OUND I
'"" MGNUry Mt\.
I:S A.M.I:IO P.M.
8ROII.ER5. ICED I o..c.,..-ott ... I !:15 A.M.I:OS P.M.
COMMODITY
TRADING
FACTS
CO II. 'TRACT
MINIMUM UNIT NOVE
FLUC'TtiATION FaoY PREVI01..'S CLOSE
SIZE
AIIOUNT
..
AIIOUNT

1S.DOIIIP
__,,,.,I
Sll.SO .0$001 SI.2SO.OO
)Q.DOIIUS. .lllU/U 7.50 :u 600.00
CANADIAN l>OUJtR; laLl. WDM&ar)' Wt.1. I:U A.M. I :10 P.M. ICIO.OOOCD .OOOISICD I 10.00 .11075S 750.00
CA TTl.. LIVE fO.C.IO-uio!.-j o.-us. .O:SSILI_ I 10.00 1.501 600.oo
CA TTL. FEEDER O.C.co M.,......, tac-.. P.M.! 1.000 US. I .01$1/U I IO.SO I .SOl 6)0.00
COCOA
H,.C_Ea_ 9:00 P.N. )0.000 LIS. I .owu I 3.00
"
1.100.00
COFFEE. lil' Col'""- foopr f.-/ 1:41 A.N 1 :JO P.M I 37.500 Las. I I J.7S 61 uso.oo
CO/'P11 ,_,, Eacb.lac: . HY I I:SV .... 1.1 :ull '"' I u.ooo Las. I I 15.00 )( UO.DQ
CORN ou4 ollr* I 9:)0 A.N.I:I.I P.M. UIOOIU 114m!U I
1:1.50 IIW I 500.00
COTiON I 9:30 .r..M.l:OO P.M. I so.ooo Las .owu' s.oo :u I 1,000.00
DEI.fl'SCH/I!ARJ: laai.M.-...,,Wi.t 1:4IA.N.I :IQ t.lol. i 115.000 Dill .DOIIISIDI.t I 12.50 .00601 no.oo
EGGS. SHELl. Ooa,o ........ , .. t..- 9:20 A.lot.I:OU Ul I 12.500 DOZ. JISt/DOZ.. I 11.2S :u 50.DQ
FRENOI F1UNC '" Moaeu.ry Mkt. j a:s ....... ,:so P.M. 1 uo.ooo FF I .oooossiFF 12.50 .0051 1.250.00
GNMA Cllco,..- oil ..... I:SOA.M.I:JO P.M. I SIOO.OOO 1/ll )J.2S 1m no.oo
GOLD anu.w--...,.wt . I 1:21A.M.I:)O P.M. IOOlrorO:t.l .lOS/OZ. 10.00 lOS 1.000.00
GOLD '-"> Ead>. loo:.. HY I 1:21 4.11 .I :JO P.M I 100 lror OZ.. .IOSIOZ 10.00 lOS 1.000.00
HOCS.L/1' Olocoeo ........... E... _, ... M.I2:!S P.M. I lo.ooo Las. I .0151/LI 7.$0 I .SOl 450.00
JAPANESE YEll' u ... _u.ry .. tl. I .,., A.N.I:IO I'.N. I u.soo.ooo l' I .OOOIS/Y 1:1.50 .110601 TJ(t.OO
LUMBER
a.-..Mncaa .... E.-i 9:00A.M.I:OS P.W./ ICIQ.DOIIIF .JOS/10001f1 10.00 51 500.00
MEXICAN PE:SO l.DU. Moftlul) .Wk1o I 1:05 ....... P.W. I 1,000.0001' .IIOOOJS/P 10.00 .001501 1.$00.00
OAT.!
a-.-rT ..... ,,,o ... w . s:u P.M. I !.000 It! I 1144/IU I 12.50 6t )00.00
ORANGE JUICE H'V (OUOft i;.adlaftJc I 9:15 A.N.I:Cl P.M. I U.OOOLIS. I .Dst/U T.SO )( uo.oo
PALLADIUM
H"t Me""'* baa"" 9:20A.W.II:SSP..W.IIOOlrorOZ..I .DSS/OZ I s.oo I s
I 400.00
PLATINUM
HYWcrcoo .... E.a- j I:SA.N.l:IOP .... f SOlrorO:t.f .IOSIOZ. I s.oo l lOS 500.00
PLYifiiOOD
O..Caro llau4 of TtaAr I 9:00 ........ 1:00 P.M. 74.032 so. Fl/ .IOS/1000 I 7.60 I 11 I
/'ORA BELLIES
t:IOA.W.I:OOP .... I 34.ooo Las. I .015tiLI I 9.00 I :1< 120.00
POTA TO!:S. IDAHO ..... , .. .-,.1 t:OOA.)I . Jl:$0 P.ld. I 10.000 LIS : .OifU I 1.00 I .SOt
(
400.00
POTATOES. MAINE
W'l' Mcn::a11w.: ! :oo 4.W.1:00,..M. I 50:1100 Las . I . owu I s.oo I .Sot 150.00
SILVER
'-o-ooflr- I o P.N. I l.iiOOOZ. .JIId/0%.. s.oo I liW l_ 1.000.00
SILVER
C...-ur lac., NY I:&A.W.I:IS P.W s.ooooz .lot/OZ I s.oo ! 211<' I 1.000.00
SILVER COINS
,.,,. Mctc.e'* .1Ldwur I:UA.W.I:Ill'.". 110.000 IS/ !lao I 10.00 I ISOI 1,500.110
SOYBEANS
O.C.,..r-fdollr""' I f:JO A.W.I:ll P.M. I SJIOOilJ lli ! 11.50 sot 1.500.00
SOYBE.A/1' ME.AJ..
O.C.,o r-.o ol1ro4c !:JO A.W.I:Jl P.M 100 Toa' .101/T I 10.00 lOS 1.000.00
SOYBEAN OIL
O...,o.....,..orlro4c I 9,JOA.WI:llP.M I 60.000 LIS I .owu I 6.00 It
SUGAR. I!IIORLDJ I
HY Collcc .. S..o f.-f t:OO A.W.I :CS P.W lll.IIOO Las. .OitiU I ll.lO 14 1.120.00

lU ....... ryMkl. f I:ClA.M,I:IO P.M. I 12SJIOOSf .OOOUI$F I n.so .11060$ 150.00
TRE.ASURY BIU.S
u.lrlklM..,ICtt I 1:15 A.W.I:ll P.M. SJ .000.000 .OIP'T
I
2$.00 som 1.250.00
INHEA T. SOFT RED
Clocooo - ollrada l_ t:JO A.N.I:IS P.W. 5.00011! 1141 I 12..50 20t JIJ()Q.tiO
IIIHEA T. HARD RED
.:.c.._,. orTtMc I t:JOA.W.I:IS P.M. 5.000 IU
,,.,
I
11.50 1St 1.250.00
INHEA T. SPRING
"".S Gnuo b<lloooc I 9:)0 A.M.I:I.S P.N. !.000 IU 1/U I 6.15 20t 1.000.00
57 5
576
CE.A IIEPOKT ABLE POR110NS
The Commodity Exchange Authority requires that
reports be filed.for each day on which a trade is
made, for the day before, during and one day after
the following pOnliom are reached by a person in
the aggregate of all accounts which that person
owns or controls:
Regulated commodities
Eggs (shell or frozen)
Pork bellies
Cattle
Hogs
Lumber
Orange juice
Potatoes
Soybean meal
Soybean oil
Wool
Corn
Grain sorghum, Milo
Oats
Soybeans
Wheat
Cotton
Reportable position
25 contracts
40 CODtraets
50 contracts
CEA POSmON UMrrS
The Commodil)' Exchange Authority has established the following
limits on the positions that may bt: held or the daily tratlt:s made by
a person in the:: aggregate of all he owns or controls in any
one contract month or in all contracts combined.
Daily position limit
Commodity Position limit if different
Eggs (shell) 150 c:ontracts
4
Pork bellies 250 contracts b 375 contractsc
Broilers
Cattle 450 contracts
Cotton SOO contracts
Plywood
Stud lumber (BOT)
Potatoes 350 contracts d
Oats 400 contracts
Wheat 400 contracts
Soybean oil 540 contracts
Grain sorghum 550 contracts!
CorD
600 contracts
Soybeans
Soybean meal 720 contracts
Hogs 750 contracts' 1,125 contracts h
Lumber (CME) 1,000 contracts' 2,000 contracts;
Silver
Copper (Comex) 2,000 contractsi
Mercury
a In addition to the limitations of 150 carlots on total net long or
shon position, no per50n shall bold a net long or shon position in
excess of 100 cariots in the October egg future, 75 carlots in the
November egg future, 50 carlots in the December egg future, or
SO carlots in the January egg future.
b 150 contracts in February, MIIJ"ch, July, August, 200 contracts
in May.
1:225 contracts in February, March, July, August, 500 contracts
in May.
dlSO carlots in March, April, May-300 cariots in others.
'To the extent that the net position held or controlled by any
one person in all futures in any one grain on any one market is
shown to represent spreading in the same grain between markets,
the limit on net position in all futures may be exceeded on such
contract market, but in no case shall the excess result in a net posi
tion of more than 3,000,000 bushels in all futures combined nor
more than 2,000,000 bushels in any one future.
1825 net contracts in all months combined.
contracts in any one contract month.
h 450 contracts in any one contract month.
i600 contracts in any one contract month.
i-tOOO net contracts in all months combined.
ln addition to the above CEA limits, certain limits are imposed
by some of the commodity exc:hlmges.
577
578
CONTRACT CHARATERISTICS FOR A GROUP
OF COMMODITIES TRADED ON AMERICAN
FUTURES MARKETS.
Conmact Siu
Minimum Most Actively
An d Fu
Commodity
Quoud ( U or S J Mor1tbs
Broilns
Dollars 25,000 lbs. Jan., Mar.,
(Iced)
per 21/2 pointsS6.2S May, July,
Cwt. S1.00/c:wt.S2SO Sept., Nov.
C1utle.
Doll&rs 40,000 lbs. Feb., April,
(Cbic11go :c.)
per 21/2 pointsS10.00 June, Aug.,
Cwt. (Sl.OO/cwt.S400) Oct., Dec.
Cboice Steers
Dollars 27,600lbs. J&n., Feb., April,
fCbgo Bd of
per 21/2 pointsS6.90 June, Aug., Oct.,
. Cwt. (Sl.OO/cwt.$276) Dec: .
Citrus
Cents lS,OOO lbs. Jan., Mu., May,
(Fro:.en
per S poinuS7 .SO July, Sept.,
Conccl'ltrllted)
Pound (l eentSl'SO) Nov., Dec:.
COCO/I
Cents 30,000lbs. Mar., May, July,
per l poinrS3 .00 Sept., Dec:.
Pound (1 cenr-5300)
Coppt!r
Cents 50,000 lbs. J&n., Mar.,
per l pointSS.OO May, july,
Pound (l c:entSSOO) Sept., Oct.,
Dec:.
Corn
Ooll&rs S,OOObu. Mar., May, July,
per l/8tS6.25 Sept., Dec:.
Bushel (l c:entSSO)
Cotton No.2
Cents 50,000 lbs. Mar .. May, July
per l poinrS 5.00 Oct,, Dec:.
Pound ( l c:entSSOO)
Eggs
Cents 18,000 doz.. Sept., Oct., Nov.
Sbdl)
per S pointsS9 .00 Dec:., j&n.
Dozen (l c:cntS180)

Doll&rs 1,000 bushels May, July,
(Winnipeg)
per l/8tSl.2S Oct., Dec.
Bushel (1 c:cnrSlO)
Crup
Year
(mllrketing
ye11r)
None
None
Dec. l
to
Nov . .30
Oct. l
tO
Sept. 30
None
Oct. l
to
, Sept. 30
Aug. l
to
July 31
None
Aug. J
tO
July 31
Normal Seasonal
!>rice Pattern
Higb l..o'UI
Feb., Mar.,
July
Spring
and
Fall
Winter
Aug.
None
Aug.
Aug.
tO
Sept.
Nov.
Summer
Nov.
Dec.
Summer
and
Winter
Summer
May
None
Nov.
Dec.
jan.
to
Feb.
April
Winter
Important
Economic Fll&tors
Affecting Prices
Size of breeding flock, egg set,
chicks placed.
Cattle on feed reports, inventory
of canlc and calves on farms and
ranches, calf crop, shipment of
stOcker and feeder cattle into the
corn belt, cattle slaughter and beef
production.
Weather, crop estimates, weekly
FCOJ movement.
World crop reports, political condi
tions, rate of imports, data on imporu,
stocks, grindings, producer measures.
Production and consumption figures
from the Copper Institute, govern
mental export controls and
stockpiling policy.
Crop estimates, surplus disposal,
carryover deliverable stocks, di$
appe1trance, loan tic up, other iced
supplies, weather.
U.S. Government program, world and
U.S. crop estimate:., carryover, con
sumption, &nd textile industry activity.
Number of layers on farms, storage
stocks, production, consumption,
weather.
Crop reports: C&nada, U.S. and
World; weather and exporu
(continued)
579
580
(continued)
Contract
Minrrnwrn Most
Vanarion
Commodity ( U or S J rnOtJesJ Montbs
Hogs, Dolla.rs 20,000 lbs. july, Aug.,
per 2112 pointsSS.OO Sept . Oct.,
Cwt. ($1.00/cwt.$200) Nov., Dec.
/..11mber Dolla.rs 40,000 board feet Ma.r., May, july
per 1,000 25&'$10 (initially)
Boa.rd Feet ($1.00$40)
Mercwry Dollars 10 flasks of Ma.r.,Ma.y,
per 76lbs. each July, Sept.,
Flask 1 dolla.r-510 Dec:.
Oa:s Dollars 5,000 bu. Mar., May, july,
per 1/8tS6.2S Sept., Dec.
Bus bel (l centSSO)
Plarinwrn Dolla.rs 100 troy ozs. Ma.r., june,
per S centsS 5.00 Sept., Dec:.,
Ounce (S1/o:r..S100)
Plywood Dollars SO troy ozs. jan., April
per 10 centsSS .00 July. oct.
Ounce ($1/o:r..SSO)
Plywood 69,120 sq. feet Jan., Ma.r.,
(Chicago) 10tS6.91 Ma.y, July,
Dollars ($ 1.00$69 .12) Sept., Dec:.
per 1,000
Plywood Square Feet 70,000 sq. feet every c:alenda.r
(New York) 10tS7 .00 month
($1.00570)
Pork Bellies Cents 30,000 lbs. Feb., Mar., Ma.y,
(Fro::.rn) per 2112 pointsS7.SO July, Aug.
Pound
Poraroes
Jdllho (Cbi.)
(100/b. b11gsJ
Dollars 50,000 lbs. Nov., Ma.r.,-
per (1 c:ent/c:wt. S S .00) Apt., Ma.y
Potatoes, Maine Cwt.
(NY)
(SO lb. bags)
Propane Cents 100,000 pls. Jan., Feb.,
li..PGJ per 1 point-SlO May, Sept.,
Gallon (1 c:entS1000) Dec.
C1'op
Normal
Yeaf'
(maf'keung
Price Pattern
year) Htgb J..D'IIJ
Oct. I june Nov.
to to to
Sept. 30 Aug. jan.
None Winter Summer
None None None
july 1 May Aug.
to
june 30
None None None
None None None
None Winter Summer
Oct. l June Nov.
to to Dec:.
Sept. 30 Aug.
July thru june, April Dec:.
bulk
Oct. thru May Spring Summer
None Winter Summer
Jmporunu
Econormc Factors
Affeczrng Prices
Cold storage stockli, hog slaughter,
sliced bacon pr04luction, live hog
pig crop reportS"'iOW farrowings, breed
ing intentions, inventory numbel'5.
Economic construction
activity Chousins starts), weather.
Production general economic:
conditions, stockli
Crop estimates, deliverable stocks,
imporu, carryover, loan entries,
other feed supplies.
Production, general economic:
conditions, stock.
Production, general economic:
conditions, stocks.
Economic conditions construction
activity Chousing staru), weather.
Cold storage stocks, hog slaughter,
sliced bacon production, live hog prices,
pig crop reporr::.-sow iarrowings, breed
ing intentions, inventory numbel'5.
Crop estimates, total U.S. Fall stocks,
carlot shipmenu. truck holdings 16
cities, Maine & Idaho situations, weather.
Production. consumption, gener&l
economic: conditions, weather.
(comi,med)
58!
552
(conzinued)
Contract Si:e
Prices Minimum Price Most Actively
Art Variation Futures
Commodity Quoted ( U or S I mDrJe.s) Montbs
Rye Dollars 5,000 bu. Mar., May, July,
per l/8H6.2S Sept., Dec:.
Bushel (1 cenrSSO)
Sihler 1 0,000 troy ozs. jan., Mar.,
(New York) 10 poinuS10 May, July,
Dollars (1 centS70) ,Sept., Dec:.
per Troy
Sil11er Ounce 5,000 troy ozs. Feb., April,
(Cbicllgo) 10 poinuSS.OO june, Aug.,
(1 cenrSSO) Oct., Dec:.
Soybeans Dollars 5,000 bu. jan., Mar., May,
per 118tS6.25 july, Aug., Sept-
Bushel (1 cenrSSO) Nov.
Soybe11n Meal Dollars 100 tons jan., Mar., May,
per S pointsSS.OO july, Aug., Sept.
Ton (51.00/ton$100) Oct., Dec:.
Soybe11n Oil
60,000 lbs. Jan., Mar., May,
per 1 poinrS6.00 julr, Aug., Sept.
Pound (1 centS600) Oct., Dec:.
10
(Domestic)
Cents 112,000 lbs. Jan., Mar.,
per 1 poinr"'S 11.20 May, July,
Sug11rNo. 8 Pound (1 centSll20) Sept., Nov.
(World)
Wool Grease Cents 6,000 lbs. Mar., May, July,
per 1 point$6.00 Oct., Dec.
Pound (l cenrS60)
Crop
Ye41r
(m4frketing
ye4fr)
july 1
to
june 30
None
Sept. l
to
Aug. 1
Oct. 1
to
Sept. 30
Oct. l
tO
Sept. 30
Quou
Calendar
Year
Oct. l
to
Sept. 30
Domestic-
April l
to
March 30
Normal Seas.onal
Price Pattern
H1gb LO'UJ.
Aug. jan.
None .None
May Oct.
july Oct.
May Nov.
Aug.
to Mar.
Sept. April
Dec. May
june
lmpor11n11
Eco11omic FtJctors
Affecting Prices
Crop estimates, deliverable stocks,
Canadian situation, exports, loan
entries, price U.S. wheat, feeds.
Production, consumption,
government policy on silver
sales.
Crop estimates, deliverable stocks,
crush, exports, loan entries, vegetable
oil consumption, weather, meal price,
cotton crop.
Total supply; Production of commer
cia! formula feeds; exports, prices
received by farmers for meat animals
md products.
Soybean and conor. crop estimaw,
crush, exports, visible supplies, other
fats & oils supply and demarid.
U.S. Sugar Act, national income,
consumption, quotaS, supplies in
Northeast.
Economic conditions, world crop
estimates, especially Cuba, world
demand vs. free world supplies.
Production, general conditions in
wool textile business, imports, world
production, sheep population trends,
military use, gov't support prorram.
Source: Ho'IJJ 10 Buy tJrui Sell Commodities
(New York: Merrill Lynch, Pierce, Fenner &
Smith, January 1970), pp. 36, 37.
583
584
584
May 7'80 PHANTOM/HIDDER HIGHS/LOWS FOR PG.244
Many have written to me on confusion (it is difficult !) ,
of "phantom'' T.P.. 's per:-'=' 244 et al.
THIS HELP ? ( Write to me if you have any further questions.)
REVIEW : of isolated highs/lows.
isolated high isolated low
FORGET DEFINITIONS
Now, isolated h/l's are easy to understand.
But, phantom high/low is not !
PHANTOM HIGB FHANTOM LOK


DAY WITH BOTH PHANTOM HIGH & LOW
re: graph pg.244 - often referred
to as 'inside day'.
Sorry to have all this so confusing
in the book l
FURTHER EXPLANATION
585
(Forget about definitions;they are always too confusing.)
What always happens with the phantom is that the
day the phantom high/low (i.e. 'T.R.' per 'P&L' ) , , , , is
hit,,, prices will go,,, usually,,, sometimes in morning,
,, , often shortly after opening , , , -beyond the previous
day's range or just to it, and visually and in fact creates
a hidden/phantom high/low for that day.
e.g. phantom high
X
open here & U can see that there is an
I 'isolated' high for the day@ 'x' , (a phantom
high) ; ; ; but the day is not over ; prices then
go crawling up (&usually do 'crawl') and BINGO!
,,, hit that isolated but phantom high.
go just to or past previous day's
low & move on up. Result:- phantom high hit.
e.g. phantom low

prices go here first,as I say,usually in the
morning and saunder on down to hit that little
monkey, that phantom-isolated low for the day.
hI ) -prices go here first.
't------ ph an tom low ( T. R. per P &L) hit
I hope that this has been of some help to you.
P.S.-note that a phantom T.R. can be hit several days later,
and not the day it is created.
'f = phantom
'
PERTINENT SUBJECT INDEX
Basis analysis 29,II3,I42,I80
Breakout analysis 58,!38,!63-8,356
Cash analysis 29,IOO,I42,I80,277
Charting I-!3,280,473
Chart patterns I54,I59-62,I65,I76,I80,I85-94,203,505-43
Committment traders report 30,96,98,I42,!80,I95,203
Congestion analysis 29,56,80,I37,!45-77,262,298,303,374-5
Contrarian opinion 30,95,98,I42,I80,203
Correlation analysis 28,283
Cycles 26,272,29S,307,499,555-67
Day r ~ v e r s a l s 20!-2,502-3
Fundamentals IO, !6,.29, I33, ISO ,!94, 272,309
Gap action I38,I40,I67,476,502,543-7
Index no's 26
Intra-day analysis 66,50I,I77
Mathematical trend analysis 35 (see P&L)
Moving averages I7-I9, I38
News 3I,26S-70
Noise I77
O.I. analysis 29,7!-97,I32,I4I,I57-9,I79,I95
Odds 29,II4,I42,I80
Oscillators !9
P&L (Point and Line) ISO, 205-65,38I-4
Point & figure 32
Price reversal analysis 64,85,86,!68,I75,I78-204,504
Premiums 36
Rally reaction 29,29S
Random walk I,29,298-302
Registered warehouse receipts 37
Seasonal tendencies S7,III,I80,272,555-67
Straightaways I4I
Support & resistance !68-72,203,256,367-9,552-3
Target calculation !68,256-60
Time-price reversal 29,49S,503
Trend analysis 29,63,79,II9-44,I74,I76,IS3-4,276,29S,302,
357,364-6,475,502
Trend lines I25-30,I35-6,I42,I79,200-2,256,359-63,476,504,547
T.R. 's I72,IS0,24I-9
Volume 22,29,55-69,92,I32,I4I,ISI-8,I67,I79,I80,I95-6,500
Wave theory 26,304
Weather 270
50 % retracements 29, I72,I97,256,370-I
LISTS OF WHAT TO DO
I4
37
69
!35-9
164
203-4
265
3!9
328
332
334-9
**
343-54
385
392
422
425-34
435
445
448-55
485 *
487-504
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