Bruce Babcock Interviews Steve Briese

3/6/2015
BruceBabcockInterviewsSteveBriese
RealityBasedTrading
Company
presents
BruceBabcock
Interviews
SteveBriese
on
Tradingwiththe
Commitmentsof
Traders
Report
http://commitmentsoftraders.org/wpcontent/uploads/Static/Perm/babcock.htm
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SteveBrieseistheworld'sforemostauthorityon
interpretingtheCFTC'sCommitmentsofTraders
Report.Alongwithhisownsuccessfultrading,hehas
hadadistinguishedcommoditycareerasanewsletter
publisherandsoftwaredeveloper.Hehassomevery
uniqueandeffectiveapproachestotrading.
Now47yearsold,BriesewasborninMinneapolis,
wherehegrewup.AftertwoyearsatSt.John'sCollege,
in1968,helefttoflyhelicoptersintheArmy.Thiswas
attheheightoftheVietnamWar.Asheexplainedit,
"MyfatherhadbeenaprisonerofwarinWorldWarII.
MygrandfatherhadservedinWorldWarI.Ijust
thoughtIoughttogoandfindoutwhatitwasallabout.
Therewasn'tanythingIfoundouttherewhichmademe
feelweshouldn'thavebeenthere."
WhenheleftVietnam,Briesewasthehighestdecorated
officerinthehistoryofhisunit.Ittookhimalongtime
togethisfeetbackontheground.Hesaid,"ittook
threeyearstoreturntosomesortofnormalcy.WhenI
gotbackIcouldn'tstayputinoneplace.Iwas
constantlytraveling.Lookingbackatitafewyears
later,IcouldseethatforthreeyearsIreallydidn'thave
mywitsaboutme."
Stevebelieveshisexperienceasacombathelicopter
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pilothadaverypositiveeffectontherestofhislife."I
operatedunderextremestressandunderthose
conditionsbecamethebestthatthereeverwasat
something.Soitdidbuildselfconfidence.Ihavelived
therestofmylifefeelingifIwasgoingtogetit,that
waswhenIwasgoingtogetit.Idon'thaveanyfearof
death.Idon'thaveanyfearofanythingelse.WhenI
tookaround,Iseethatasabigadvantageovera
tremendousnumberofpeoplewhofearallkindsof
things."
Hereenrolledincollege,butagainleft,thistimeto
helpathisfather'sstructuralsteelfabricationplant.
Togethertheybuiltthebusinesstothepointwhereit
becameatouristattractionforJapanesewhowantedto
comeandcopythemostadvancedsteelfabricating
plantintheworld.Ashedescribedit,"Adozenpeople
showedupwithnotebooksandtapemeasures.Before
weknewwhatwasgoingon,theyphotographedand
measuredourentireplantindetail,everypieceof
equipment.That'showtheJapanesebecamesuchan
industrialpower."
In1976,heleftthatbusinessandforawhileflew
helicoptersinAlaska.Thenhemanagedanemployment
agencyforayear.Throughthat,hefoundaperfectjob
andplacedhimselfasnationalsalesmanagerfora
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specialtycontractingcompany.Heworkedthereuntil
1982,whenhestartedhisowncommercialroofing
business.Overthenextsevenyearshebuiltthat
operationto60employees.
Onhis40thbirthday,hedecidedtogoontosomething
else.Hefoundotherjobsforhiskeyemployeesandjust
closedthebusinessdowntoconcentrateonpublishing
thecommoditynewsletterhehadpurchasedthe
previousyearandtradingforhisownaccount.
Atthattime,Stevewasnotanewcomertothe
commoditymarkets.Hehadstartedtradingin1973
afterreadingAnyoneCanMakeaMillionDollarsby
MortonSchulman."Thebestandmostexplosive
investmentintheentirebookappearedtobe
commodities,"heexplained."Iwenttoalocalfirmto
seeifanyofthebrokerswastradingcommodities.Sure
enoughtherewasaguytherewhotookLarryWilliam's
hotlineandhadcommoditiesonhisscreenallday.I
openeda$3,000accountandboughtthreesilver
contractsat$2.97.Itwentstraightup.
"Irodeitallthewayto$3.60.Ithoughtithadgonefar
enoughforawhile.IgotoutandthendecidedImight
aswellmakesomemoneyonthecorrection.Iwent
shortandwasaheadforaboutadaybeforethemarket
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lockedlimitupforthreedaysinarow.Bythetimeit
wasover,Ihadlostmy$3,000,andIowedthebroker
another$3,000."
Stevedidn'tgiveup,however."AfterIpaidthebroker
back,Iwentaboutcreatinganotheraccount.Atthat
time(1974),IdiscoveredtheCommitmentsofTraders
Report.Isubscribedtothatandlookedfor
opportunities.Iwassearchingforextremestogo
againstthesmalltraders.
"ThenicethingabouttheCommitmentsreportwasit
onlycameoutonceamonth.Itmightbeseveralmonths
beforeyou'dseeasituationwheretherewasabig
spreadbetweenthetradingpositions.WhenIfound
somethingthatlookedcheaponthechartsandsmall
traderswereintheoppositepositionorhadnoposition,
thenI'dbuy.Ididn'thaveanyrealsystem,butIbegan
keepingmyownpricechartswithopeninterest,
Williams%RandtheCommitmentsdata.
"Typically,Iwouldmakesomemoneyandthenloseit
back.Iwasmakingenoughthoughtostayinterested.I
soonrealizedthatevenifIlostmoney,ifI'ddonejust
theopposite,Iwouldhavemadealotofmoney.SoI
keptworkingondevelopingsomekindofmethodology
totradeby.
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"By1983youcouldbuyapersonalcomputer.You
couldn'tdomuchwithityet,butitwasn'ttoolong
beforetherewassoftwareavailabletodosomethings.I
startedprogramingin1983withthefirstportablethat
cameout.ItwasaCP/Mmachine.
"In1987,afterthestockmarketcrashIdecidedthatthe
commercialconstructionbusinesswasnotgoingtobe
booming.Istartedlookingaround.I'dbeeninterestedin
commoditiesallthistimeanddecidedmaybeIcould
makealivingatitanddowhatIreallywantedtodo."I
resolvedtodevelopamethodologytotrade.Ididsome
researchintowhohadorganizedaCommitmentsof
TradersdatabaseandwhereIcouldgetit.Icame
acrossCurtisArnoldwhohadbeenpublishingthe
CommodityInsidernewsletterbuthadjustquit.He
couldn'tmakeagoofit.
"Inegotiatedtobuyhisresearchwhichconsistedofhis
databaseandhisformulafortheCOTindex.His
formulawasastochastictypeoscillatorbasedonthe
commercialpositions.Itmadealotofsense.Istarted
myownnewsletterinMarch,1988,publishingnet
positionchartsandCOTindexes.Infact,Italkedtoyou
atthattimeandusedyourmailinglisttogetstarted.
"Idecidedthenewslettershouldpayallmyliving
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expensesandoverhead.ThenIwouldn'tbeunderany
particularpressuretoliveoffmytrading.That'stheway
Iorganizedit.Evenwithfivekids,withinsixmonthsI
wasabletoliveoffthenewsletterandtradeonthe
side."
Steveusedhisprogrammingskillstocreateanumberof
commerciallysuccessfulcommodityprograms."Ihad
peoplesendingmesystemsallthetime,wantingmeas
apartnertoselltheirsystem.
"Oneguykeptfaxingmehissignalseverydayforsix
months.Hefinallyconvincedmehehadsomething.I
madeadealwithhim,anddevelopedasoftware
productcalledSystemTracker.Thetheorywastotake
manypubliclyavailablesystemsandmethods,keep
trackoftheirtrading,andthengetintoandoutofthe
marketsalittlebeforetheydid.Werentedtheprogram
for$300amonthto50people,withthecustomerbeing
abletoapplyuptothreemonth'srenttothe$10,000
purchaseprice.49boughtit.Westillhaveoneperson
whocontinuestoleasetheprogramfor$300amonth.
"Thatsamesystemdeveloperlaterinventedan
algorithmfortradingcurrencycrossratespreads.Steve
turneditintoasoftwareproducttheysoldcalledCross
Current.IttradedtheJapaneseYenagainstthethree
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Europeancurrencies.ItcameoutinAugust,1992,and
purchasersmade"tonsofmoney"thefirstyear.
Althoughthecurrenciesdieddownsomewhatsince,the
systemisstillahighlyratedperformer.Itiscurrently
availablefrom,coincidentally,CurtisArnold.
StevealsomarketedastockindexsystembyRoger
AltmancalledPrivate$tock.Hehasn'trunatrack
recordonitrecentlybutsays,"Wehavepeoplewho
continuetotradeit."Healsocreatedauniquecharting
programprimarilyforhisownusecalled,AutoPilot.
HehasrecentlyreprogrammeditforWindows.It
containssomeindicatorsavailablenowhereelsesuchas
lglehartPercentNewandHurstEnvelopes.
MyinterviewonApril25,1996,continued:
Canyousummarizeyourtradingapproachwith
respecttoentries,exitsandstops?
Ithinkthebottomlinetomyapproachisthatifyouare
tradingamethodology,atechnicalsystem,thetechnical
systemshoulddictatewherestopsandentriesgo.The
typicaltrader,however,probablycan'taffordtotrade
withtheriskthatmostsystemscreatebyhavingalarge
distancebetweentheentryandtheexit.
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Theroutemostsystemdevelopershavetakenaround
thisistoadjustthestoploss.Itbecomesamoneystop.
"Ican'tafford$1,000riskonthis,soI'mjustgoingto
putamoneystopinat$500."Ithinkthat'sentirely
wrong.Ifyou'regoingtotakeaposition,youshouldbe
abletostaywiththepositionuntilthemarkettellsyou
throughyourtechnicalanalysisthatyouarewrong.If
yougetoutaheadofthat,you'renotreallyfollowing
anykindoftechnicalsystem.Icontinuetobelievethat
usingstandardchartpatternsisaverylucrativewayto
trade.
You'retalkingaboutclassicalchartpatterns.
Triangles,headandshoulders,thatkindofthing?
Yes.EdwardsandMagee.Ialsohaveamanuscriptof
thechartingcoursewhichprecededthatbook.Itwas
neverpublishedinbookform.Itwasatradingcourse
publishedbyanuncleofMagee.I'vegonebacktolook
atwhathasworkedandtriedtoreducethechart
patternsdowntoamanageablefew.IhavetwothatI
lookfor.
Whichare?
Thefirstisafailureswingtoporbottom,whichyoucan
considertobeadoublebottomorslightlyhigher
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secondbottom.
BruceGould's123.
Orthelasthalfofaheadandshoulderstoporbottom.
Orthelasttwopeaksofatripletoportriplebottom.
Thesearereversaltypepatterns.
Theotheroneisacoil.Thatwouldincludeanytypeof
trianglewhichisaconsolidation.Itistypicallya
continuationpattern,butitcanalsobeareversal
pattern.
Theproblemwiththesepatternsisthattotradea
breakoutandputyourstopontheothersideofthe
patternusuallycreatesmoreriskthanIwanttotakeand
thatmosttradersshouldtakebasedontheiraccount
size.Thetypicalapproachtothiswouldbetotradethe
breakoutwhenitcomes,buttoputyourstopatamoney
riskdistancefromtheentry.
Itaketheoppositeapproach.First,Ideterminewhere
mystoplossshouldbebasedonthepattern.Iwantto
putmystopatthepointwherethepatternfails.ThenI
determinehowmuchI'mwillingtoriskonthetrade.In
mycaseIneverriskmorethen$500percontractonany
trade.Idon'ttradetheS&P,wherethatwouldbe
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difficult.
Isitamatterofpersonalcomfort?
Yes.
Ona123orfailureswing,wouldyourstopgo
belowthefirstlow?
Yes.
Goon.
I'veestablishedmystop,andIknowwhattheexitpoint
willbe.NowIhavetofindtheentrypointthatwill
keepmyriskwithintherequiredamount.Thiswill
usuallybeatapointbeforeabreakoutverifiesthe
pattern,stillwithinthepattern,Iuseotherfactorsto
forecastwhichwayapatternisgoingtocomplete.
Youdon'twaitforabreakoutandthentrytobuya
reaction.Youtrytoanticipatethecompletionofthe
pattern.
That'sright.IusetheCommitmentsofTradersdatato
predictthedirectionapatternwillcomplete.I'llgive
youanexampleintheBondmarket.[Seethechart.]In
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theChristmas,1995issueofmynewsletter,Idescribed
aSpecialSituationontheshortsideofinterestrate
futures.BasedontheweeklychartIwaslookingfora
doubletopinTBonds.Itwasahugepattern.Idon't
carehowrichyouare,youcouldn'taffordtowaitfora
breakdownbelowthe1994lowandputastopabovethe
1993high.
That'saworsecasesituation.Mostpeoplearen'tgoing
tobetradingpatternsonaweeklychart.Iwaslooking
foradoubletopontheweeklychartbecausethe
commercialsweresellingveryheavilyintotherally.I
electedtoputonapositionbasedontheweeklychart
patternwithastopabovetheprevioushigh.Ofcourse,
thatoneworkedtoperfection.
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Youhadtobeprettyluckytoenterwithin$500of
thehigh.
Whenyouknowwhereyourstopisandyouknowwhat
yourriskis,youareforcedtowaitforanopportune
entry.Themarketmustcometoyou.Inthiscaseit
workedoutbecauseItradedoptionsonthistrade.It
waspossibletodoevenwithfuturesifyouwere
preparedaheadoftimeandhadanorderintosellifthe
pricegothighenough.
Thehighontheweeklychartwas12204.Doyou
rememberwherethefutureswerewhenyoudid
youroptions?
Yes,theywereabove121.
Thattypeofsituationdoesn'tcomealongeveryday.
I'mgivinganextremeexample.We'restillnotevenhalf
waydowntothe1994low,whichisthepointwhere
thispatternwillbeconfirmedontheweeklychart.
Peopleshortfromthetophavemadeatremendous
amountofmoneyalready.
Ifindthattheonethingevenpeoplenewtothemarkets
areabletodoisdeterminewheretheywanttobeout
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thespotwheretheyknowthey'regoingtobewrong
theirstoplosspoint.Typically,Iaskthemtofindthat
point.Itellthemthat'swheretheirentryshouldbe.If
youaregettinginwheneverybodyelseisexiting,the
majorityofthetimeyouwillprobablyhaveanoptional
entry.
That'saveryintriguingidea.Wherewouldyouput
yourstopthan?Thatbecomesamatterofrisk.
Ibasethatonapercentageoftheaccountsize,whichI
thinkshouldbeoneortwopercentonanyonetrade.
Forsmallertradersit'sgoingtobeabiggernumber,but
certainlynomorethanfivepercent.
Thissoundscontradictory.Youstartedoutby
sayingyoudon'twanttouseanonchartbasedstop.
Youuseapatternorsomemethodtosaywhereyou
shouldexit.That'swhereyouputyourstop.Then
youenteratapointwhichwillkeepyourrisktothe
amountyouwant.Nowyou'resayingforgetallthat
andenteratyourexitpointwithamoney
managementstop.
I'musinganoutsideindicator,inthiscasethe
CommitmentsofTradersReport,topredictthe
directionofthenextmove.Typicallytheentrypointis
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muchclosertothestoplosspointthanpeoplerealize.
Quiteoftencommercialsareabletomoveamarketto
collectallthesereadystopsandhaveamaximum
positionbeforethemarketgoestheirway.SoIthinkthe
stopisthemostimportantthing,andthebestentryis
closetothat.
Yoursecondstrategyrequirespatiencebecause
you'regoingtomisssometradeswhenthemarket
nevermakesittoyourentry.Italsorequires
couragebecausethemarketisprobablylooking
prettybadwhereyourstoppointisandyou'vegotto
besteppinguptotheplate.Thekeytoyour
methodologyisthatnomatterhowbadthemarket
looks,it'sdeceptive.
Themarketalwayslookstheworstbeforeitturnsnear
yourstop.Ofcourse,IusetheCommitmentsdatato
predictthatamajorturnishappening.Underthis
procedureyou'regoingtofindtheoptimumentry.
Soyouwouldn'trecommendthattypeofprocedure
unlessyouwereusingtheCommitmentsofTraders
Reporttoestablishdirection.Wouldthatbeafair
statement?
Yes.
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Wouldtryingtouseitinotherwaysbedangerous?
Ithinkso.I'malsosayingthisentryissuperiortoa
breakoutentrybecausethebreakoutentryisgoingtobe
toofarawayfromwheretheprescribedstoplossshould
be.
Idon'twantpeopletobedeceived.You'redefinitely
sayingtousethisonlyinconjunctionwith
CommitmentsofTradersdirectionalsuggestions.
That'sright.
Iagreewithyouinthesensethatbuyingweakness
andsellingstrengthisordinarilynotagoodwayto
trade.Butyou'regoingtomakeanexceptionhere
foryourCommitmentsmethodology.
Yes.
BeforewegettoyourCommitmentsstrategy,we
stillhavetocoverexiting.Ithinkyou'vedonea
prettygoodjobofdescribingtwodifferentwaysto
enter.Now,onceyouareinawinningposition,how
doyouexit?
Theexitistherealartoftrading.Therearealotof
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peoplewhocanenterright,buttheexitisvery,very
difficult.Iprefertouseatrailingstoploss.WhatIlook
foristhepointwhenspeculatorsbecomeheavily
involvedinthemarket.YougetwhatIrefertoasa
speculativebubble.YoucanseeitintheCommitments
Report.Atthattime,Iliketomovemystopupbehind
thelatestcorrectionloworhigh.Ialsohaveasystem
thatlooksatvolatility.Whenthevolatilitydoublesfrom
entry,Iwilltakeoffhalftheposition.
Volatilitydefinedaswhat?
Astheaveragedailyrange.Iusethesametimeframeas
Iuseforgettingintothetrade.
Whatwouldthatbe?
Iusevarioustimeframesdependingonthemarket.For
instance,let'ssayI'mtradingabreakoutsysteminboth
theDeutschemarkandSwissFranc.Sincetheyareso
correlated,Iusetwodifferenttimeframes.Idon'twant
totradethesamemarketcycleinbothmarkets.For
instance,ifyou'retradingabreakoutaboveasomany
dayshigh,Imightlookforabreakouttoanew25day
highinonemarketandabreakouttoanew100day
highintheother.Iwouldtradeeachmarketdifferently.
Thetypicalsystemdeveloperlookstooptimizea
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systemtoonlyonetimeframe.Doingthat,therewould
onlybeafewcomplexesinwhichyou'rereally
diversified.Youmighthaveachoiceofaslittleassix
marketstotradebeforestartingtodoubleuponthe
samemarketforces.
Whataboutthedangerofcurvefittingwhenyou
optimizeeachmarketdifferently?
ThesystemsIusetypicallyaresorobustthatinterms
ofabreakouttheymightworkfrom20daysto120
days.
Whyaretheysorobust?Becausetheyhaveveryfew
parameters?
Sure.Numberone,theyhaveveryfewparameters.And
numbertwo,therangeofvaluesforthoseparametersis
sobroadthatitreallydoesn'tmatterwhichoneyou
pick.Youcanpickwithadartwhatparametervalue
youwanttotrade.Thekeytoincreasingthesmoothness
ofyourequitycurveisthatwithinaparticularmarket
sectoryoushouldbetradingmorethanonecycle.That
meansusinggrosslydifferenttimeframes.AsI
previouslydescribed,youcouldtradea25daybreakout
inonemarketandinarelatedmarketthattendstomove
thesame,tradea100daytimeframe.Ofcourse,you
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musthaveasystemthatisrobustenoughtotradethose
noncorrelatedtimeframesprofitably.
Thatsoundsliketryingtocombinelongtermand
shorttermsystemsinthesameportfolio.Thereare
peoplewhowilltradeoneshorttermsystemandin
thesomeaccounttradelongtermaswell.That
wouldamounttothesamething.Isthattheidea
you'retalkingabout?
Yes.Togetbacktomyexitplanwhenvolatility
doubles,inordernottohaveanadditionalparameter,I
usethesametimeframetodeterminetheaveragedaily
rangeasIusedforentry.Youlosedegreesoffreedom
everytimeyouaddanewparametertoasystem.(That's
astatisticalmeasureofreliability.)
Theincreaseinvolatilitytellsmethismarkethas
probablygoneasfarasit'sgoingtogoonthisparticular
legofthemove.Forinstance,recentlyIhadasystem
thatwentlongCrudeOilonabreakout.Volatility
doubledrightatthetop.Itookoffonecontractatthat
point.
Thenyoutrytogetbackinsometimelater?
Yes.Itrytogetbackinwhenthemarketreactsvery
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closetomycurrentstoploss,soIhavemoreorlessthe
originalriskbackinthetrade.OnalongtradeIlookfor
abigdowndayfollowedbyasmallinsidedaynearthe
bottomofthefirstday'srange.Ifthatbringstherisk
down,Iputthetradebackon.
Fortherestofyourposition,you'retrailingyour
stopbelowthelatestreactionlow?
That'sright.
Youhavesomeimportantideasaboutmoney
management.Canyoutellusaboutthose?
IdeterminedwithCrossCurrent[hiscurrencyspread
tradingsystem]thatbyusingapyramidingscheme
whichaddstowinningtrades,youcoulddrastically
improvethereward/riskratio.Withthatsystemyou
couldaboutdoubleit.Mostsystemtestingsoftware
packagesdon'tallowyoutopyramid.Ortogetoutofa
tradeinstageseither.Thatwascriticaltoturningaso
sosystemintoaverysuccessfulsystem.
Anotherbreakthroughcameinmeasuringsystem
performance.Theavailableoptimizationroutinesuse
standardperformanceyardstickssuchasreturnon
maximumdrawdownortotalprofitsdividedbytotal
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losses.Whenyouoptimizeasystem'sparameters,you
areoptimizingbasedonthosebenchmarks.Those
standardonesareabouttheonlychoices.Ifoundthey
werenotverygood.
Insystemtradingwhatyoushouldbetryingtodoisto
findasystematicmethodofbuildinganequitycurve
thatisasclosetoastraightlinewithassteepanangle
aspossible.Thebiggestdrawbackwithmostsystemsis
thelackofsmoothnessofthatline.Youwantto
minimizethemovementaroundastraightlineequity
curve.Idevelopedastatisticalmeasurewhichdidthat.
Itdoesn'tdoanygood,however,unlessyoucan
actuallyoptimizeforit,whichiswhyIcreatedsoftware
todoit.
Canyoutellusmorespecifics?
No.It'sproprietary.
Howdoyouchoosethebestmarketstotrade?
Ionceanalyzedahighlyratedsystemforitsauthor.He
foundhissystemwasprofitableinthreedozenmarkets
andfromthosehehadvariousportfoliosforvarious
sizeaccounts.Hebasedhisportfoliodecisionsonthe
totalprofitsgeneratedovera5or20yearperiod.Using
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thestandardsystemperformancemeasures,whichare
theoneshehadavailabletohim,suchasreturnontotal
drawdownortotalprofitstototallosses,it
seemed/perfectlynatural.Butifyoulookedatmy
proprietaryperformancemeasure,youcouldseeright
awaythatmanyofthesemarketsshouldhavebeen
poorlyratedeventhoughtheywerehighlyratedusing
thestandardmeasures.Ilookedalittlecloseratthe
results.Sureenoughthereweresomegrainmarketsthat
wereveryprofitableforoneyeareveryf'iveorsix
years.Buttheymademoneysoinfrequentlyandhad
suchdrawdownsinbetween,thattheysubtractedfrom
thesmoothnessoftheequitycurve.Theirequitycurves
weresofarfromastraightlinethattheywerenotgood
marketstotradewiththatsystem.
Whataboutspecializinginjustafewmarketsorone
market?
Ioncetalkedtoafellowwhoeveryspringinvested
$75,000inSoybeanoptions.Itoldhimhisstrategywas
goingtohititbigeventually,butitwouldprobablybe
theyearhedidn'thave$75,000lefttoinvest.Oneofthe
bestthingsyoucandoisincludeasmanymarketsas
possibleinyourtradingthathaveshownconsistent
profitmakingpotentialyearafteryear.
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Whatmarketswouldyourecommend?Whatarethe
bestmarkets?
We'retalkinghereintermsofatrendfollowingsystem.
Thecurrencieshistoricallyhavebeentremendousyear
afteryear.Someoftheinternationalfoodsaregood.
Cocoaisabigexception.Mostofthegrainsarenot
good.Eventhoughtheylooklikeitonachart,when
youtrytotradethemwithatrendfollowingsystem,
youfindtheyjustdon'tperformverywell.Theirbig
trendsaretooerraticandfarbetween.Theymayhave
trendedwellovertime,buttheydon'tperform
consistentlywellyearafteryear.CornandSoybeanOil
arethetwobestmarketswithinthegrains.
Canyoutellmehowmanymarketsisagoodcore
numbertotradewithoutspecifyingwhattheyare
necessarily.Yoursystemauthorhad36markets,
whichwastoomany.Whenyouweededthosedown,
howmanydidyouendupwith?
Eighteen.
AreyoufamiliarwithmybookTrendinessInthe
FuturesMarkets?
Yes.
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Ifirstpublisheditin1988,andIupdateitevery
year.Itisanobjectiveexaminationofhow
historicallytrendythevariousmarketshavebeen.
Iwouldputthecurrenciesfirstandinterestrates
second.
Exactly.Coffee'supthere,andOrangeJuice.Iagree
withyou100percentthatCocoaisnotagood
trendingmarket.Idon'ttradeCocoawithsystems.I
trade21marketswithmyvarioustrendfollowing
systems.
IlovetheCocoamarket,butithasparticular
characteristicsthatdon'tallowyoutotradeitwitha
trendfollowingsystem.
I'vesuggestedovertheyearsthatpickingtheproper
portfolioofmarketsisequallyimportantwith
pickingagoodsystem.Itsoundslikeyouagreewith
meonthat.
Yes.It'scritical.Theproblemisthatthesystem
performancemeasuresavailabletotheindividualtrader
arenotsatisfactory.
LetmerunanotherideabyyouIfeelstrongly
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about.Partoftheproblemwithalmostalltesting
softwareIsthatitonlyallowsyoutotestonemarket
atatime.Youcan'tjudgewhathappenswhen
you'retradingaportfolioofmarketstogether.This
appliestodrawdownespecially.Mysystemsoftware
allowsyoutotestawholeportfolioatonceandsee
whatthejointdrawdownis.Doyouagreethat
portfoliotestingiscrucial?
Yes,andIdothataswell.Yoursoftwarehasalways
donethat,andIagreethatitiscritical.Butitstill
doesn'tgiveyoutherightanswerifyoudon'thavethe
rightperformancemeasure.
Thatiscertainlyfoodforthoughtevenifyouwon't
telluswhatitis.Let'sturntoyourCommitmentsof
Tradersmethodology.Whydon'tyoustartwiththe
theoryofwhyItworks?
InmuchthesamewaysomepeopleusetheElliott
WaveTheoryorvarioustechnicalmeasuresto
determinehowfarthemarketwillmoveandwhenit
willreverse,IviewtheCommitmentsdataasameasure
ofcrowdpsychology.Intermsofcrowds,Icanbreak
commoditytradersintothreefairlyhomogeneous
groups.Thesethreecrowdshappentolineupwiththe
breakdownoftheCommitmentsofTradersReport.By
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measuringtheirrelativebullishnessorbearishness,I
candeterminethelikelydirectionofamarket.WhatI'm
lookingforisextremesinsentiment.Assoonasyou
takeaposition,youhavejoinedacrowd.Youstartto
losepersonalinitiativeandadoptthecrowdmentality.
Let'ssayyou'rewatchingCNBC.Ifananalystagrees
withyou,he'saverysmartguy.Ifhedoesn'tagreewith
you,hedoesn'tknowwhathe'stalkingabout.He'sall
wet.Youtendtofollowyourcrowd'sleaders.
Forthosenotfamiliarwiththis,wouldyoudescribe
thethreedifferentcrowdswe'retalkingabouthere?
Thefirstcrowdiscommercialhedgers.Theyare
membersofoneoftwosubcrowdsinthattheyare
eitherproducersorconsumers.Producerswouldinclude
suchentitiesasminingcompanies,mutualfundsand
grainelevators.Theseentitiesholdcashpositionsina
commodityandselltheircommodityforwardinthe
futuresmarketatcurrentpricesifthey'reexpectinga
pricedecline.
Ontheothersideareconsumercommercialslike
manufacturersandfoodprocessorswhohavea
continuingneedforaparticularcommodity.Ifthey
believethepriceofthecommodityisgoingtorise,they
buyforwardinthefuturesmarkettocovertheirfuture
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needs.
Whatthesesubgroupshaveincommonisthatthey
tradeoninsideinformationandtheygenerallytradein
onlyonedirection.Miningcompaniesarealwayslong
thephysicalmetals,sotheyalwaysshortinthefutures
market.Dogfoodcompaniesalwayshaveaninventory
ofmeatbyproductsorsoybeanmeal,andtherefore,they
alwaysbuyinthefuturesmarket.
They'reahomogeneousgroup.Theyareinthemarket
toreducetheirriskfromfuturepricemovements.They
haveanoffsettingcashposition.Iftheyarelosingin
futures,theyarewinningincash.Thisgivesthemmuch
morestayingpowerthantheothergroups.Theyhave
deeppocketstobeginwith.Inordertobelonginthe
largecommercialcategory,theyhavehugecash
inventoriesandhugefuturespositions.Thatmakes
commercialsahomogeneouscrowd.
Thesecondcrowdislargespeculators.Somebooks
backinthe1970s,includingLarryWilliams'book,How
IMadeOneMillionDollarsLastYearTrading
Commodities,recommendedthatyoufollowthisgroup
oflargetraders.Atthattimelargespeculatorsusually
gotthatwaythroughtradingprofits.Todaythelarge
tradersareprimarilythecommodityfunds.They're
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willingtoassumetheriskfromcommercialsin
exchangeforanopportunitytoprofit.Theyare
typicallymotivatedtoshowaprofiteverymonth,and
they'redominatedbycomputerdriven,trendfollowing
approaches.Thus,theyalsotendtobeavery
homogeneousgroup.Theybecamelargebyhavinga
greatsalesdepartment,notbytradingprowess.SoI
don'tfollowthem,buttheyareaverycloseknitgroup.
Theremaininglargegroupissmalltraders.That
includesbothspeculatorsandsmallcommercialhedgers
suchasfarmersandotherswhodon'thavelarge
positions.Whattheyhaveincommonisthattheyhave
smallerpocketbooksthaneitheroftheothertwo
crowds.Theylackinsideinformationand,therefore,
they'remoresusceptibletonews.Thiscrowdtendsto
bebullishiftheyarelongratherthanlongiftheyare
bullish.
Theselittleguysareprobablythemostsusceptibleto
crowdpsychology.Oncethey'reinaposition,they
makeundisciplineddecisionsthatafterthefactthey
wouldfindillogical.Whilethey'reunderpressurefrom
theircrowd'smentality,theygoalongfortheride.They
arethelastonesinandthelastonesout.
IlookattheCommitmentsdataasaveryaccurateway
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tomeasurecrowdpsychology.FromtheworkIhave
done,Ihavedeterminedthatinmostmarkets,ofthe
three,commercialsarebyfarthebestgrouptouseasan
indicatorformostmarketconditions.Thereasonisthey
takepositionsforthelonghaulandtypicallydefend
pricelevelsforlongperiodsoftime.Ididalittle
researchstudyacoupleofyearsagothatlookedat
extremereadingsforeachofthethreegroupsto
determinewhetherpricehadmovedinagreementwith
theirpositionthreemonthslaterorwhetherithad
movedopposite.Therearemanywaystodetermine
whetheragroupisrightorwrong.Thisisjustone,but
itconfirmedmysuspicions.Commercialswereright
abouttwothirdsofthetime.Smalltraders,whomany
peoplethinkareagoodcontraindicator,wereright45
percentofthetime.That'swaytoocloseto50percent
tobeusefulasacontraindicator.Largespeculators
wereveryclosetosmalltraders.Theywereright46
percentofthetime.Basedonthis,inmostsituationsI
lookattheCommercialposition.
Watchingthecommercialsdoesonemorethingforus.
Nobodycanbeanexpertinfundamentalsinmorethan
afewmarkets.Evenbeinganexpertinfundamentals
doesn'tmeanyou'regoingtomakemoneytradingthat
market.Peoplewhotradewithfundamentalsare
typicallycommercialswhodon'tneedtobeasaccurate
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astherestofus.Theyhaveanoffsettingcashposition
whichgivesthemmorestayingpower.Ilookatthe
commercialpositionasameasureoftheunanimityof
opinionamongcommercialhedgers.Whencommercial
hedgersgetveryonesidedinamarketbasedon
historicalpatterns,youhaveaconsensusformedthat
candeterminemajorturningpointsinthemarket.
Whatabouttheargumentthathedgershaveto
hedge,andtheyjustgoinanddoit.Theyarenot
thatconcernedaboutpredictingmarketdirection.
They'rejusttryingtohedgetheircashneeds.
Thatmakessenseuntilyoutalktothepeoplewhoare
actuallydoingthetradingfortheselargefirms.Itturns
outthetradingoperationinmanyofthesefirmsisnow
aprofitcenter.Theirlivelihooddependsuponmakinga
profitontheirhedges.Whiletheycanaffordtobe
wrong,theydon'twanttobewrong.Theirtraderswho
areputtingonthesepositions,likeanyothertrader,
wanttoberight.
Theyhaveseveraladvantages.Thebiggestisan
informationaledge.Ifyoulookatthefundamental
informationavailabletotradersthatdoesn'tcomefrom
thegovernment,mostofitoriginatesfromthevery
commercialhousesthatwe'retradingagainst.Inthe
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bestcasescenario,youassumethecommercialhouses
havealreadyactedbeforetheyreleasetheirreportsand
prognostications.Intheworsecase,youmightimagine
thatwhattheyactuallyreleaseisnotcompleteor
accurate.Theyarealsobetterfinanced.Commercials
haveahugeinformationalandfinancialadvantage.All
myresearchhasshowntheydomakemoneyontheir
hedging.
Mostofthetimetheyaren'tonesidedenoughto
giveasignal.Whatpercentageofthetimedoestheir
tradinggetonesidedenoughtosaysomething?
Ihaven'tworkedoutthepercentage.Butthetimesthey
areonesidedtendtobekeyreversalpoints.Thevery
bestsignalsweget,themostreliable,arewhenamarket
consolidatesandreactsfromanongoingtrend.
Typicallywhenweseecommercialbuyingcomeinon
acorrectiontoanextreme,itisahighlyreliablesignal
thatthemajortrendisgoingtoreassertitself.
Wedon'twanttomakethissoundliketoomuchofa
surething.Itdoesn'talwayswork.Doyouwantto
talkaboutthatalittlebit?
Sure.CommercialsunderthestudyIdidwereonlyright
twothirdsofthetime.Whatyoufindisthatwhenthey
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arewrong,theycanbevery,verywrong.Inhisnew
bookontechnicalanalysis,JackSchwagertalksabout
signalfailuresbeingthemostreliableofallchart
signals.Whenwehaveasignalfailureonacommercial
signal(suchaswhereCommercialsareasbullishas
theyhaveeverbeeninamarketanditstartsheading
south),Iviewthatasasignalfailure.Thosecanbethe
mostexplosivemoves.
Youanticipatedmynextquestion.Whataboutusing
areversalstopwhenyou'retradingoneofthese
commercialsignals?
That'sthelastpartofSchwager'sdiscussion.He
referredtonovicetraderswhoridetheirpositionsintoa
bigloss.Amoreexperiencedtraderwillhaveaprudent
stoplosstoexithisposition.Butthereallyskilled
traderwilldoa180andreversehispositiontogowith
themove.
WhatItrytodoinmyworkisnotonlypinpointwhere
commercialsareaggressivelyonesidedinthemarket,
butalsokeypointswhereIanticipatetheyaregoingto
bewrong,I'velearnedtoidentifycertainpatternsinthe
Commitmentsdatathatoccuratmajormarketturns.
TaketheTBondmarketasanexample.[Seethe
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accompanyingchart.]in1993,Ihadspotted
commercialsasverybullish.Theyheldanextremely
bullishpositiongoingintothespringof'94.Their
buyinghadbeenconcentratedataboutthe113level,
whichIthenhighlighted."Ifthemarketbreaksthrough
thisextremecommercialsupportat113,"Isaid,"that
willbeoursignalfailurepointthepointtogoshort."It
didbreakthrough,andthatwastheworstyearon
recordforbondprices.
Interestinglyenough,commercialscameinheavilyas
buyersinOctober,1994,triggeringaminorbuysignal.
Theiractivitycalledbothendsofthemoveina
differentway.Theywerewrongatthetopbutrightat
thebottomofthatmove.
Iwaslookingforthisreboundtobecomeasecondary
sellingopportunity.Aspricescamecloserandcloserto
thepreviouspeakjustover122,1startedtobetona
doubletop.Commercialswerethemostbearishat
Christmastime,justaspricesthreatenedtheprevious
1993top.Inthiscasethecommercialswereexactly
right.Thisiswhereyougetaveryhighconfidence
signal:acorrectiontoanongoingmajortrend.Iviewed
themajortrendashavingturneddownin1994.
Commercialscameinassellersonthetestofthe
previoushighandwereexactlyright.Itisinterestingto
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notewhathappenedacrosstheinterestratespectrum
afterthemarketbrokefromthesecondtopbutbefore
that3pointdowndaycausedbytheunemployment
report.Commercialswerebuyingwithavengeance
acrosstheinterestratespectrum.Theybought
enormousnumbersofcontracts.
Iviewedthisasanotherindicatorofamajortop
becausewhattypicallyhappensatthesemajorhighsis
commercialsputinthetopthroughtheirsellingbutthen
trytoholdthemarketwithinanarrowrangebybuying
afteraslightdecline.Whentheybuyinhugeamounts,
that'sanindicationofpanic.Whatitmeansistheyhave
suchhugepositionsinthecashmarketthattheytryto
usethefuturesmarket,wheretheycanleverage,tohold
upthecashmarket.Whatyoufindinthesecasesis
firmsputtingonwhatarecalledTexashedges.They're
longcashandlongfutures,too.InthiscaseIwasable,
asIhavebeentimeandagain,tospotthispanicbuying
asaredflagandaredherring.Itwasanindicationthat
weweregoingtohaveasubstantialmoveagainstthe
commercials.
Itsoundssomewhatcontradictory.Yousaythatthe
commercialsaremostlyrightandsoyoudowhat
theydo.Butthenyoualsogooppositetowhatthey
do.Youreallyhavetoknowthespecificsofwhento
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followthemandwhennotto.
That'swhymynewsletter'srenewalrateissohigh.The
Commitmentsdataisreadilyavailablefromavarietyof
sources.TheCFTChasevenmadeitavailableonthe
Internet.Anybodycancollectitforfreeandtookatit.
Allthechartservicespublishnetpositionchartsthat
showwhatthepositionsofthesetradergroupsare.But
analyzingthesechartsisnotastraightforward,
straightlineprocedure.It'snotricktodeterminewhena
particulartradinggroupisbullish.Therealtrickis
beingabletodeterminewhenthey'regoingtobewrong.
I'mnotsuggestingyoucanbat1,000,butIam
suggestingthatwhencommercialsarewrong,theytend
tobewronginsuchabigwaythatthosearethemoves
wedon'twanttomiss.That'swhyyoushouldtrytospot
thekeycommercialsupportandresistancezones.If
theyarepenetrated,youwanttogowiththatmove.
Let'sgoontotheprocedure.Tellushowyou
producewhatyouprintinyournewsletter.
IstartedwithadatabaseIboughtfromCurtisArnold.
HepublishedanewsletterbeforeIdid.Hehadmanyof
themarketsgoingbackto1983.Ittookmeayearanda
halftofillinthisdatabaseforallthemarketsthathave
enoughopeninteresttofollow.Thedataismonthly
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from1983toNovember,1990.In1990,Istartedaletter
campaigntopetitiontheCFTCtoreleasethedatamore
promptlyandmorefrequently.Thatactuallybrought
results.StartinginOctober,1990,wegotreportsonthe
firstandfifteenthofthemonththatwerereleased
withinthreedays.Thedatabecamebimonthlyfrom
October,1990untilOctober,1992.Thentheywentto
reportingweeklyfigureseveryotherweek.They
calculatethenetpositionseveryTuesdayandrelease
twoweekswortheveryotherFriday.
Muchofthehistoricaldataoutthereisdefective.
There'sadatasourcecalledPinnacleDatawhichclaims
tobethesolesourceofSteveBriese'sCOTIndex,as
wellasprovidingtheCommitmentsofTradersReports.
WhattheyhaveareCurtisArnold'sCOTindexes.He
usedafixedtimeframeanddidnotadjustforchanges
inopeninterest,whichhavebeenextremeinsome
markets.SoPinnacledoesnothaveSteveBriese'sCOT
Indexes.
ThegovernmentreleasedthehistoricaldataPinnacle
usesintapeformin1990.Itgoesbackto1986and
appearsastwiceamonthdata,whichwasnotwhatwas
reportedatthetime.Itwasnotaudited,anditisfullof
errors.Thegovernmentknewthiswhentheyreleasedit.
Mostoftheavailablehistoricaldata,including
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Pinnacle's,includethesefaultynumbers.
Mydataisallfromtheoriginalreports.Formanyyears
thegovernmentcouldn'talwaysaddcorrectly,soI
providederrorcheckingtothem.Tomakesuretheyadd
up,IhaveerrorcheckingbuiltintotheprogramIuseto
readthenumbers.Ialsohaveallthecorrectionsthe
governmentissuedsubsequenttothereports.
Doyousellyourdataindependently?
Ido.
Howmuchisit?
$95ayear.
Soifyouwanttogobacktenyears,it's$950?
No.Igiveawaytheentirehistoricaldatabasegoing
backto1983withaoneyearupdateorder.Yougeta
year'sworthoffutureupdatesplusallthehistoryfor
$95.
Theupdatesarewhatyouyourselfdownloadevery
twoweeksusingamodern?Couldn'tapersonjust
getthedatathemselvesontheInternet?
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Unfortunately,theInternetfilesarestructuredlikea
printedreport.They'renotusefulunlessyouareableto
readthenumbersintoachartablefile.WhatIdoistake
theelectronicallyprintedreport,pulloutthekey
numbersandputthemintocommadelimitedASCII
filesinastandardpricefileformat.Youcanthengraph
theminmostcommoditychartingpackages.They'rein
open,high,low,close,volume,openinterestfields.
Youcanimportthemandcreatechartsonyourown
computer.
Wheredoyougetthedata?
FromMartinMarietta,whichsomebodyelsejust
boughtout.Ipayahundredandsomedollarsamonth
tocollectthedata.
Whydoyoupaysomuchwhenit'sfreeonthe
InternetorfromtheCFTC?
Iamprogrammedtoprocessthefileformatthatcomes
fromMartinMarietta.Ididrevisemyprogramto
conformtothegovernment'snewformatwhenthey
wenttotheInternet,butthentheychangedtheformat
again.Iwasn'tabouttokeepreprogrammingeverytime
theychange.SoIstayedwithMartinMarietta.Also,the
Internetcanbequiteslow.Collectingthatfilehastaken
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meupto45minutesforsomethingthatshouldtakea
minute.Ineedthedatarightaway,soIpayforit.
Ifsomebodysubscribesto,say,CommodityTrend
Service'schartservicewiththedatainthere,isthere
anythingwrongwithlookingattheircharts?
No,that'stheeasiestwaytodoit.Thenit'saquestionof
interpretingthecharts.Butyouofferquiteabitmore
thanjustcreatingchartsoftherawdata.WhatIdoin
processingthedataiscreatewhatIcalltheBriese
PercentCOT(CommitmentsofTraders)Indexwhich
takesthecommercialpositionandcomparesittoan
historicalbenchmark.Thelargecommercialpositionis
reportedassomanylongsandsomanyshorts.I
subtracttheshortsfromthelongstoarriveatanet
position.Ithencomparethatcurrentnettothe
"maximum"and"minimum"netpositionhistorically.
Thosemaximumsandminimumsarethemostbullish
andtheleastbullishpositionsoveraspecifiedlook
backperiod.Commercialsmovefromnetlongtonet
shortinmostmarkets.AllI'mdoingiscreatinganindex
whichshowsthecurrentposition'srelationshiptoan
historicalperiod.Howrelativelybullishorbearishare
thecommercialscurrently?
Theperiodyouuseisdifferentforeachmarket,and
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it'sproprietary.
That'sright.
Thedifferencebetweenwhatyoudoandwhat
CurtisArnoldusedtodoisthatheusedthesame
periodforallmarkets.
Correct.Ihavemadeoneothermodificationwhichhas
becomenecessaryovertheyears.Therehavebeenhuge
changesintheopeninterestinmanyofthesemarkets.I
haveaproprietaryopeninterestadjustmentIuse.
Idon'tunderstand.
Becausewe'remeasuringchangesinthedifference
betweenlongsandshorts,iftheopeninterestincreases
substantiallyinamarketbecausethereismoreactive
hedgingfromaparticulargroupofsuppliersor
producers,thenthenetpositionsmightnotbefromthe
samegroupyou'vebeenfollowinghistorically.Asthe
openinterestrises,thenetpositionsyouseecharted
todaymaynotbethesametradermixascomprisedthe
previousdatapointsonyourchart.Forinstance,Futures
Chartsprintsfouryearsofdata.Asyouseetheopen
interestrisequitedramaticallyinsomeofthemarkets,
themixoftraderschanges.Ifoundawaytoadjustfor
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that,soIgetamoreaccurateongoingreadingof
relativebullishnessandbearishnesscomparedto
historicallevels.
Thepercentagenumbersyouprintinyour
newsletterarepercentagebullish.Thehigherthe
percentage,themorebullishthecommercialsarein
aparticularmarket.
That'sright.WhenIshowa100percentCOTIndex
reading,thatmeansthecommercialnetposition,the
longsminustheshorts,isequaltoorgreaterthanthe
highestithasbeenoverthelookbackperiod.Azero
percentreadingmeanstheopposite.Thatwouldbetheir
mostbearishposition.ThereasonIusethisindexisthat
themixoftradersvariesfrommarkettomarket.You
havetobeabletoreadthenetpositionpatternyousee
byplottingthenetpositionofCommercials,small
tradersandlargespeculatorsforeachparticularmarket.
Patternsinonemarketwillnotworkinanothermarket.
Forinstance,insomemarketsCommercialsarealmost
nevernetshort.YetinSilver,commercialshavenever
beennetlong.Thereasontheyhaveneverbeennetlong
istherearemoreproducers(miningcompanies)inthe
futuresmarketthantherearemanufacturerswhorequire
silver.SothenethedgeinSilverfutureshasalways
favoredtheshortside.Ifyou'relookingataSilverchart
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versusaGoldchart,inGoldyou'llseethatcommercials
readilymovefromnetlongtonetshort,whereasin
Silvertheynevergetnetlong.It'sacompletelydifferent
pattern.Byusingmyoscillator,theCOTIndex,wecan
comeupwithauniformscaleforallmarkets.
Sothetableyouhaveonthebackofyournewsletter
isquitedifferentfromthenumbersthatyouwould
seecomingfromtheCFTCorchartedinthe
CommodityTrendServicechartbook?
Yes.
Andinyouropinionyournumbersarealotbetterto
use.
Ifyou'refollowingtwoorthreedozenmarketsandyou
havetoassimilatethenetpositionpatternsineachone
differently,that'sadifficultchore.Bysimplychanging
ittoauniformoscillatorsothatzeroandonehundred
meanthesamethingforeverymarket,it'smuchsimpler
toemploy.
Whensomeonegetsyourdataupdatesfor$95a
year,doesItincludetheCOTIndexnumbersas
well?
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Yes,itdoes.Itincludesthemforeachofthethreetrader
groups.
Thatseemslikeprettyvaluableinformationforonly
$95ayear.Asubscriberwouldreceiveonabiweekly
basisthesamenumbersyoupublishonthelastpage
inyourletter,butnotthethreepagesofanalysis.
That'sright.Itcreatesamarketinterestinthe
Commitmentsdata.WhatIhavefoundthrough
watchingotheranalysts'workisthatasthisdatahas
becomemorereadilyavailableandmorewidely
reviewed,thequalityofothers'analysisissopoorthatit
increasesourreadership.
Otherpeoplearesobadatthisthatyou'relooking
greatbycomparison.isthatwhatyou'resaying?
Yes.Andmisinterpretingthisdatacausesmany
Mondaymovesthatgothewrongway.Mysubscribers
areabletotakeadvantageofthisonTuesdaymorning
aftertheyreadmyletter.
Thishappensbecausethedataisreleasedon
Friday?
Yes,It'sreleasedonFridayaftertheclose.You'llquite
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oftenseeareactionthen.Whenyoureadonthenews
wirewhathappened,itwasthattheCommitments
numberscameout.
Ifsomebodyhasforinstance,OmegaResearch's
Superchartsprogram,theycoulddownloadyour
dataandthenfigureouthowtodisplayitunder
theircommoditycharts?
Asamatteroffact,Iprovidespecificdirectionsfor
displayingnetCOTIndexpositionsinSuperCharts.
There'sanothernumberinyournewsletterwe
haven'ttalkedaboutyet.It'scalled"move."What's
thatallabout?
Ilookattwothingsinthecommercialnumbers.
Numberone,wewanttolookattheactualnetposition
inrelationshiptothehistoricalperiodtoseehow
extremethecurrentpositionis.Ifit'sextremeenoughto
movetheindextoabout90percent,Icallthat,for
simplicity,amajorbuysignal,althoughsubscribers
shouldnotinterpretitasadvicetobuy.It'ssimplyan
indicationthatcommercialsarebuyinginamajorway.
Ifit'sextremeenoughontheotherendtogetbelow5
percentonourindex,Icallthatamajorsellsignal,
whichagainisnotnecessarilyanindicationfor
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subscriberstosell.ThereisanotherwayIliketolookat
thedata.Thatistofindouthowmuchthecommercials'
netpositionhaschangedoverarelativelyshortperiod
oftime.Ifit'senoughtomovetheindex40pointsin
eitherdirectionwithinasixweekperiod,thatshowsan
unusualamountofcommercialactivity.Icallthese
minorbuyandsellsignalstodistinguishthemfrom
majorsignalswhich,asIpreviouslyindicated,meanthe
commercialshavereachedanhistoricalextreme.
Typically,theminorsignalsprovidekeyareastobuy
bullmarketsaftercorrectionswherethecorrection
nevergetsdeepenoughtoreach90percentonthe
index.IlookathowmuchtheCoTindexhaschanged
inthelastsixweeks.Ifaminorbuyorselloccurs
becauseofasubstantialchange,Iwillidentifythat
marketwitheitheraplusorminussign.
Lookingatyourmostrecentletter,whichisdated
April15th.Thisisjustpriortosometrulyhuge
movesinthegrains.Lookingatyournumbersfor
commercials,thecommercialsarelonginSoybeans
only10percent,inWheat33percent,Corn26
percent,SoybeanOil17percent,SoybeanMeal23
percent,Oats32percent.Ifonewerelookingat
thesenumbersinyourCOTIndex,itlookslikethe
commercialsarenotverybullish.Yetthemarkets
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aregoingbananas.Whyisn'tthisgoingtofakeyou
out?
Thecommercialsarevaluebuyers.Theywerethemost
bullishwhenpriceswereclosertotheirvaluepricing
levels.IhadabuysignalinWheatinMarch,1995,at
345,acorrectionlow.InSoybeans,Ihadamajorbuy
signalinFebruary,1995,at550.Beansarenowabove
800.Commercialsarenotbuyingaggressivelyatthis
pricebecausethemarkethasmovedwellabovethe
valuelevelwheretheypreviouslybought.
Butthey'renotsellingaggressivelyeither.Isthatthe
point?
Thishasbeenaninterestingmarket.We'vehadnewall
timehighsrecentlyinCornandWheatalongwith
historicallyhighSoybeanprices,yetcommercialsare
notdowntozero.That'swhyinthatissue,eventhough
thereweren'tanybuyingopportunitys,Itoldsubscribers
thatthisthingmayhavealongwaytogofromhere
becausethecommercialswerenotaggressivelyselling
theseralliesevenatrecordprices.Theycangive
importantindicationsevenwhentheyarenotatextreme
levelsofbuyingorselling.
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AclearcutexampleofthisoccurredintheCoffee
marketin199394.Thatwasabullmarketmanypeople
thoughtcameoutofnowhere.Everybodyassumedit
wasnothingbutaspeculativebubble.Backin
December,1993,wehadputinabottomafteralong
bearmarket.Therewasasmalldoublebottomin
September,1992,andthenalargerfailureswingbottom
inApril,1993.Thecommercialswereaggressive
buyersonthatfailureswingbottom.Infact,itwasjust
acoupleofpointsshortofamajorbuysignalonmy
index.Thentherewasalongtriangularconsolidation
thatlastedaboutsixmonths.Webrokedownoutofthat
consolidationinJanuary,1994.
WhatIsawwasthis.Onthatbreakdown,commercials
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cameintothemarket.Theirnetpositionsmovedtothe
highestlevelinovertwoyears.Itwasanindicationto
methatthiswasabeartrap.Theinternationalfoodsare
quitefamousforthesebecausecommercialsdominate
thesemarkets.Theytypicallyholdtwothirdstothree
quartersoftheopeninterestintheinternationalfoods.
InCocoa,CoffeeandSugartheyaremastersatgetting
amaximumpositionatthemostfavorableprice.That's
whattheydidthere.Theymovedthepricedown
throughobviouschartsupportatthebottomofthelong
consolidationandthentookitrightbackup.Everybody
assumedtheinitialmovewasaspeculativerally,thatit
wasthecommodityfundscominginandbuyingoodles
ofcontracts.Themajorportionofthemovewas
actuallycommercialbuying.Thelargespeculatorswere
sellingintothemovebeforeitevergotgoing.They
weresellingatwellbelow$1.Theystartedsellingat85
cents.Asthemarketwentup,volatilityincreasedand
theopeninterestdroppedsubstantially.Thatwaslarge
speculatorsgettingout.Theycouldn'tstandtherisk.
Themarketcontinuedtomoveoncommercialshort
covering,andthat'swhatpropelledtheenormousmove
in1994commercialshortcovering.
Whenyouseethatsituation,itiscommercial
capitulation,whichresultsinhugemoves.Forasimilar
currentsituation,lookataCocoachart.Werecently
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sawalongconsolidationandthenanapparentdownside
breakoutwithalargecontingentofcommercialbuyers
aheadofthat.Youcouldhaveanticipatedthatifthere
wereadownsidebreakout,itwasgoingtobeabear
trap.That'sexactlywhatoccurred.Thenallofasudden
itwaspushing1400.
Wouldyousummarizehowyouinterpretthe
Commitmentsnumbers?
OnceIgetthenumbersandconvertthemtotheCOT
Indexes,Ilookfortwothings.Ilookforthelarge
movementindexnumberstoseewheretherehasbeena
majorchangeinthelastfewweeks.Secondarily,Ilook
toseewhichonesareatextremes:above90percentand
below5percent.
WoulditmakesensetoanalyzetheCommitments
dataonaseasonalbasis?
CommodityResearchBureaumadethatassumptionin
1985,anditwaslaterrepeatedinacoupleofmarket
books.Theysaidthecorrectwaytoanalyzethe
CommitmentsofTradersdatawastocomparecurrent
commercialpositionswiththeirseasonalaverage
positions.It'sanaturalassumptiontomake.Farmersare
plantinggraininthespringandharvestinginthefallso
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thereshouldbeaseasonalitytotheirhedging.Isentthe
datatoaPh.D.economistandaskedhimtocheckitfor
seasonality.Heconcludedtherewasnone.That'swhyI
decidednottoprintseasonalchartsoftheCommitments
data.
IthoughtIshouldshowademonstrationofthissoI
drewupthenetpositionsofthecommercialsfor
Soybeansfortenyears.Peopleareamazedwhenthey
seethechart.It'salloverthemap.There'splainlyno
seasonalpatterntoit.Youcancreateseasonalchartsby
makingaverages,butifyoucheckthemstatistically,
you'llfindthere'snostatisticalreliability.
Ifsomebodyreadyourletterforawhile,howlongdo
youthinkitwouldtakebeforetheycoulddotheir
ownanalysiswithoutyou?
I'vebeenanalyzingthisdatafor22years.Itypically
spend12hoursoneachreport,whichincludeswriting
theanalysis.SinceIdon'tmakespecifictrading
recommendations,allIamdoingisanalyzingthe
report.Ican'tbelievetherearemanytraderswhohave
thatamountoftimetospend,andIknowtherearen't
anywhohavethatkindofexperience.Ican'tseewhere
it'sprofitableforanybodytodotheirownanalysisof
theCommitmentsdatawhenmyresearchissocheap
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andreadilyavailable.
Yes,Iseeyourpoint.Idon'twanttosound
impertinent,butyoumakethissoundsoeasyand
attractive.Naturally,ourreaderswouldwantto
knowifthisissoeffective,howcomeyou'renotrich
fromtradingit?
IthinkIamrich.Ihavefivekidswithjustoneleftin
highschool.ForthelastdozenyearsIhavecoached
basketball,softballandbaseball.Ihavemadeenough
moneyinthemarketsthatmyfamilyhasbeen
comfortableandsecure.I'mputtingallmykidsthrough
college.I'vetakenoutofthemarketswhatI'veneeded
tomeetmyprimarygoalwhichwasgettingthesefive
kidsofftoagoodstart.Iwillhavemoretimefromnow
ontoconcentrateonthefinancialaspectofmywork.
Sowithinyourownfinancialparametersyouhave
beensuccessfulasatraderusingthis?
Sure.
Isthereanythingwe'veleftout?
WhenyouthinkabouttheCommitmentsdata,people
oftenthinkofitasaseparatespecialtyareaofanalysis.
51/55
3/6/2015
Thisisbasicallyopeninterestthatwe'relookingat.
Therewasawholebookwrittenonvolumeandopen
interest.Hereisaquicksummaryofthestandardopen
interestandvolumeanalysisrules.(1)Whenprice,
volumeandopeninterestareallrising,that'sastrong
market.(2)Ifthepriceisrisingbutvolumeandopen
interestaredeclining,you'llhaveaweakrally.(3)If
priceisdecliningwithvolumeandopeninterestrising,
youhaveastrongdowntrend.(4)Decliningpriceswith
decliningvolumeandopeninterestmeansaweak
downtrend.Thosearethefourrulesofvolumeandopen
interestinterpretationyoucanreadinbooks.
Hereisthereality.Inthefirstplace,volumeisnota
predictiveindicatorincommoditymarkets.Idon'tknow
52/55
3/6/2015
whetheritisinstocksornot,butI'veprovenitisno
morethanacoincidentindicatorinthecommodity
markets.It'scoincidentwithvolatility.Whenyouchart
thefivedayaveragevolumeversusthefivedayaverage
pricerangeandinvertone,you'llseeaperfect
Rorschach.[Seechart.]Yougetamirrorimage.Asthe
pricerangeincreases,moretradersbecomeactive,more
stopsarehit,andvolumeincreases.Volumeisdirectly
proportionaltovolatility.Therefore,itisnota
predictiveindicator.
IfyoulookatthefourrulesIspelledout,theywork
abouthalfthetime.Theyworkoftenenoughso
somebodycanshowexamplesoftheirsupposed
effectiveness.Icouldshowjustasmanyexamples
wheretheydon'twork.Forexample,therewas
decliningopeninterestovertheentire1994rallyin
Coffee.Idon'tthinkanyonewilldenythatwasavery
strongrally,andyetitoccurredwithdecliningvolume
anddecliningopeninterest,whichisexactlyoppositeto
theclassicrules.
Openinterestisofparamountimportanceinmarket
analysis,butyouhavetothrowoutalltheoldrulesand
lookatthemakeupoftheopeninterestinarivingat
yourconclusions.Bylookingatthemakeupofthe
varioustradinggroups,whosebreakdownthe
53/55
3/6/2015
Commitmentsdataprovides,youcantellwhenthose
rulesaregoingtoworkandwhenthey'renot.
What'sthepriceofayearlysubscriptiontoyour
letterandwhatdoesitinclude?
$295.00.Thatincludes26issues,a16pagesubscriber's
guidewithlongtermchartsofthevariousmarkets,plus
avideo.IgaveanalldayseminarinNewYorka
coupleofyearsagoandputthebestofthatintoa3
hourvideo,whichgoestonewsubscribers.
Isthereanyshortertrialsubscription?
Yes,a3monthtrialis$95.
Thatsoundslikeoneofthebestbargainsaround.
MythankstoSteveforthisenlighteninginterview.If
Iwerelimitedtoreadingjustonecommodity
newsletter,IthinkI'dhavetomakeithisBullish
Review.Youmaysubscribetohisnewsletteror
modemupdateservicebywritingtoBullishReview,
14600BlaineAvenueEast,Rosemount,MN55068.
Orcall(612)4234900.Fax(612)4234949.
RealityBasedTradingCompany
54/55
3/6/2015
1731HoweAvenue,Suite149
SacramentoCA958252210(800)9992827
or(916)6777562
Copyright1996byBruceBabcock,Jr.All
rightsreserved.
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