Curso Larry Willians

The Future Millionaire's
Confidential Training Course
by Larry Williams
©1995 by Larry Williams
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I. INTRODUCTION
EXACTLY HOW I MADE MY MILLION DOLLARS
Surely, every speculator dreams of making a million dollars or more in the brief time period of one
year. Unfortunately, few of us accomplish this seemingly impossible dream. As one who has done
just that, more than once, I'd like to tell you how it was accomplished. And further more, I'm going
to tell you what I'll do differently the next time I try!
There have been several books and courses on how to make millions in the stock market. While they
do make interesting reading, (possibly even more entertaining than this bit of writing) I felt they did
not really tell the reader exactly how to get out and make that money. All the book buyer was
receiving was an interesting story, but none of the tools or concepts that would enable him to meet
with similar success_
It has also been my belief that a truly good, educational course should, in all likelihood, be a rather
small one. Perhaps the old adage that "good things come in small packages" could apply here. Or,
perhaps it's just that a truly great idea can be succinctly stated. I prefer to think it is the latter.
In my personal collection of market books, (and I have books ranging in value from $1.00 to
$5,000) the smaller books, for some strange reason, are always the best. The stock market courses
with their thousands of pages, millions of words and illustrations. seem to miss the mark.
Perhaps the answer lies in the fact that anyone busy enough to have made a million dollars just
doesn't have the time to fool around filling tip blank pages. The fellow who's not quite as successful
seems to have a bit more time on his hands.
In any event, this is certainly not a large course by any standards. It is, however, an accurate
account of how I made over one million dollars in one year in the futures market. It is, in essence,
the anatomy of a "killing," executed by a well-defined plan of action rather than a joy-ride on lady
luck's bandwagon. All of my well-used tools are described herein along with the underlying
concepts.
As important as these tools and concepts maybe (and you can't succeed without them) I'm inclined
to feel that the most vital factors in market success are of a personal nature. They are vision,
diligence and perseverance.
My wife says I'm too goal oriented. That I see everything in terms of goals, levels and plateaus.
Perhaps so. But this does seem to be a very successful way of "skinning the cat." At least it has been
for me. Certainly, if you do not have the vision that you can
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succeed, you just aren 't going to make it. After all, if you ' re going to dream — why not
dream BIG! 1 advise you to establish high goals and then expand upon them.
Before getting involved in futures, I never "dreamed" I would make a million dollars in
one year. And ... I didn't.
One of the strongest motivating factors for me is my ego-involvement with the market
and the traders. While the money is nice, 1 find it even more rewarding_ to know that I
have, and will continue. to beat the market.
However, too much of a good thing can sometimes have its ill effect. Especially when the
ego is involved. Ego-tripping can, all too easily, push you into arguing with the market
or making risky trades in an effort to prove your brilliance. Ego-tripping can also force
you to call the exact, high and low of each move. Such an approach dooms you to
failure. The markets are very, very difficult. They demand all of our attention and
energies. By their very nature, they drain our energy reserves to the point of coercing
its to do things we should not.
HOW DREAMS COME TRUE
One thing I can state unequivocally: If you don't have any money to invest in the
market, you'll never make your million! Many readers of my books on the market seem
to think that all it takes is a good system and the money will come from heaven. Maybe
so! It certainly didn't work that way for me! As a matter of fact, when I was giving stock
market seminars throughout the country-, some people would try to gain entrance
without paying even a nominal $30 fee, simply because they didn't have that kind of
money. How incredible! It stands to reason, if you are in the market, you already have
the money. If you want to get into the market and don't have the money, you'd better
find a way to get, the cash.
To an extent, this is what I did. In the fall of 1972 I began forming limited partner-
ships. That is, people came to see me asking me to manage their accounts. In some
cases there were seven people in each partnership. In others there were nine. As
general partner, I had complete discretion with the accounts. Realistically speaking, the
money was mine to do with as I saw fit. In total, some $300.000 was presented to me for
management. This meant I had a decent interest in a large amount of money but my
own financial involvement was limited. I had less than $3,000 invested in the $300,000,
but I was also contributing my skills and market abilities to the partners. This is one
way you can acquire the necessary funds to correctly trade the markets. Prove. in your
own limited account, that you can make money in the market and you will be able to
attract additional money to manage. Make certain, however, that you comply with local
and federal requirements to do this.
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Should you wish to do it strictly on your own shoestring (which is a more conventional method) I
suggest you save your money until you have at least .x10,000. Ideally, you should have $20,000.
Once this has been attained you can commence trading in a professional manner.
After you have acquired the bankroll, it's time to select the proper tools. That's why you bought this
course and my main reason for preparing it. The tools you will learn are technical and fundamental.
The technical tools, by themselves, will be of little value. The same for the fundamental tools. It is
only by combining the two that I have been able to meet with market success. By and large, the
fundamental indices will serve to select the commodities most likely to have large up or down moves.
The technical data will help you decide when to get in and out of those special situations that have
been ferreted out by the fundamentals.
To arbitrarily trade any commodity with my technical tools is a mistake. It will not work for me or
you. The tools will work only for futures that you have pre-screened and qualified as potential "sure-
thing" trades. The importance of this cannot be over-looked. There is no one perfect trading tool or
system. Systems only work when they are based on valid, underlying truths. Trading systems, usually
based on price change or price trend, will be useless in trading range markets. Buy signals will spell
disaster in bear markets, etc.
For this reason, you must first select the one or two commodities that have heavy odds in their favor
— then apply the technical tools.
Along with a good set of tools, you will need dedication to your calling. Without dedication you will fail
to do your work at the times you should be working.
To my knowledge, there is no other occupation more demanding and trying than speculation. If you are
to follow the markets, if you are to see your dream become a reality, you must be on your toes at all
times. You must give a good deal of yourself to that dream and you must follow the markets on a
daily basis.
LADY LUCK — DOES SHE EXIST?
I would be remiss in thinking that my success is not based, in part, on just a nice rendezvous with
Lady Luck. In fact, you might speculate that my first killing in the market was based on nothing
more than a lucky stroke of her wand. You know, being in the right place — a bull market — at the
right time.
I, too. questioned that early in my trading career. Now, however, I've had many years of consistent
success. I've gained confidence in myself and in my techniques.
In the final analysis of life I have come to the conclusion all that really matters are
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people and nature. People who can love and understand at the same time. These are the
things that really count when we grow old and the world continues to revolve past and
beyond us.
Most of the people (not all of them) I've worked with are really tremendous. They are, for
the most part, the kind of people who are out-and-out winners in their everyday lives.
Stay away from negative people — losers and the fast buck artists. Align yourself only
with the best people and the best firms whether you are going after a $10,000 killing or a
$1,000,000 jackpot.
WHAT I WOULD DO DIFFERENTLY
Past performance is no assurance of future results. However, if we take the time to observe
our errors, an analysis of the past can assuredly help us improve upon our future
performance.
In looking back over my trading I can spot a number of mistakes. And, I suspect, if I make
these errors, so does everyone else.
My number one error has always been that 1 do not focus enough on the "loaded trades." For
one reason or another I find myself straying into marginal, or even bad trades. I do not
know why I do it ... only that, it happens.
A helpful solution for me is writing down, on a piece of paper, my reason for making that
trade. Once the reasons are there, in black and white, I can quickly see if I'm crap
shooting or about to enter a loaded situation.
There are mediocre trades presented every day, but there are only a very few sure-thing
trades. We tend to overlook the best, trades. You cannot allow this to happen to you if you
are going to succeed in commodities. The high risk trades will nickel and dime you to
death. The only big money I've ever made has been earned by sitting tight on good
positions. In and out trading does little more than pay the broker, it usually loses money
for me. You must stay with red hot trades. Forget about day trading, about trying to
scalp a few points or about selling for a reaction in a bull market.
One fellow I know had good vision in the Plywood market in late 1972 when it staged a
dynamic rally. He knew it would go much higher. However, along the way he decided that
it was time for a small pullback. Accordingly, he sold out his long positions and shorted an
equal amount.
It was a good decision because prices did begin to pull back and for a few days he showed
a profit.
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Then, without warning, prices began limiting up, seven days in a row. Before my friend could get
out of the market he had lost $62,000. His error was in looking for two small a move and
overlooking the big move-
So-so trades that offer a possible gain equal to, or only slightly greater than the risk, must
eventually drag all traders down. Regardless of how agile or smart you are, if you play around
with these dangerous situations, you will be hurt.
I know!
Another thing I've learned is to pay closer attention to the market and use more discipline in my
own trading. Perhaps this example will best illustrate what I mean-
I had taken a small position of Wheat for a trading turn. The risk/reward ratio was good.
Fortunately, it immediately popped up the limit. I had a nice profit and prices closed up limit for
the day. Equally important was that the day's activity came at a time when a bottom was
projected (and had all the appearances of being a bottom day) because prices were down limit early
in the session and then snapped back.
The following morning the indications from the floor were that prices would open substantially
higher ... that there was a good deal of strong buy orders on the floor. I was all set for a nice
trade.
But, in the event something was to go wrong I felt it would be indicated by prices opening weak
rather than strong. I told myself that if that did happen I should exit the trade and stand aside.
Well, prices did open weak. Instead of being up substantially, they were off to unchanged. That
was my sell indication.
Did I sell? No. I waited. Waited for something ... some kind of bounce or burst in prices to the
upside (despite the fact that I had my selling indication). In the first five minutes of trading I
should have been liquidating the position.
With all my greed showing I decided to wait just a bit longer to see if prices wouldn't come back.
You know the rest. Of course they didn't come back and by the time I sold I had a gain of about
$150 per contract whereas the profit, had I sold when I should, would have been about $2,000. All
because I failed to act quickly enough.
At times we act too quickly, and at other times, too slowly. What common denominator will tell us
when to act correctly?
For one thing, we usually act too quickly when we are trying to make money and too slowly when
we are trying to protect our money. When you are pressed to make a decision, ask yourself, "Am I
doing this to protect my money or to make more money?"
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If the answer is to protect money, act more quickly. If the answer revolves around making more
money — act slowly.
THE RAT RACE AND COMMODITY TRADING
At the same time I was busy making my million dollars in the commodity markets, I was also
running two other successful businesses.
If 1 had to do it all over again, I would not divert my attention to anything but the commodity
market.
As I've mentioned several times, the market is a cruel lover. It demands all you have. For that reason,
it seems the trader should be expending all of his energies on the market. Forget about stocks, real
estate, bonds, new issues, etc. You must focus entirely on commodities. Trading is a full-time, 24
hour-per-day job.
By the same token, when you pull out of the market to take a vacation, you should pull out 10V; so
that your mind can recuperate. When the market gets too hard on you and the pressures too much
to bear, leave it alone. Walk away, but do it all the way. Don't leave one or two positions. Make a
clean break.
There are several reasons for this advice. First, when people do go on vacation, they fail to leave
stops because they think the''11 be watching the market on "a pretty close." basis. This is very
dangerous. Either vacation, or stay at your desk and work. One fellow I know tried to do both and
his $100,000 portfolio slipped to $45,000 in two short weeks. Some vacation that was!
Another reason for telling you to totally clear out of your positions when on vacation is that if you
don't do this, your mind will stay in the market rut. You will not be able to refresh your creative cells.
Why even go on vacation if you're going to hold onto positions? RANDOM
THOUGHTS ON A NONRANDOM MARKET
The first is my own physical conditioning. Years ago when Bobby Fischer played chess with the
Soviet champion (and whipped him soundly) I gained a good deal of insight into the market and
intellectual prowess. While the Russian was in training, studying all the moves, Fischer, who totally
demolished Spasky, was also getting ready. But his was physical training. He jogged, swam, lifted
weights, watched his diet. To be as powerful as he was. Bobby honed his mind and body to a
razor's edge. He spent almost as much time getting into physical shape as mental shape.
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That's the way it should be for market traders as well. Without a doubt, my best
performances have come when I'm in my best physical condition. Centuries ago,
Plato told all of his students to maintain their health and physical condition at
optimum levels if they were to be among his best students.
More recently, it's been demonstrated that executives in physical training are
more creative, more resourceful and tend to arrive at better decisions more rapidly
than their non-athletic counterparts.
I'm not suggesting you become Joe Montana. All I'm saying is if you're a bit
chunky around the waist, a little flabby in the legs, and get short of breath from
lifting your pen (much less a good walk) you'd better pay some attention to your
physical well-being. You need every ounce of it for the market.
STICK TO YOUR GAME PLAN
Later on I'll be telling you about my game plan for market success. In time you'll
develop your own, but, like me, you'll go off the plan, meet with problems, and then
go back to the plait. it's almost like dieting. It's easy to lose weight when you're on a
good diet. So it is with the market. Follow your plan or you'll be quickly separated
from your hard earned green. Why even map out a game plan if you're not going
to follow it?
The single greatest cause of market loss is the inability to develop or follow a
rational program. My greatest weakness, and yours too, will be that of straying
from the plan you've set for yourself.
RELAX YOUR WAY TO EASY STREET
I've also found it useful (but oh so difficult) to relax because the daily battle of
supply and demand creates a knot in my mind. It is vital that we find the time to
relax our mental processes. This can be done through meditation, a hobby, some
very physical or demanding activity that forces your mind into the sport and away
from the market. For me, fishing and running fill the bill. For someone else it may
be golfing, bowling, collecting stamps or acupuncture.
It matters little how you do it —just as long as you do it.
It is now time to show you the pathway to market success. The doors I'm about to
open can change your entire lifestyle. This method works. It will take you a bit of
time to catch on but you can do it by carefully reading, contemplating and under-
standing the following few pages.
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II. A BEGINNER'S GUIDE TO FUTURES
WHY FUTURES AND OPTIONS?

If you put money into traditional investments, you've watched the value of your in-
vestments fluctuate wildly over the last 15 years.
• When inflation rates soared above 10%, your savings account and fixed-income
investments couldn't come close to keeping up with that pace, much less provide
any real return on your money.
• When inflation cooled, your collectibles and other tangible assets — including, per-
haps, your home or other property — were not the investments they had been
to touted to be in the inflationary days.
• When a bullish stock market turned sour in October 1987, your stock portfolio and
mutual funds turned out to be a lot riskier than you expected.
This is a new era for investors. Old buy-and-hold strategies of the past do not work as
well in markets that have become vulnerable to price swings that are wider than any
time in recent history.
In this type of atmosphere, futures and options can be an attractive alternative, both
for investors who are trying to preserve what they have and for the more venturesome
The biggest obstacle many people have to overcome is their preconceived image of
futures and options. Like any market, these markets have their share of horror stories
but they serve a valuable price-discovery, risk-shifting function for producers and users
of various commodities.
Producers want the best price they can get when they sell; users want the lowest price
possible when they buy. Whether it is a wheat field in the middle of Kansas, a money
center in London, or a stock portfolio in New York, a very real risk of price change
exists for both sellers and buyers whether they like it or not.
If producers and users could always get together and settle on an agreeable price and
terms between themselves, futures and options markets might not be necessary. But,
in most cases, some go-between is necessary in the unending tug-of-war between the
two sides. That go-between who provides the vital link in the marketplace is the
speculator — often the subject of scorn but an essential part of the free-market sys-
tem.
The speculator is not a gambler. Gamblers create risk where none existed before by 8
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betting on the turn of the card or the finish of a race, determining the amount of
their risk by the size of their bets.
Speculators in futures and options markets, however, do not create risk. They
only assume a risk that already exists — a risk that a producer or user may not
want to bear at a particular time. For his willingness to assume risk, the speculator
hopes to make a profit on changes in price. Sometimes those profits may be huge.
But futures and options trading is NOT for everyone. Trading is not an investment,
per se, and it is NOT suitable for all people at all times. In fact, with today's wilder
swings, it is more dangerous than ever for many investors and any involvement in
the markets should not be taken lightly.
But, futures and options can be a vital part of your financial strategy and should
certainly be considered by any serious investor — even the conservative. Here's «-
why:
Leverage — In the stock market, each $1 invested gains control of $2 worth of stock
if you buy on margin. In futures, however, each $1 you put up can control $10 or
more of a commodity or underlying instrument.
For example, you can control 5,000 bu. of soybeans with a total value of $30,000 for
a margin deposit of $3,000. I f you buy a soybean futures contract at $6 per bu. and
the price goes to $6.60, you make 60¢ per bu. or a total of $3,000 — a 100%
return!
These kinds of moves — and even bigger moves — occur all the time in futures
and options markets. You may be able to get such spectacular returns in other
investment areas, but few can match the liquidity offered by futures and options
markets.
But remember a point that cannot be emphasized too much in these markets:
Where the reward is great, so is the risk. No trader can be right all the time, and it
may take only one mistake to wipe out a dozen winning trades. The benefit of
leverage is its promise of big returns, but that is also its greatest danger.
Strategies for safety are important.
Profit even in down markets — In the futures and options markets, it's as easy
to sell as it is to buy. Typically, an investor thinks he has to buy and prices have to
go up in order for him to make money. However, in futures markets, you can profit
from dropping prices by going "short," and in options markets, you normally can
buy a put option as easily- as you can a call option.
Less to watch — You can invest in thousands of individual companies in the

stock market, each of which may go their own way regardless of the general stock
market trend.
Rather than watching 50 groups of stocks with dozens of individual stocks in each
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group, however, the futures/options trader has less than a dozen major groups to
monitor, and he can follow nearly every significant. economic area by watching less
than two dozen major commodities.
If you are interested in stocks, you can trade the whole market or parts of the
market with stock index contracts without having to trace a number of individual
stocks.
Access to information — The futures/options trader generally has much better

access to information about his areas of interest than do investors in other areas.
Dozens of government and private reports are released to the public daily for
nearly every commodity. You can get a pretty good idea about price prospects for
some major commodities yourself by just being alert, for example, to weather
conditions in key growing areas or to changes in interest rates at your local bank.
Information on commodities is not limited to boardroom decisions and

personalities and insider knowledge, but is relatively easy to get. Yes, there is a
premium on getting information early to position yourself in futures/options
markets, but even a novice trader in these markets can do much research on his
own quite cheaply.
WHAT AND WHERE TO TRADE
About every basic commodity that you use in your daily living and many of our
major investment areas are covered by futures and/or options contracts at one of
the ex-changes.
Like the stock market, futures and options markets can be broken down into
several broad areas: grains, livestock, metals, interest rates, stock indexes,
energies, etc. Within those broad areas, you can select specific commodities, time
periods and sizes of contracts.
Several key factors should enter into your decision about what commodities to
trade:
Margin — Some commodities require thousands of dollars as your assurance that

you will fulfill the terms of the contract — stock indexes, for example — while others
require only minimal deposits. The amount of margin depends on the size of the
contract and its volatility.
Volume — The number of contracts traded each day is an important guide to a

market's liquidity. You should look for markets with high volume because that
gives you a chance to get in and out at price levels you want. If the market is too
"thin" — few contracts are traded — no one may be available to take the other side
of your order. That means you are likely to get poor execution on your order and
lose more to "slip-page."
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Open interest — The number of contracts outstanding at the end of the day is also a
good guide to a market's liquidity. A low figure indicates little trading interest, a thin
market and potential bad "fills."
Volatility — I f prices of a commodity tend to jump around over a wide range every
day, your account could be wiped out quickly by trading that commodity, even if you are
right about the long-term price trend. Learn the historical volatility for a commodity
and decide how much risk you want to take. While some commodities may have high
volume and open interest, good money management may suggest limiting your first
trades to the "quieter" commodities.
The table below lists the major commodities traded at U.S. exchanges (although fu-
tures and options are traded all around the world). Under type of contract, "F" indi-
cates futures contracts, "OF" options on futures and "O" options on actual instru-
ments.
Names and addresses of global exchanges are also easily available. Most major bro-
kerage firms can provide you more details on each of these contracts, or you can con-
tact the marketing departments at the exchanges for contract specifications. Con-tract
and trading information also can be found in The Futures Sourcebook, a comprehensive
reference guide listing U.S. and international exchanges and the products they trade.
(To obtain a copy of the Sourcebook, call (319) 277-6341.)
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Commodity Exchange Type of contract Commodity Exchange Type of contract
Grains, oilseeds Metals con't..
Corn CBOT F, OF Platinum NYMEX F
MidAm F MidAm F
High fructose MGE F Palladium NYMEX F
Oats CBOT F Aluminum COMEX F
MidAm F Food, Fiber, woods
Soybeans CBOT F, OF Sugar CSCE F, OF
MidAm F, OF Coffee CSCE F, OF
Soybean CBOT F, OF Cocoa CSCE F, OF
MidAm F Cotton NYCE F, OF
Soybean oil CBOT F, OF Orange juice NYCE F, OF
Sorghum KCBT F Lumber CME F. OF
Wheat CBOT F, OF Currencies
KCBT F, OF British pound CME F. OF
MidAm F, OF MidAm F
MGE F, OF PHLX F, O
Rice CRCE F Swiss franc CME F, OF
Livestock, MidAm F
Live cattle CME F, OF PHLX F, 0
MidAm F Deutsche mark CME F, OF
Feeder cattle CME F, OF MidAm F
Live hogs CME F, OF PHLX F, O
MidAm F Japanese yen CME F, OF
Pork bellies CME F, OF MidAm F
Interest Rates PHLX F, O
T-bonds CBOT F, OF Canadian dollar CME F. OF
CBOE 0 MidAm F
MidAm F PHLX F. O
NYFE F Australian dollar CME F, OF
T•notes (2- NYCE F PHLX F, 0
AMEX F French franc CME F
T-notes (6 CBOT F, OF PHLX F, 0
MidAm F European Currency NYCE F
AMEX F, 0 U it PHLX F, O
T-notes (5- CBOT F U.S. Dollar Index NYCE F, OF
CBOE 0 Indexes
NYCE F, OF Major Market Index CBOT F
Municipal CBOT F, OF (MMI Maxi) AMEX O
T-bills CME F, OF Standard & Poor's CME F, OF
MidAm F 500 Index CBOE O
AMEX 0 Standard & Poor's CBOE 0
Eurodollars CME F, OF 100 Index
PBT 0 NYSE Composite NYFE F, OF
Euro-rate CME F NYSE 0
Interest rates CBOT F Value Line Index KCBT F
Interest rates CBOE 0 PHLX 0
Energy Instltutlonal Index AMEX O
Heating oil NYMEX F, OF Commodity Research NYFE F, OF
Unleaded NYMEX F, OF Bureau Futures
Crude oil NYMEX F, OF Price Index
Propane NYMEX F Financial News PSE 0
Residual fuel NYMEX F Composite Index
Metals Gold/Sllver Stock PHLX O
Gold COMEX F, OF National Over-the PHLX F, 0
CBOT F Counter Index
MidAm F, OF CBOE 250 Index CBOT F
Silver COMEX F. OF International Market CSCE F
CBOT F, OF AMEX 0
MidAm F Utility Index PHLX 0
Copper COMEX F, OF
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FUNDAMENTALS VS. TECHNICALS
Those who have been trading for a while tend to fall into one of two camps when
they are looking for input for their trading decision: fundamentalist or
technician.
The dictionary defines "fundamental" as relating "... to essential structure,

function or facts ... of central importance ... serving as an original or generating
source ..."
"Fundamentals" — the common word used in commodity trading lingo — are

indeed the "essential structure" of the market, some traders insist. Basically, the
fundamentals in commodity trading consist of all supply and demand factors as
they relate to price.
If you believe that "rain makes grain" or that trade figures of capacity utilization
are key elements in determining interest rates, you would probably be comfortable
with a fundamentalist viewpoint.
The art of forecasting prices through analysis of price patterns is termed

"technical analysis."
Some technicians scorn fundamentalists who try to forecast prices based on

supply and demand conditions. They contend you do not have to know beans
about soybeans to trade them successfully. All you have to do is "follow the line" of
daily price action, because the price will reflect everything that is affecting that
commodity.
In fact, both technical analysis and awareness of economic conditions add

trading depth. Like two lenses of the same spectacles, omit one and an important
tool for knowing future prices is left out.
In the long run, fundamental supply and demand factors will determine the
direction of prices, and it is important for every trader to have this perspective.
Even technical traders will concede that fundamentals are reflected in prices,
although they may not care what those fundamentals are.
It would be nearly impossible to list all the fundamental factors that influence an
individual market. About anything that happens in the world today might have
some bearing on a commodity price somewhere and that might affect a
commodity price elsewhere.
High interest rates, for example, might cause a decrease in housing starts, which
might lessen the demand for lumber, plywood, copper, etc., which might cause
an economic slump, which might lessen the demand for meats, which might
lessen the demand for grains and soybean meal ... interest rates themselves are
the result of fundamental factors — it's almost impossible to tell where the chain
begins or ends.
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The following is excerpted from "Starting Out In Futures Trading" by Mark Powers. It is an
excellent introduction to futures trading facts.
STOCKS VERSUS COMMODITIES
The late Vince Lombardi, legendary coach of the Green Bay Packers during their glory years,
once said, "Luck is what happens when preparation meets opportunity."
Lombardi was saying that, in the long run, people who are successful make their own luck by
being prepared to take advantage of favorable circumstances ... and those who rely on
"chance luck" have very little hope of continued success.
The purpose of this section is to introduce the beginner to the world of commodity futures
trading and to aid in preparing you to take advantage of favorable circumstances that arise in
the trading of commodity futures. This section should provide you with an understanding of
many of the basic aspects of futures trading -- knowledge without which only "chance luck"
can work in your favor.
The word commodity is used herein for the most part interchangeably with the word futures.
Futures contracts are now traded on many goods and services that are not strictly
commodities in the traditional sense. The concepts, ideas, and descriptions in this book are
applicable to futures whether the underlying "commodity" is agricultural, industrial,
financial, foreign or domestic.
TRADING STOCKS VERSUS TRADING COMMODITY FUTURES
Most of you have probably invested in stocks, so you understand something about exchange
markets and how exchanges operate. Stock exchanges and commodity ex-changes are similar
in many ways. For example, they are both membership organizations established as a means
of facilitating the investment decisions of large and di-verse groups of people.
The stock exchanges act to bring people with extra capital together with those who need
capital to develop a business. They facilitate the transfer of ownership of corporations which
are engaged in various productive activities such as steel making, auto manufacturing,
banking, etc. Property rights change hands.
The commodity futures markets act to bring people together to transfer the price risk
associated with the ownership of some commodity, like wheat, or a service, like an interest
rate. No property rights to a physical commodity change hands at the time the futures
contract is entered into. The transaction is a legally binding promise that at a later date a
transaction will occur involving the property rights to the actual commodity.
15
M A R G I N AND LEVERAGE
Commodity futures contracts, when traded with high leverage, fall in the
high-risk area of the spectrum near speculative stocks, puts and calls, new
issues, and "penny" stocks. But if you trade them using low leverage and
carefully select trades that provide favorable probability payoffs, then futures
trading can be at the low-risk end of the spectrum.
Just as there is a risk spectrum for all investments, one could set up the same
sort of spectrum for commodity futures contracts. That is, you can select
commodities for trading that have less risk associated with them because of
higher margins (less leverage) or more stable prices. For example, trading
futures in a commodity like the S&P 500 is normally more risky than an
equally leveraged position in lumber. Lumber prices are usually less volatile.
Equal leverage with lower volatility means lower risk.
Further, the method of trading you select can affect the risk you assume. For
ex-ample. you could use a "spreading" technique, which refers to the
simultaneous purchase and sale of contracts in two different markets or for
two different months. This usually, though not always, has less risk
associated with it than an outright long or short position.
Why do commodity futures end up so far out on most people's risk

spectrum? Is it because the prices of beef cattle or pork bellies fluctuate so
much more than the price of blue chip stocks? Not at all. In fact, the prices of
many commodities fluctuate less than many stock prices. During one six-
month period of 1992, IBM's stock moved down 20 percent, up 20 percent,
and back down 50 percent. That's real volatility. Meanwhile, no commodity
changed that much. The important difference is in the leverage of margin —
the amount of money needed to control a given amount of re-sources.
When an investor buys a stock on margin, the margin represents an equity

interest in the security and the investor owes the unpaid balance as debt. In
futures contract trading, the trader is not buying or selling the commodity but
only agreeing to buy or sell it at a later date. In one sense, you could look at
the purchase or sale of a futures contract as the purchase or sale of the right
to participate in the price change. The margin payment is considered a "sign
of good faith" or earnest money such as might be used in acquiring a piece of
property. In other words, the purchaser promises to fulfill his contract
during the delivery month.
Use of the term "margin" to describe the security deposit posted when trading
commodity contracts is somewhat unfortunate, since it suggests that "margin"
in the securities market and "margin" for commodity futures contracts are
identical. In fact, they are quite different in concept and in practice.
16
T he purpose of margin in commodity trading is to act as a security deposit,
thus providing the broker and the exchange clearing house with protection
from default by the customer or the brokerage firm. The level of these
security deposits is set by the exchange on which the commodity is traded.
Margins on securities are set by the Federal Reserve Board, and their
purpose, as stated in the Securities Exchange Act, is to prevent the excessive
use of credit for the purchase or carrying of securities. Federal legislation
gives the Fed authority to re-view margins on certain financial futures.
New purchases of stock on margin generate credit in a way that adds to the
national money supply. When stock is bought, the entire purchase price is paid
to the seller a few days after the transaction. If the purchaser is buying the
stock on margin, the balance of the purchase price must be borrowed in order
to make his full payment. Ordinarily, this balance is borrowed from the
broker or from a bank and, in either case, the effect is to expand the national
total of bank credit, leading to an expansion of the national money supply by
the amount borrowed. This points up a major distinction between margin in
commodities and margin in the stock. Margin in commodities does not, in and
of itself, involve the borrowing of money nor does it affect the money supply.
Leverage is high in commodity futures trading because, as a percent of

contract value, margins are low. In the stock market, margins are currently at
50 percent. In commodities markets, margins are usually less than 10
percent and in some instances less than 1 percent of market value. Because of
the low margins in commodities, one can control large amounts of resources
with small amounts of capital. Hence, a slight change in the value of the total
contract results in a substantial change in the amount of money in your
account. For example, a 1 percent change in $10,000 invested in the stock
market via a non-margined account will equal a 1 percent change in equity, or
$100. A 1 percent change in a futures contract valued at $10,000 is equal to a
$100 change in account equity also, but in order to control that $10,000
futures contract, you probably needed to put down $750 as your initial margin.
And a $100 change in $750 is equal to a 13 percent change in your equity
(see Figure 1.1).
17
Figure 1.1 Leverage Illustrated
It is this leverage factor that cause commodity futures to be considered a high

risk investment. Of course, there is nothing that says you must use all of that
leverage. You could arbitrarily set your personal margin higher, say at 30 percent
and trade more conservatively. In other words, the riskiness of futures trading is a
self-selected risk- The institution of futures trading does not necessarily mean
more risk by de-sign.
THE TIME FACTOR
Besides the difference in leverage, another difference between trading stocks and
commodities is that time is more important in commodities. You can buy a stock
and put it away for years. Not so with commodities. Generally, you have to get
out of a commodity position within a matter of months after you first make the
commitment, or you are legally bound to accept or give delivery. However, at the
time a futures con-tract is created, you know the exact date on which it will
mature, so there is little excuse for being "caught" inadvertently.
DAILY PRICE LIMITS

Unlike stocks, many commodity futures contracts usually have daily price limits
which prohibit prices from changing by more than a certain amount on any given
day. These daily price limits are instituted first, and most importantly, to limit the
financial risk to the clearing house. Clearing house members must settle with
each other each day,
18
paying in or receiving the amount by which the value changed of each contract
they owned that day. Second, limits act to constrain hysteria in the marketplace
and let all parties have a breather when prices are changing by substantial
amounts. Some futures have no price limits while others have formulae that
dictate the imposition of price limits and the suspension of trading when markets
get too volatile. Perhaps the best-known example of this is the cooperative effort of
the Chicago Mercantile Ex-change (CME) and the NYSE regarding price limits of
the S&P Index and the trading of the underlying stocks at the NYSE. When the
stock market gets volatile and the S&P futures index advances or declines by 1200
points, trading is halted for half an hour. If the Dow Jones declines by 50 points,
there is a trading halt.
MARKET ANALYSIS
Market and price analysis of commodity futures is similar to and yet simpler than
for stocks. For those who are chartists, the techniques of charting and chart
interpretation are nearly the same for commodities as for stocks. On the other
hand, fundamental analysis of many commodities is much simpler, because there
are far fewer commodity contracts than there are stocks, and some of the best
fundamental research organizations in the world provide free data, for example,
in agricultural commodity futures the U.S. Department of Agriculture; in interest
rates and currency the Federal Reserve, the U.S. Treasury, and Department of
Commerce.
SELLING SHORT
You can sell short as easily in commodities as you can buy long. A short sale in
commodities can be a speculation or a hedge. It is not necessary to borrow the
commodity in order to go short in the futures market, since it is not a sale of the
actual commodity, but only a promise to sell and deliver the commodity at some
future time. I f you close out your position prior to the close of trading in that
contract, no delivery is required. In the case of a short sale in securities, you must
borrow the securities sold. Ultimately, you would have to obtain a similar amount
of securities and return them to the party from whom they were borrowed.
Another difference: Contrary to the securities market, going short in futures does
not normally require an uptick before initiating the position. Nor does it involve
dividend payments.
METHOD OF TRADING
The "specialist" system used to maintain markets on the floors of the New York
Stock Exchange and American Stock Exchange is not used by any U.S. commodity
exchange. Commodity trading is conducted as an open auction, where settlements
prices are
19
arrived at by open outcries of "bid" and "asked" prices. No single person is
granted the right by the exchange to "make a market" and keep a book on all the
open bids and offers. The commodity markets have a number of members, each
contributing to the making of the market through open competition.
In commodity trading there is no receipt or delivery of certificates with which you

have to be concerned each time you trade. That happens only if you decide to
make or take delivery at the consummation of the contract, in which case you will
receive the physical commodity not on your front lawn but rather in an exchange-
approved ware-house or depository. Many futures contracts now have cash
settlement meaning the product is never delivered. Instead, at maturity, the two
parties simply settle by exchanging cash, the same way as daily mark-to-market
settlements are conducted.
SIZE OF ACCOUNT
_N1ost commodity accounts are small. From surveys conducted by the Commodity
Futures Trading Commission, by the exchanges, and by brokerage house, it is
clear that a majority of all accounts contain less than $10,000 in equity.
Nearly 90 percent of them have less than $20,000 in equity, and only a few have
equity in excess of $100,000. About three-quarters of all accounts are categorized
as speculative.
It seems apparent that most people risk very small absolute amounts in trading
commodities. Less than one in four accounts is a hedge account, and even the
large ac-counts (those in excess of $100,000) are small compared to accounts in
the securities industry where $100,000 or less is considered a small account.
WHO TRADES COMMODITIES AND WHY?
Some people trade commodity futures as a normal adjunct to their business of

producing and marketing a product. For example, if a meat packer wishes to
establish the prices he will pay for cattle to slaughter in his plant during the next
six months, he may buy futures. Traders who fall in this category are called
hedgers. They buy and sell contracts as substitutes for merchandising
transactions they will make at a later time. We will deal with this topic at length
in subsequent chapters.
Other people trade commodities not as a normal part of producing or marketing

a product but only in the hopes of making a profit on their transactions by
correctly anticipating price movements. These people are generally categorized as
speculators.
There are different types of speculators. Among them are the "scalpers" at the ex-
changes. They buy and sell contracts continuously, minute by minute, in large
and
20
small amounts, hoping to make a small amount on each transaction. They seldom
carry a position for more than a few hours.
Another type of trader is the "position trader." He takes a position in the market and
holds it for at least a day and frequently longer. He tries to take advantage of short-
and long-term trends.
One of the questions frequently asked is, "What sort of person is this speculator?"
In a Chicago Mercantile Exchange study conducted in the 1970s (the only modern-
day, full study done on this topic), some 4,000 customers were surveyed. These cus-
tomers were trading in all types of commodity futures listed on any exchange in the
United States. It was found that the typical trader looked something like this:
• Male
• About 45 years old (56 percent of the sample were males between 35 and 55 years
of age).
• Middle to upper-middle income class.
• Good job (54 percent were professionals such as doctors, lawyers, dentists, top
management people, or white collar workers).
• Well-educated (68 percent of these 4,000 traders had gone to college; 60 percent of
them had graduated with a bachelor's degree; 18 percent had graduate degrees).
• Tends to be a short-term trader (85 percent were holding their positions for less
than one month and 55 percent of them for less than 10 days). This could be
interpreted in any number of different ways. It might indicate that many of them
are trading without a plan.
• Tends to be a small trader (55 percent of these 4,000 customers were trading one
contract each time they traded; 75 percent were trading less than five contracts
each time they traded).
• The individual trading commodities generally had a securities account also (70
percent of the 4,000 had securities accounts).
This does not mean that these characteristics are required in order to be a successful
commodity trader, because it takes a special emotional and psychological makeup to
trade commodities. But it does help to remove some of the mystery about the type of
individual who trades commodity futures. He is probably your next-door neighbor.
21
SOCIAL AND ECONOMIC BENEFITS OF FUTURES TRADING
Although economists have not yet found a way to accurately quantify all the
social and economic benefits that flow from futures markets, a number of them
can be identified.
The basic economic functions performed by futures markets relate to

competitive price discovery, hedging (offsetting) of commercial price risks,
facilitating financing, and allocating resources.
Prices on an organized futures market reflect the combined views of a large

number of buyers and sellers, not only of current supply and demand but
also for the relation-ship up to 12 or 18 months in advance. This does not
mean that a futures price is a prediction that will hold true. Instead, it is an
expression of opinions concerning future supply and demand at a single point
in time. As conditions change, opinions change — and. of course, so will
prices. These changes do not make the market's pricing function less useful.
On the contrary, keeping the supply/demand equation current makes the
system more useful than a one-time prediction.
Information generated by futures trading through the price discovery process

is in-valuable for planning at every stage of commodity production,
distribution, and processing. Planning is a normal part of every commercial
business. It is necessary to achieve maximum efficiency and to minimize
operating costs. To the extent that futures markets improve planning and
efficiency and reduce operating costs, the benefits should accrue to the
consumer and the economy.
The second major function of the futures exchange is risk shifting. A futures
market is a market in risk. It is the risk of price change, not the physical
commodity, that is being traded on futures contracts. The futures market
allows risk to be "packaged" in special ways and transferred from those who
have it but may not want it (commercial businesses) to those who do
(speculators).
The risk of price change is ever present. This risk represents a cost that must
be borne by someone. If the merchants or middlemen have to assume the risk,
they will pay the producer less, charge the processor more, or a combination of
the two. If the risk is assumed directly by the producer or processor, they will
need to be compensated for bearing the risk, and they will pass the cost of that
along. In any event, the cost of risk assumption will become a charge on the
economy.
Market participants who do not reduce the risks through hedging are
speculating. In assuming these extra risks, they may be increasing the costs
to the consumer.
A futures market acts as a focal point where buyers and sellers can meet
readily. This improves overall market efficiency by reducing "search" costs.
Buyers automatically know where the sellers are and vice versa. They do not
need to search each other out.
22
O f course, a futures market can't do all things. Some people have the mistaken notion
that future markets establish prices. This is incorrect. A futures market does not
cause either high prices or low prices. In an open market, prices are established by
supply and demand. The futures market simply reflects the supply and demand fac-
tors and their interaction.
I f a consumer boycott of a product becomes operative, if a foreign nation raises its

export tax, if the foreign policy of a nation is intended in some way to affect world
commodity prices, the futures market should reflect those influences, if it is working
right. A futures market cannot guarantee a businessman a profit. I f the businessman
cannot control costs or is inefficient, the futures market will not magically make his
operation profitable.
In short, a properly functioning futures market should foster and improve competition
throughout the marketplace, thus encouraging efficient use of all resources.
SPECULATION IS NOT A FOUR-LETTER WORD
Commodities ... ? that's Russian Roulette!

Commodity trading is only for "high rollers. "
Anybody who trades commodities loses.
Mention commodity futures trading to a group of strangers at a cocktail party, and the
comments above are the most likely kinds of statements you'll hear.
So let's consider some of the reasons why people trade and the more common reasons
why some traders lose.
To review for a moment, we outlined two basic categories of people who take positions
in commodity futures — hedgers and speculators. Hedgers are those who trade as a
normal adjunct to their businesses of producing and marketing a product or in the
case of financials buying, selling, or holding a portfolio. They buy and sell futures
contracts as substitutes for merchandising transactions they will make at a later time.
Speculators take positions in commodities only in the hopes of making a speculative
profit by correctly anticipating price movements.
WHY DO SPECULATORS SPECULATE?
Many speculators trade simply because they want money, and the high leverage in
futures trading affords the opportunity to turn small amounts of money into big
amounts.
But it goes deeper than that. Some people trade because they seek a sense of excite-
23
ment and risk not available to them in their daily work. The derring-do that
had survival value in frontier days is still extolled in our society; yet it is often
unavailable n everyday life. In an industrialized nation where most jobs are
routine, a person cannot win status through on-the-job valor.
The commodity markets, though, give a person the risk, the feeling of a "man-
alone-against-the-odds," that is not available in the everyday world. There is a
certain mystique and romance associated with commodity trading. To be able to
pick up the )hone and call a broker makes a person a participant in an
eliciting, international gtame. It pits his skill and judgment against that of all
others in the world of futures trading. To win is more than the making of
money. It is a reaffirmation of his oven ability and acumen; it is food for his ego
— and therein lies the danger. When the ego makes over, rational decision
making is impaired. A man whose ego won't admit a mistake tends to stick with
a losing position too long. Consequently, people who fall in over with their
positions become big losers.
% successful trader knows and understands the importance of his ego in trading,
and is learns to control it. In fact, self-discipline is an important key to
successful trading.
Come of the basic psychological motivations for trading can be explained by the
greed' 'ear complex. People trade because they want money. Yet, by trading, they
fear losing what they want the most. Sometimes the greed motivation becomes
so strong that :hey overtrade. In other instances, fear becomes so overpowering
that the ability of in individual to make rational decisions is impaired. A good
trading plan will help control this greed/fear complex.
mother motivating factor is sheer gambling instinct. Some people trade

commodities )ecause the market is like a "Las Vegas" for them. They enjoy the
excitement. of the znknown, the taking of risks, and money doesn't mean that
much to them. Usually these people are losers.
There also seems to be a basic need-to-own drive in every individual. This drive
mani-'ests itself in the decision to trade futures contracts and, undoubtedly,
helps explain Nhy the general run-of-the-mill trader prefers to be "long" in the
market and hesitates ;o go short. He would rather have no position than a short
position.
Wore you trade, ask yourself whether any of the reasons above describe you. If
so, think carefully about your suitability for trading.
SPECULATION OR GAMBLING?
Even relatively sophisticated investors and investment counselors have been

heard to -efer to commodity futures trading as "a close relative of a Nevada
casino." Gambling
24
and speculation are distinctly different economic activities, however.
Gambling involves the creation of a risk for the sole purpose of its being taken.
The dice game or horse race creates risk which would not otherwise be present.
I f the police raid the dice game or the race track burns down, the risk they offer
no longer exists. Gambling involves sterile transfers of money between
individuals. In the strict economic sense, it absorbs time and resources, yet
creates no new value.
Speculation, however, deals in risks that are already necessarily present in the
process of producing and marketing goods in a free, capitalistic system. As
livestock and crops are grown and marketed, there are obviously risks of price
change that must be taken by someone. It can be those who own the actual
commodity — or someone else.
For example, let's suppose you own a small ranch and decide to raise beef cattle.
You know how much young feeder cattle cost, and you estimate how much it will
cost you to feed them up to market weight by next fall. Based on these
calculations, you decide that if you can sell your cattle next fall at 60C per pound
or more, you can make a fair profit and the enterprise will be worthwhile to you.
The day you buy your feeder cattle you are assuming the risk that by market
time next fall cattle prices will be below 60c per pound, which could mean no
profit, or worse, a loss to you.
The futures market enables you, by selling a futures contract, to shift at least
part of this risk to a speculator who is willing to assume it in hopes of profiting
from a change in that future price. The point is, the risk was there. It had to be
born by someone whether the futures market existed or not. The futures market
served an economic function by facilitating the transfer of the risk from someone
who didn't want it to someone who did. (This is, of course, a highly simplified
example of a hedge.)
This does not mean that no one treats commodity trading as gambling. Anyone
who approaches futures trading without a knowledge and understanding of
commodities and their markets is doing just that — gambling. And it shouldn't
surprise you that these people tend to be losers in the long run.
DO MOST SPECULATORS LOSE?
Perceived wisdom has it that most commodity traders lose money. In this case,
perceived wisdom is correct. All studies conducted over the years on this topic
yield the same conclusion: most individual traders lose. Studies done by the
University of Illinois and others, as well as private industry surveys, have
concluded that overall about twice as many people lose money as make money.
Or, to look at it another way, roughly one-third are winners and two-thirds are
losers. On the average, each loser lost more than each winner made.
25
But such broad generalized conclusions can be misleading. Elliot Bermvitz of
Lind-Valdock, the largest discount broker in the world, surveys the firm's
16,000 customer coconuts periodically and he's found some interesting
results (see Table 2.1).
Table 2.1 Profits and Lasses—Individual Speculators
Table 2.1
Successful Unsuccessful
% of Traders Traders's Traders's
No. of Trades with profits Average Profit Average Loss
191 '92 191 '92 191 '92
1—20 22.4 29.5 2,456 2,483 2,808 2,306
21-100 26.3 32.2 8,000 7,126 8,408 7,716
101—200 33.5 36.7 15,888 18,501 16,686 21,989
200+ 44.5 43.2 37,656 44,347 31,731 40,460
All Accounts 26.1 31.7 9,514 7,340 6,942 6,106
Data from Jan—July each year.
although this survey is not scientifically sound as a random sample and it

suffers from "survivor bias" (i.e., the losers leave and the winners stay to trade
more actively), , probably reflects reality.
yen the most experienced, most successful traders make losing trades. In fact,
in my experience analyzing professional traders, many have more losing
trades than wining trades but still make money because the losing trades
represent small losses and ginning trades represent large gains. For example,
if you had 10 losing trades averaging $100 each and two winning trades
averaging $600 each, you would be a net winner of $200, even though you
had more losing than winning trades.
10 WINNING FORMULA
since there is obviously no magic formula for winning, it is important that the
beginning trader understand some of the more common reasons why
inexperienced traders may lose money.
Under capitalization Experience has proven that to begin trading with too
little risk capital (and risk capital it must be; a trader should trade only with
capital he can afford to lose) is almost a guarantee of failure. A position not
adequately backed by adding capital may be forced into liquidation by a
temporary adverse market move, Which results in a call for additional margin
that cannot be met.
. Lack of Knowledge Some traders, of course, lose simply because of lack of know-
26
how. It is easy for inexperienced traders to misinterpret or miss altogether
important pieces of information that affect prices. The results can be frequent
mistakes in market analysis and errors in trading decisions. Before getting
involved in trading, one should know the methods of fundamental analysis
and be able to detect errors in trading decisions. One should know the
methods of fundamental and technical price analysis, learn the different
types of buy and sell orders and how they can be used, and study the
production and marketing system for the futures you want to trade. (Note:
Yes, even financial futures like T-bonds have a production and marketing
cycle!)
3. Trading Too Many Different Commodities Many new traders try to follow
too many different commodities. It is difficult for even an experienced trader to
keep a close watch on more than a few commodities at one time. It is good
advice when starting out to stick to one or two commodities and learn them
thoroughly.
4. Lack of Discipline A lack of discipline is another frequent pitfall for a new

trader. As was pointed out earlier, human ego is an important part of trading.
When you take a position in the markets, you become emotionally involved. You
defend your decision. Unless you are exceptionally objective, you can trap
yourself in an unprofitable position by refusing to admit, even to yourself, that
you have made a mistake. Successful traders exit quickly when they suspect
they are wrong. They do not fight the market.
5. Lack of a Trading Plan Probably the single most important mistake new
traders make, however, is to embark without a trading plan. A plan is like a road
map. Just as you would not set out on a cross-country drive without a map, so
you should not embark on commodity futures without a clear-cut trading plan.
An adequate plan forces you to set objectives and develop discipline in meeting
those objectives. An adequate plan removes speculation from the personal realm
of gambling.
PRACTICE TRADING
Before you open an account and lay your money on the line, it is a good idea to
test yourself and your abilities by making some hypothetical trades. Results of
your practice trading may help you decide whether futures trading is for you.
A word of caution is in order, however: Success in paper trading is no guarantee

of success in real-life trading. I f you are like most people, you will probably react
quite differently when faced with a real trading decision than with a paper trade.
This is a major reason why one should be wary of placing too much faith in
hypothetical or simulated trading results.
27
III. WHAT'S YOUR TRADING STYLE... And why this is so important
A. H OW DO YOU MAKE YOUR MI ND UP? Do you ponder or p lunder?

B. WHAT DOES YOUR ATHLETIC BACKGROUND IMPLY?
Sprinter or jogge r?
C. WHAT FORCES YOU TO TAKE ACTION? Data, Intuition, Third Party?
D. H OW MUCH RISK ARE YOU WILLING TO TAKE? As % of mone y.
E. WHAT DO YOU BELI EVE IN?
F. WHY ARE YOU TR ADI NG?
G. WHAT CO NFLICTS MIGH T ARISE WITH YOUR JOB, LIFESTYLE,
PERSONAL HABITS?
H. ARE YOU A BETTER STARTER OR FINISHER?
28
IV. GETTING DOWN TO BRASS TACKS — WHAT MAKES THE MARKETS MOVE
A. UNDERSTANDING THE SUPPLY/DEMAND EQUATION

1. Price is not controlled
2. Price is determined by: VALUE
3. Value is the balance of Supply/Demand
4. Value is determined by COMMERCIAL INTERESTS (long term)
5. Value is determined by TOO MANY BUYERS/SELLERS (short term)
B. UNDERSTANDING THE COMMERCIALS — They are the largest players in

the game. Thus, to know them is to know the market. We can follow the
commercials in three fashions.
1. COMMITMENT OF TRADERS This is the actual report of their net

long or short position
2. OPEN INTEREST This shows us if they are adding to their short sale
(expecting lower prices) or decreasing short sale (expecting higher
prices).
3. PREMIUMS The public usually buys the distant months, the

commercials MUST buy the nearby months. By tracking what months
of a commodity they are buying/selling we can determine the intensity
of their de-sire to own, or sell the commodity in question.
29
MY MILLION DOLLAR FUNDAMENTAL SYSTEM
FUNDAMENTALS: WHY THEY ARE IMPORTANT
As I've mentioned earlier, the commodity market is unique because it is a realistic

market based on supply/demand pressures. In turn, these pressures are authentic as
they are based upon actual need of commodity processors. Because of this, the overall
fundamental structure is of vital importance.
As a trader you must be concerned with the fundamental view. It will dictate whether
you are long or short a particular commodity as well as enable you to better evaluate
the risk in a position you are taking.
Traders who fail to read this chapter or attempt to disregard fundamentals "will cer-
tainly find themselves in trouble. More importantly, if you have a good grasp of the
fundamentals — where prices should be going — you will meet with greater market
success. I f you can envision where prices should be going you will be less affected by
short term, erratic swings, thus enabling you to hold your positions for maximum
gains.
A very successful trader I know has made his killing by sticking to the fundamental
tactics I'll show you in a moment, and then holding onto the commodities until he is
stopped out (at his original purchase price) or when the fundamental picture changes.
This means he's ridden the market to its utmost and has taken gargantuan profits,
profits ten times greater than those made by the average trader.
Developing vision is of extreme importance. It enables you to weather the daily storms
that bounce prices tip and down. It enables you to hold onto your winning positions,
creating sizeable profits. The resulting peace of mind is alone well worth the time
you'll spend figuring out the fundamental bias.
TWO DEFINITIONS THAT ARE IMPORTANT
"Traditional market devotees have defined fundamentals as revolving around the sup-
ply/demand of the commodity. They compare previous years' supply/demand levels
while incorporating today's changing production. This is placed into context with
prices. The results are the fundamental view.
Another fundamental approach relies on an intrinsic value level. Basically, it implies

that a commodity is cheap at a certain point. This is the usual thought pattern we all
share toward commodities. Sugar, judging by past standards and current prices, is
either cheap or dear.
30
Without a doubt this is the most dangerous fundamental system to follow. To say
that a commodity has an approximate., absolute value, is to deal in an unreal
abstract. Pork Bellies, for example, are only worth that which someone will pay for
them ... they may be worth nothing or $5.00 a pound.
The value approach fundamentalists invariably get wiped out in the market because
they see something cheap, i.e., down from a previous high level, and begin their
buying. At times they are correct but more often than not they are just trying to call
the bottom, and that's difficult.
At this point, the value approach player is faced with a dilemma. He knew Bellies
were cheap at 50c but here they are at 40c. What does this tell him? Does it tell him
he was wrong, or does it tell him to compound his error and buy more? Since Bellies
are cheap at 50c, aren't they really a great buy at 40c?
The value approach does not allow us to change quickly enough for rapid markets.
Stay away from it.
A SAMPLING OF FUNDAMENTAL TOOLS
You can apprise yourself of standard fundamental statistics with a quick trip to any
brokerage firm. The most general approach is to study the government reports. As
an example, the USDA releases a report telling of farmers' planting intentions for
the coming crop year.
As the crop year develops, additional reports will be issued indicating the approxi-
mate size of the crop. Along with the government's reports several brokerage firms
are getting into the limelight by issuing reports compiled by polling the various com-
modity producers. By and large, both reports give the same indications.
On the demand side of the picture you'll be able to obtain reports from the USDA.
These are called "Stocks in All Positions" which tells what the farmers are doing
with their grains. Are they holding onto it or letting go? These reports attempt to
provide an answer.
Additional facets of the demand picture will be observed by noting retail sales,
meat sales, the price of pork vs. beef vs. broilers, etc.
An attempt to arrive at a fundamental view of the market based on this approach

usually gets me nowhere. I guess I'm simply not sharp enough to put all the facts
together.
For this reason I rely on the actions of others to help me determine the fundamental
picture. In effect, I evaluate the fundamentals by observing the actions of people
31
whom I have reason to believe can do a better job than myself. Let's discuss
this approach.
MY MILLION DOLLAR TOOLS
My research has uncovered three aspects of the market that tell me what is
being done by people smarter than myself. From these three, non-redundant,
sources of data I am able to develop a vision of what is in store for the market.
MY FIRST SMART MONEY TOOL
The simplest data with which to work is the COMMITMENTS OF TRADERS IN

COMMODITY FUTURES, released by the USDA about the 10th of each month.
This report breaks down the long and short positions held by the large and small
traders.
As you might expect, small traders tend to be on the wrong side of the market
and larger traders tend to be on the right side of the market. The following Corn
chart, with the monthly ratio of longs to shorts held by large traders, is a good
case in point.
As you can see, the large traders anticipated higher Corn prices. Despite a
lackluster market in a narrow trading range, the large traders had a sizeable
long position, particularly when compared to their short position. Followers of
these reports had a definite indication to be on the alert for a sizeable move in
the Corn market. The handwriting was on the wall for all to see.
Your first fundamental tool will be the large trader report. Please keep in mind
that its purpose is to show you where the large traders are and what they're
doing. This is not a timing tool. It's function is to alert you to the "deals" you
should be scouting out.
32
RN LARGE TRADERS
Speculative LONG SHORT

Long or short only 41,555 7,990 + 14,275
Long and short (spreading) 44,700 42,075 + 13,015
Total 86,255 50,065 + 27,290
Hedging 217,588 310,740 - 34,057
Total reported by large traders 303,843 360,805 - 6,767
SMALL TRADERS
Speculative and hedging 136,147 79,185 + 24.207
TOTAL OPEN INTEREST 439,990 439,990 + 17,440

Percent held by: Large traders 69.1 82.0 - 4.4
Small traders 30.9 18.0 + 4.4
_______________________________________
_______________
33
Commitments of traders, Chicago Board of Trade, April 30, 1973
Classification April 3 0 , 1 9 7 3
Long Short
LARGE TRADERS SOYBEANS (In thousand bushels)
Speculative
Long or short only 18,375 20,865
Long and short (spreading) 66,315 6 6 11 9 5
Total 84,690 87,060
Hedging : 172,370 155,040
Total reported by large traders 257,060 242,100
SMALL TRADERS
Speculative and hedging 54,570 69,530
TOTAL. OPEN INTEREST 311,630 311,630
Percent held by: Large traders 82.5 77.7

Small traders 17.5 22.3
SOYBEAN OIL
LARGE TRADERS Speculative 9,113 9,113

Long and short (spreading) Total
Hedging 15,879 22,876
SMALL TRADERS
Speculative and hedging 13,493 4,725
TOTAL OPEN INTEREST 47,246 47,246

Percent held by: Large traders 71.4 90.0
(In tank cars of 8 , 7 6 1 10,532
SOYBEAN MEAL
LARGE TRADERS (In hundred tons)

Speculative
Long and short (spreading) 3,448 3,448
Total 8,528 8,538
Hedging 14,205 14,441
SMALL TRADERS
Speculative and hedging 4,329 4 00 8 3
TOTAL OPEN INTEREST 27,062 27,062
Percent held by: Large traders 84,0 84.9

34
MY SECOND SMART MONEY TOOL
Your next source of fundamental information will come directly from The Journal of
Commerce or the Wall Street Journal. This is one of the most important sources for
fundamental data but is passed up by 98% of the players in this game. Let me
first explain some workings of the market so you can better grasp the significance
of the data.
Typically, a commodity that is going to be delivered in December of this year will

sell for more than a commodity that is to be delivered in June of the same year.
That's because the person who must hold onto the commodity until delivery in
December will be faced with more holding costs. After all, he will have to pay
storage, insurance, and perhaps interest for the months of July, August,
September, October, November and December. The person taking delivery in June
does not have to absorb these costs.
Therefore, the more distant months of a commodity sell for more than the nearby
months.
Write that on a slip of paper and carry it in your wallet. Paste it on your ceiling or
stick it to your forehead, but whatever you do, don't forget that lesson. It is the
basis for my million dollar fundamental system.
The typical price structure is to see distant months selling at a premium. That is,
June 1975 Wheat selling for less than December 1975 Wheat; or July Pork Bellies
selling for less than the following year's February Bellies.
A reversal of this price spread is highly significant as you can perhaps imagine.
Such a reversal — when the nearby contracts sell for more than the distant
contracts — is concrete proof someone is willing to pay a premium for the product.
Someone, some-place wants the commodity so badly that he's willing to pay an
extra amount to ac-quire control of that commodity.
Now, who could it be? Well, when you consider that large traders and the
commercials have more money than the public, and commercials are the only ones
who really need the commodity, I think you have to conclude the driving force
behind such a premium spread is smart money.
In fact, you'll find that all bull markets of any significance are signaled well in ad-
vance by the special premium situation I have just pointed out. Ted Rice, while
with Continental Grain, one of the world's largest Commodity dealers, is one of
the few insiders to tell the public about the importance of this premium spread.
The words from this vice president of this major commercial dealer are
fascinating.
35
He has publicly stated that, "we can say carrying charges exist when grain isn't wanted
at existing prices."
There it is, words from the real smart money in this game. A carrying charge market,
one where distant contracts sell for more than nearby, means the commodity is simply
not in tight demand. The reverse, as you can see, says the commodity is in tight
demand and a bull move is on, or about to develop.
Lesson number two in fundamentals is to closely follow the premiums. In a later

chapter I'll explain more about premiums. For now, just remember, it is vitally impor-
tant to follow premium spreads so you can forecast which markets are bullish and
which are bearish.
MY THIRD SIIIART MONEY TOOL
The third and final million dollar fundamental tool was given to me by Bill Meehan.
Bill's tactic is to determine what the commercial interests are doing in the commodity
market. To fully understand the data you need some of the rationale behind it. Here
goes!
To begin with, you should know that the largest short seller in any market tends to be
the commercial interests — these are smart money people. This is because the com-
mercials are always in the market spreading and hedging their actual positions.
Certainly, speculators are also short sellers, but the majority of short selling is done
by the commercial interests. Knowing this is important because it is possible to keep
track of how much short selling is taking place in the market through the use of Open
Interest.
Open Interest is the total position of the longs and the shorts in the market. There is a
buyer for every seller; in other words, they are evenly matched. The Open Interest
figure represents the number of open long and short positions. The figure is available
each day on the broad tape as well as in the following day's newspaper.
The Open Interest figures will decline if, and only if, short sellers are covering their
shorts. It will rise if, and only if, short sellers are increasing their shorts. Since we
know that smart money is responsible for most of the short selling, we can correctly
say that an increase in Open Interest indicates an attitude of bearishness on the part
of the commercials. A decrease indicates an attitude of bullishness on the part of the
commercials.
By itself, the Open Interest figures offer little forecasting value. It is when we team
them together with price action that some truly remarkable patterns develop, fore-
casting some fantastic market moves.
36
The patterns for which I look are those of price consolidation or trading ranges.
When such price action develops, and Open interest declines during this price
action, we are being told commercials feel prices will break out of the
consolidation on the upside. We should be buyers.
By the same token, a price consolidation or trading period during which Open
Interest increases tells us commercials are shorting, looking for prices to
break out of the consolidation on the down side.
Ideally, the consolidation pattern will be part of a large up or down move as

depicted by the prime example below. This is not always so, but when it is, the
odds are all the more on your side.
Notice the example of Open Interest while Copper made a major bottom. Prices
see-sawed back and forth in a trading range while the open interest took a
dramatic plunge telling us the commercials were ready for a big bull market.
Indeed they were! (chart not shown).
37
Next, turn your attention to the gargantuan bull move in Cotton — the market
that saw Cotton go to its highest price in world history. All this was
previewed by a tremendous decline in open interest during the preparatory
bottom range.
38
Platinum shows a good picture of how Open Interest can help spot tops and
bottoms. Notice, as the Open Interest expands to a high level, prices stall and
decline until Open Interest falls to a low level from which a rally is given birth.
Amazing, isn't it?
A tremendous slide in the price of Cattle was also forecast by the rapid increase
in Open Interest during August. I am also showing unmarked examples of price
and Open Interest so you can learn to look for yourself at this interesting
relationship. Study it well, it is the third fundamental tool that will help you on
your way t a million shiny cartwheels.
39
Open Interest used in this fashion is most valuable market tool I possess. It is the back bone to
my success.
40
41
HOW TO EVALUATE ALL FUNDAMENTAL NEWS
One of the biggest problems facing the average trader is the news with which he is
bombarded each and every trading day. Russia is buying Wheat. China is selling
and the Peruvian fishing fleet just went out while the Oranges are freezing in
Florida! What can one do? Is it possible to develop a reasonable method with
which to interpret this ever changing and frequently erroneous data?
I think so.
The method I use to judge news is to assume that any story I hear is just that —
a story. While I want to hear all the news I have a resolute attitude that news
itself means nothing to me.
What does count is the way the market should react to the news and the manner in
42
which the market actually does react. This is really a rather simple strategy. It
takes precious little savvy to comprehend the fact that Wheat prices should rally
since Rhodesia is buying Wheat. Should the hot lines flash that Brazil has an
overproduction of Sugar, even the simplest trader will expect sugar prices to
undergo some selling pressures. That would be normal.
In the commodity market it is the deviation ffom normal patterns that is

significant. That's the way to play the fundamental news stories. Should bearish
news hit the market, and prices merely shrug it off, you know the market is
indeed strong and ready to rally.
Last year the Cattle market showed how valuable this tactic can be. A government
report came out; very bullish on the entire complex. The opening indications were
that Cattle would be "up the limit." Frankly, I didn't care what was supposed to
happen — it was what would happen that was important.
In this case, Cattle futures opened up only slightly, telling us the news wasn't
really bullish and Cattle prices were weak. Indeed they were. They plummeted 6o
over the next few trading sessions!
Don't judge the news. Learn to judge the market's reaction to the news and you will
be able to master any fundamental news stories.
43
C. UNDERSTANDING THE MASSES (THE PUBLIC)
1. THE DIFFERENCE — The commercials have a long-term perspective

of where prices will go, while the public is more near sighted ... and
usually wrong. The masses group usually buys at the highs, sells the
lows.
2. MARKET SENTIMENT How to tell what the usually-wrong-crowd is

doing.
Jake
Bernstein
Larry
Williams
Market Vane Sentiment
HOW THE PUBLIC AND PROS CAN BE USED TO SPOT MAJOR MOVES BEFORE
THEY HAPPEN
Since my 1973 best seller "How I made $1,000,000 Trading Commodities"

introduced the concept of monitoring large and commercial traders as tools to
forecast the future, traders such as myself have tried to use this data for trading.
Sometimes with success, sometimes not.
In the early 1990's Nick Van Nice clearly showed that when commercials are
excessively bullish or bearish they are most often correct.
Other authors suggested we could monitor the activity of the public, as at major
turning points they were usually wrong. In back testing this theory I noticed this
too worked sometimes, but not all of the time.
In late 1993, it occurred to me that the best way to use this data was to wait until
these two camps, the usually wrong public and usually right commercials, were
diametrically opposed.
My reasoning was that if the commercials were very bearish on a market, at the
same time the public became very bullish, a decline of some importance would
most likely come about.
By the same token, when the commercials were very bullish, yet the public
bearish, a price low should be near.
In checking the record it was quickly apparent I had stumbled across some very
powerful forecasting data. Instead of taking my word for this, I suggest you take
an old chart book over to your favorite easy chair, block out half an hour or so,
and begin thumbing through it.
44
Here's what you would see in a recent copy of Futures Charts:
Starting with the first commodities, copper and gold, you would see the featured charts.
I have marked off the following times the public was excessively bullish and bearish.
That's half the equation.
Keeping in mind we want to the opposite of them, but only at the time the commer
cials are also opposite them, I have marked off on both charts the few times such a
"conjunction" of diverse views was held by these players. Keep in mind that a mere
bullish stance on the commercials is not enough to take action (they can be very early
in a move). It is when they are bullish and the public bearish you will want to buy.
We'll look for selling junctures when the public is bullish and the commercials bear-
ish.
With even less than 20/20 vision you can see that this juxtaposition of sentiment ap-
pears at important turning points. Note the January 1992 low in copper, clearly fore-
cast by a bullish commercial net-buying reading, while the public was bearish. Again
October of that year, the same condition evidenced itself with a rally of almost 15
cents.
45
46
The January 1993 low in gold was a repeat performance of what you just saw in
cop-per. While the commercials had been bullish for some time, the bottom did
not come about until the public had tossed in their bullish towels, turning
bearish.
I can think of no more diverse a market to the metals than corn, yet again you
will see the same pattern taking place. High net buying by the commercials at
1991 and October 1992, produced rallies.
Even a market as wild and wooly as coffee comes under- the spell of this dynamic
duo on investor sentiment. Notice how the best sell points came right on
schedule with our all important pattern.
WHY IT WORKS:
There is madness to this method, a reason as to why it locates such excellent

market turns.
First, let me point out that the signal will usually be early (study the charts
yourself) so there is no need for a rush to judgement. In fact, a long term entry
mechanism will probably work better than a very short term one.
The reason this works is that the public extreme bullish readings are almost
always brought about by a large price rally. In essence, this gauge is telling us
that when above 66% bullishness, the market is really and truly overbought.
Since we require this reading to occur at a time when commercials are bearish —
regardless of price trend — we have zeroed in on a time when the "trend" of
informed buying/selling (the commercials) is negative. This is a bit like selling
short in a bear market.
The reverse is equally true. When the commercials are bullish, doing more buying
on a balance than selling, and the public bearish, you will note that prices have
been declining, causing public disfavor with the market. But, and this is the
important part, the price weakness has not shaken the conviction of the pros ...
hence the oversold condition can be used as a buy zone with a great deal of
success.
Got the general drift of it? Good, now grab your chart book and head for your
favorite easy chair.
47
D. THE PUBLIC VIEW, THE PROFESSIONAL VIEW, AND MEASURING
ACCMIULATIONAND DISTRIBUTION
1. Close to Close Relationship

2. Open to Close Relationship
3. Close to Open Relationship
FORMULA
On up close days, use close minus low as buyers
On down close days, use high minus close as sellers
Keep accumulative line, look for divergences
4. EXAMPLES OF WILLIAMS' ACCUMULATION DISTRIBUTION

FORMULA
48
49
50
51
52
53
54
55
56
HOW TO MEASURE ACCUMULATION
AND DISTRIBUTION IN COMMODITIES
Price is deceptive. Whether you have been trading commodity markets for one
week or twenty years, you know one thing for certain; current price action is not
necessarily a reliable indicator of the future. What looks like a sure thing up
market goes down immediately! Analysts have attempted to defuse the individual
impact of daily price action by smoothing price data with moving averages,
exponentials, chart patterns and a host of other techniques. Anything to get
away from the unreliability and deceptiveness of price action alone.
In 1967 1 began an attempt to measure accumulation and distribution in the

stock market. I've since applied my techniques, with some slight alterations, to
the commodity market and feel that it is possible to determine when a market is
undergoing accumulation for a rally or distribution for a major market decline.
FIRST A LOOK AT VOLUME
Volumes have been written about Volume as a tool for stock and commodity
trading, but for the most part I have not found volume to be a necessarily reliable
indicator. There are several logistical problems that occur. In the stock market you
may have a stock make a small movement, but on an incredible amount of volume.
The volume is simply a switch taking place from one mutual fund to another, not
necessarily representative of true buying or selling.
In commodities, volume also presents a problem. First of all, it is not available to

us, accurately, until two days after the market has closed. Second, it is my belief
that much of the volume in the commodity market does not represent true buying
and selling pressures, but is a measure of either hedging, arbitrage, or tax
maneuvering.
Finally, there's a great problem in measuring volume in commodities in that so

frequently commodities have large gaps and/or simply trade at one price all day
long "lock-limit." On a lock-limit move you have the maximum amount of price
move, but no volume or precious little volume. I'm certainly never able to get out
of my short positions on a lock-limit up move (maybe you are).
This is a major contradiction; large price move but no volume. Traditional volume
approaches would indicate bearishness, but in fact we know lock-limit up moves
de-note bullishness, lock-limit down moves denote bearishness.
I have done a good deal of work trying to figure out if there is a possible substitution
or another set of numbers we can use in place of volume. I believe there is.
57
I have simply substituted the entire true range of the day for volume. By entire
true range I mean that we do not use just the high and low you receive from
your broker or your Wall Street Journal.
We need to take into consideration gaps. As an example, if the previous day's

close was 600, but the low in today's Wall Street Journal or from your broker for
today is 61c, then the true low would be 60c. Prices gapped from 60c to 61( and
then continued moving higher.
By the same token, if there is a gap to the downside, say yesterday closed at 58c,
and today's high from your broker or from the Wall Street Journal is 53c, then
there is a move that must be accounted for because prices gapped from the 58c.
Therefore, 53c is not the true high; 58c is the tr ,ie high.
You must first identify each day's true range, making certain that gaps are taken
into consideration. Note that you may have a high that is higher than the
quotation from your broker or the Wall Street Journal. It would still be the true
high. As an example, if yesterday closed at 59c and the high from the Wall Street
Journal or your broker was 62c, that would be the true high.
A simple rule is that the true high is always whichever is higher;

yesterday's close or today's quote high. The true low will always be
whichever is lower; yesterday's close or today's quote low.
We have, by this simple process, identified the total number of participants in

the market by saying that this total range represents the action of all buyers and
sellers for a given day.
The next thing we must do is to determine if the market was under accumulation
or distribution for the day.
58
I have done a good deal of work at trying to measure, in a variety of ways, if a market
was under buying or selling pressure for a day. As an example, if prices close down for
the day but close higher than where they opened, one can say that is accumulation.
By the same token, say the market closed up for the day but substantially off its high
of the day. One could say that selling was taking place during the day, not buying.
I have found for practical purposes in the commodity markets, the best way of
measuring accumulation and distribution is simply to say that if the market
closed up for the day (higher than yesterday's close), or down for the day (lower
than yesterday's close), to measure accumulation and distribution accordingly.
Simply stated, then, an upclose will say the market was under accumulation for the
day; a downclose will way the market was under distribution for the day.
ACTUALLY MEASURING ACCUMULATION/DISTRIBUTION
Now what we need to do is determine how many units of accumulation or distribution

there were for the day.
I do that in this fashion: if the market has an upclose, I then know it was an accumu-
lation day. I then take the distance from the true low to the close and that is the
number of buying units that I have for the day.
If the market closed down for the day, I have a distribution day and I take the total
number of price units from the true high to the close.
The total number of price units represents the amount of selling or buying for the day.
The day will either always have buying units, always have selling units, or in the case
of an unchanged day, no units at all.
HOW TO USE THE DATA
There are three major ways of using this data. For the beginner, I would simply urge
you to run a continual index of accumulation and distribution that measures the A/D
on a cumulative basis. I usually start at the number 5000 when I begin plotting a
commodity. I then add, if the next day is an upclose, the amount of buying units from
that day. If the following day is a down day, I would then subtract the amount of
selling units for that day. If the following day is a down day, I would again subtract
the total selling units from that day. If the next day is an up day, I would add the total
buying units from that day. By doing this in a continuous fashion I can construct what
59
some have called an "On-Balance*" line or a "Cumulative" line of accumulation and
distribution.
HERE'S AN EXAMPLE:
MAY BELLIES HIGH LOW CLOSE A/D A/D LINE
2-13 6430 6280 -6355 -75 (H-C) 5595

2-14 6402 6230 -6235 -167 (H-C) 5425
2-15 6345 6245 +6272 +37 (C-L) 5465
2-16 6415 6310 +6347 +75(C-L) 5540
Shown above is an actual example of the May 1984 Belly Contract. It will give you an idea of
how the numbers are kept. Note the true low of 2-15 is 6235 and 2-16 is 6272.
"There is some discussion about who first developed the term "On-Balance Volume.' To my
knowledge it first appears in the literature of this business authorized by two gentlemen
from San Francisco, Woods & Vignola in the early 1940's.
DETERMINING BUY OR SELL INDICATION
Now comes what it's all about: using the Accumulation/Distribution Index. or Line, to tell us
whether a market is tinder accumulation or distribution. I have found that when price
moves to a new high and that high is not matched by an equal new high in the k D line, the
market is under distribution and I expect a sell to shortly follow.
By the same token, when the market falls to a new low, but that new low is not matched by a
new low in the A/D line, I then look for the market to move up. I believe it has come under
accumulation.
The basic buy and sell patterns are shown in the diagram that follows. I have also taken the
liberty of showing you some charts from a long time ago, as far back as Cattle and Soybeans
in 1975 as well as Beans in 1979 and the precious metals markets.
The precious metals markets had many people make a rush to be bulls in the summer of
1983, but as you can see from the A/D formula there simply wasn't a prayer of a chance as
the markets were under heavy distribution.
It should be pointed out that this tool is not a fine tuned timing tool, it simply suggests a
market that should go higher or a market that should go lower. It is a selection tool, it
screens your trades for you, and highlights outstanding opportunities. Also, major market
moves will occur without any "warning" from the A/D. It does not always
60
spears — but when it does, listen. Look for a market that has been under aggressive
accumulation for a long period of time, say two to four weeks. I then feel confident that market
will go sharply higher, and I want to be taking short term buy signals.
Conversely, look for a market that has been under heavy distribution, as the precious metals
markets were in the summer of 1983. You can take sell signals, go flat on buy signals, or disregard
buy signals, as the market is going to have a substantial selloff.
I f you have any other additional questions on Accumulation/Distribution or wish to know what
it's doing on any current market, feel free to write me at Box 8162, Rancho Santa Fe, California
92567.
61
62
63
64
65
66
67
68
69
70
71
72
E. HOW %R MEASURES PUBLIC EXTREMES
1. When everyone is bullish, this is the best time to sell. The best time to buy,
conversely, is when everyone is bearish.
2. %R identifies these times by highlighting market extremes.
FORMULA
Value 1 is Highest High - Lowest Low of time period under study. Value 2 is Close -
Lowest Low of time period. Divide Value 2 by Value 1 to arrive at %R, where the close is as
a percentage of the X day range.
3. Examples of %R on various markets. These appear on pages 49-56, in conjunction with

the Accumulation/Distribution discussion.
73
MY MILLION DOLLAR — NEVER BEFORE REVEALED — TRADING TOOLS
This chapter will perhaps be the most interesting of all to you traders. The tools I
am about to discuss may not have been brought to your attention previously. They
will be profitable only if used in conjunction with the well-defined, major bull and
bear market moves. Should you choose to use these indices on the sloppy, go-
nowhere markets, or markets that are not tightly locked in (where future
direction is questionable) for-get about their effectiveness.
I suspect this might lead some readers to become angry with me. but I %vant you
to know that you have my sincere wish for market success and that success will
come only if you confine your efforts, using; technical tools, for the well-defined
markets.
A WORD ON TECHNICAL THEORY
Technical tools rely on daily price action as opposed to the underlying

fundamentals. In view of this fact, one must be cognizant of the knowledge that
such tools are subject to rapid and unforeseeable changes. The trader that changes
with the tools will make money. The trader who gets trapped by a bad signal. but
keeps hoping for the good one to re-materialize, will be hurt. All technical tools
are subject to whipsaw action. All technical tools can be in error. Even my million
dollar tools are wrong from time to time. But, by and large. they are correct and
their performance is further improved when they are used for the well-defined
markets.
There are three basic approaches upon which all technical tools are based. The
most common technical approach is a trend method. Then there's the momentum
method, the oversold/overbought method, and finally, work based on the amount
of accumulation and distribution taking place in the market.
Trend approaches are most apt to give false signals and stunning losses. As a
matter of fact, during the past two weeks* market activity, a commodity trend
system (probably the most widely followed), lost 40% of their equity. In one day,
their accounts were down over 17%!.
The trend approach works well in long term, sustainable trends. However, when
trading ranges develop, any trading system (such as penetrations of any moving
aver-age or point and figure) will result in losses. To my knowledge, no one has
yet constructed a profitable trend-following program that makes money every
year.
The essence of the problem is that trend systems cannot forecast which markets
will have the long, sustainable moves that make trend following profitable. Trend
systems do not forecast, they merely identify.
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THE PROFITABILITY OF MOMENTUM
My concept of momentum, (bandied about by many other services, books and

broker-age firms) is based on measuring the speed at which prices advance and
decline.
Imagine, for a moment, a ball being tossed into the air. At some point, even the
very untrained eye can say the ball will now begin falling because we can see the
speed of travel has begun to diminish. And so it is with commodities, with the
exception that it takes a highly trained eye to detect this loss of momentum toward
either an up or down movement.
To simplify, or define the speed, or rate of travel, for prices I devised the use of price
rate-of-change about five years ago. My definition and tools for measuring speed are
quite elementary. Compared to the machinations of my computerized
predecessors, my methods are downright child's play.
The momentum concept shown here will be as accurate as any of which I am aware.
Best of all it's the simplest to maintain on a daily basis. Here's how it's done:
HOW FAST ARE PRICES CHANGING?
Finding out the rate at which a commodity's prices are changing is not difficult. It
takes only a few seconds per commodity, and all you need is some paper and a
couple of sharp pencils.
Let's say, for example, that you wanted to construct a 25-day rate of change index
for August Pork Belly prices. To get today's index number, you subtract the closing
price 25 days ago from today's closing price. I f bellies closed at 38.44 then and
38.72 today, today's index number would be 38.72 minus 38.44 — or .28. (You
always subtract 25 days ago from today. I f bellies closed at 38.44 then and at
38.02 today, the index number would be —.38.) Tomorrow you would do the same,
using tomorrow's closing price and that of 25 days earlier. That would give you your
next index number. And so on.
These index numbers are plotted chronologically above or below a "zero-line" on a

graph with an appropriate scale. They are then connected with a solid line, as
shown on the bottom of the accompanying chart for August bellies, to form a
momentum curve.
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There's more to the momentum curve than may meet your° eye. A rising curve
means an increase in upward momentum — if it's above the zero line. A rising
curve below the zero line signifies a decrease in downward momentum. By the
same token, a falling curve means an increase in downward momentum below
the zero line, a de-crease in upward momentum above the zero line.
Once the curve is constructed, there are many ways it may be used to help you
fore-cast prices. A simple but relatively effective way involves drawing trend lines
on the curve itself, as shown on the chart. Although momentum generally tops or
bottoms out well in advance of prices, the best signals come when long-term
trends of the momentum index are broken. Point A on the chart provides a good
example, as the downtrend in momentum was penetrated well ahead of the
market run.
Another approach is to construct a 10-day moving average of the momentum

index itself, taking it as a "buy" signal when the momentum index crosses above its
own 10-day moving average, as a "sell" signal when it falls below it.
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TIME PERIOD IMPORTANT
It was not by chance that 25 days was used in the example above. Most
commodities exhibit some degree of cyclical price behavior. The momentum principle
works better when an effort is made to match the time period used to the harmonics
of the particular market concerned. In pork bellies, the cycle — the number of days
from bottom to bottom — is about 50. Therefore, 25 days — or one-half of the
cycle's span — was chosen as the basis for calculating our rate-of-change or
momentum index.
THE MARKETS'S MOST IMPORTANT TECHNICAL ASPECT
For my money, the technical theory of most value and validity is the concept of
overbought/oversold. This theory, or concept, is indeed the basis for all life and
thought. Let's turn our attention to nature, or the human body, to get a better grasp
of this, the most important technical concept.
In nature, we have light and dark. Night and day. For direction, we have north and
south. Within our own frame of reference we have feelings of joy or sorrow. We are
hot or cold, and even our body chemistry is either alkaline or acidic. Indeed, all
things in nature are based on the underlying concept of opposites. Front and back,
sweet and sour. As the Chinese would have it ... Yin and Yang.
As readers of my previous books are aware, I'm quite involved in the Yin and Yang
philosophy, especially as it relates to the markets. The original concept, founded by
the Chinese many thousands of years ago, is simply that there are two forces in the
world by which everything may be defined.
The interworkings of these forces is that Yin just about begins to overtake and com-
pletely dominate Yang, the opposite force. Then, Yang regains its strength, refur-
bishes its power and begins to conquer Yin when Yin, once more, re-develops its
strength. And so it goes, a never ending battle of good and evil, light and dark, hot
and cold, or overbought and oversold.
Strangely enough, within Yang there is some Yin and within Yin there is some Yang.
Just as we find some good in the most evil person, some bad in all saints, some light
in what at first seems a dark room.
My observation of market action has revealed to me that just as a condition of price

imbalance appears to be a one way street, the opposite force takes over. What looked
like a sure thing is soon falling out of bed. That's why traders who buy on break outs
don't last very long.
A break out condition usually occurs at the tail end of a move when buyers are in
almost total domination of sellers. That condition, according to Yin and Yang, can't
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last long.
I'm certain you've seen what I'm talking about. As sellers become so strong, so
certain of themselves, they must be defeated as buyers rise up to take advantage of
the imbalance.
Perhaps the key to technical study is understanding balance and imbalance. I have
done some work along those lines that has been encouraging and will be discussed
later.
HOW TO TELL WHEN A COMMODITY IS OVERSOLD
Enough about concepts and abstracts. Here, exactly, is how I justify an overbought
or oversold market.
My method may, or may not be the ultimate answer to Yin and Yang. However, it is
the best I have found considering the irrational character of price action and the
ease of constructing the index. As an additional bonus, the index is done on a %
basis so you know exactly the nature of an extreme. Overbought/oversold indices
that use only the price range front one point to another have no absolutes. Thusly,
what was oversold at one time period may not be oversold at another.
I'll refer to the index as % of R, or %R. The index is a simple measure of where
today's closing price fits within the total Range of the last ten days.
Let's say the range for the last ten days was ten points, with the highest high of the
last ten days at 65, and the lowest low of the last ten days at 55.
Today's closing price is 58. As you can see from the illustration the close is quite low,
within context of the total range during the last ten days.
In terms of percentages. the close at 58 represents a figure that is 70% of the total
range.
Should the commodity have closed at 55, the % would be 100%. That is, the close is
100% of the distance from the top of the range to the close. I f prices had closed at
65, the % reading would have been 0 because the distance from the close is 0% of
the distance from the high to the close.
The exact formula for arriving at %R is first to determine the distance from the
highest high of the past ten days and the lowest low of the last ten days. This is the
"Range."
Then, take the difference from the high at the last ten days, which you have already
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identified and today's closing price. We'll call this "Change."
All that's left to do is divide the Change figure by the Range figure and you will arrive
at what % today's price is — out of the last ten days range. It's as simple as that.
Here's an example. Let's say Silver had a high of 280.5 the last ten days and a low of
272.5. Today's close is 278.5. The Range (high to low) is 80. The Change (today's
close to 10 day high) is 2 0. When we divide 20 by 80 we arrive at what % today's
closing level represents of the total ten day range. In this case, the %R reading is
2 5%.
Plot this daily reading on your chart paper. It will, naturally, range from a Yang
(overbought reading at 0%) to Yin (an oversold reading at 100%). Generally speaking,
readings below 9 5% give a buy indication — during bull markets. A reading above
10% gives a sell signal during bear markets.
The preceding paragraph is the essence of my technical system. The %R index will
not work if you insist on acting on the buy signals during a bear market. Now you
realize why I have, in earlier chapters, stressed so strongly, the necessity of isolating
the dominant bull and bear markets. Once you've done that, all you have to do is
track price movements with %R and wait for the signals telling you it's time to start
positioning the commodity according to the fundamental situation we have
discussed.
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Let's review some examples of %R at work to see its limitations as well as its advan-
tages and 'historical record. As you will see, it always calls the best buy and sell areas.
This is a dandy index.
TIMING YOUR SILVER TRADES
Here's a chart of December Silver starting on November 17, 1972 through November
1, 1973. During this period, silver was in a well-identified bull market as I repeatedly
indicated in my advisory service at the time. This means our interest in the %R index
was strictly on the buy side. The signals we would "work" were those given by %R
dropping below 95%n. In total, eight signals were given. All predicted immediate
rallies of at least a full cent. That's a $1,000 profit per contract.
There is one "bad" period which I've been carefizl to mark on this chart. This is an
example of when %R signals can go haywire. This is the only screening you have to
make on a buy signal in a bull market.
If prices have recently undergone an extremely rapid rise, exhibiting signs of a techni-
cal blow-off (that means prices will stage a wild, upside move then immediately limit
down without trading) wait for a buy signal from the %R Index. You are through
waiting and ready to buy when:
1. %R has hit 100%,

2. Five trading days have passed since the 100% reading was hit,
3. %R again falls below 95%.
Once those three criteria are met, it's time to once again begin acting on the %R sig-
nals, assuming you are buying long in a bull market.
Unless there has been a wild, speculative blow-off in the bull market, you should try
to take a position every time the index falls below 95%. This procedure assures that
you are buying on extreme weakness at a time Yang is about to overtake Yin.
Not all signals will be correct. I have constructed no perfect indices. The Holy Grail is
yet to be found. Because of that, I use a few other tools to confirm the %R, and I use
stops as my ultimate protection. Yet, %R remains the best timing tool I have ever
used for determining overbought or oversold markets.
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SOY BEAN OIL AND SUPER PROFITS
During 1973, Soy Bean Oil was also in an easy-to-identify bull market. Open
Interest had several huge reductions. A premium appeared and large traders
were long. All signs were "go." It was only a question of selecting optimum times to
buy. Enter, %R!
In the ten month chart of Bean Oil prices, ten signals were given by %R as I have
marked on the chart. All but one of the signals was followed by immediate and
substantial gains. That's not bad! Alert chartists will notice the signals come when
prices are extremely weak. Thus, you are almost always able to buy into massive
weakness ... not after a turn has developed.
Indeed, that's the beauty of the index. While most gauges wait for a turn to
develop, 17,-,R identifies the exact low point, give or take a day. This means, you
can wait until after the signal is given no need to trade during market hours —
and place your order for the following morning open when prices are on the skids
following through the previous day's liquidation. That's a humdinger of a time to
take down large, large positions.
THE SECRET OF SELLING SHORT
We reverse our procedures for selling short with %R. We look for a well-defined
bear market. That means, prices have been trending lower; Open Interest is on
the in-crease, there are no premiums and the nearby months are weaker than
the distant.
Our next move is to wait for %R to zoom up to 10% or less. Notice the beautiful
sell signals given in Plywood.
At this point, Yin is about to overtake Yang and market traders begin selling to
the newcomers. Here, the exact day of the high was called quite well by %R. The
index has a great ability to call our attention to many major selling levels in bear
markets.
IDENTIFYING A SELLING POINT FOR BEANS
In September Soy Beans were in a well-identified bear trend. A quick glance at

the chart makes that quite clear. The alert trader was ready to sell short. The
question was when, and could %R spot the selling time?
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It did in sterling fashion. The tool raised to 11% telling us it was time to short.
The next day it was limit up and we had our sell signal at 080. The following day it
was all over. Beans took a dive down to the 590 area. Had you sold one contract at
680 and covered at 590, on a margin of $3,000, you would have had a net gain of
over $4,000 just ten days later!
Your bear market strategy using colt will be to wait until Open Interest has had a
sizeable increase (while prices remain in the bear market), and then %R hits the
selling area at 10%0 or less. The final indication that you should pull the trigger
comes the day after %R gives the sell signal.
Let ‘em have it with both barrel's. Place your stop, walk away. Your work is done
for the time being!
HOW TO HANDLE TRADING RANGES
Most technical systems are butchered during trading ranges. How about %R?
Well, as a matter of record, it %vas designed to help me as it identified the tops
and lows of trading range markets with explicit exactness.
March Sugar is a good example of an extended trading range market. My work

gave convincing evidence prices would go higher. Yet, in a trading range, a buy
and hold strategy is not as successful as a buy and sell policy.
During such situations you buy when the %R hits 90% or lower. Sell and go short
when it bounces back into the 109 range. You will find an amazing degree of
correlation between trading range tops and 9cR peaks. Ditto for bottoms.
Trading ranges mean prices are locked into supply on the topside and demand
underneath. Usually. supply comes in with a high %R reading and demand
returns when %R falls back to the low buy area.
Several other examples of %R are shown here for your study and observation.
Their greatest value will be for your historical perspective. Study them, refer to
them. You should have a better feel for the index when you develop information on
the commodities you wish to follow.
HOW TO COMBINE MOMENTUM WITH %R
You now have an understanding of momentum, overbought and oversold. It's time
to synthesize the two. While I have told you to explicitly use the ten day basis for
%R in the measurement of momentum, there are other time periods to use such as
twenty-five days, etc. Choose whichever seems to be working best based on the
current cycles.
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That's the key to momentum — extracting the correct time period — then using
the momentum approach.
That's what I do. Yet, people are always asking me for a uniform time period in
which to work. Unfortunately, there isn't any. But, if I'm really pressed, I tell
people that a twenty day period is optimum, especially if they take a twenty-day
moving average of price and then determine how far above or below that average
is today's price.
The math is easy. Take the last twenty days' closing prices and divide by
twenty. Then take the difference by which today's closing price is greater or
lesser than this twenty day figure. This difference will oscillate above and below
a line that represents uniformity in price or zero difference.
The Silver chart shown here indicates several good buy and sell signals from the
momentum gauge. The signals are generated by a long term break in the
momentum trend line. When that occurs it tells us prices have lost their power
and a trend reversal is in gear. Get ready!
HOW TO USE THESE TOOLS IN A BULL MARKET
In a well-defined bull market you will be buying on a %R signal at, for example,
"A" on the Silver chart. Your sell is given when the long term trend on
momentum tops out as defined by a trend line ("B" on the chart).
In this case there was a $5,500 gain for every $1,000 invested.
The trick here is to use the %R data for entering the market and the
momentum trends for exiting. A final hint: when the momentum figure becomes
extreme, by historical comparison, it's time to cover your position without
waiting for the trend reversal to take place. There is nothing wrong with taking
profits in advance of a trend reversal in momentum ... especially if the index is
at an extreme level. Remember ... Yin and Yang.
HOW TECHNICAL DATA CAN IDENTIFY THE FUNDAMENTALS
Here is an index that's so simple you'd almost be inclined to scoff at it. But
consider. it will enable you to have a clear-cut fundamental view of any market,
at any time. This little tool is one of the secrets of my advisory service,
Commodity Timing.
First, let's visualize the market and determine why we have bullish or bearish
trends. Such trends develop because the fundamentals dictate a bear trend and
because enough traders, who are aware of the fundamentals, are selling and
pushing prices down. Reverse the procedures for causes of a bull market.
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I have concluded that it is impossible to always know the underlying fundamentals.
It's beyond my comprehension. All I can do, at best, is isolate markets where the odds
are in my favor. In markets where I have no "feel" for the fundamentals, I turn to
price structure to learn the fundamentals.
After all, i f fundamentals cause price trends, price trends can tell us what the funda-
mentals may be.
The problem is in determining exactly what the price trend is. How can we do this?
Isn't it true that the markets are far too erratic to arrive accurately at the overall
trend?
I really don't think so. I can always tell you the probably future direction of prices (the
fundamentals) by taking a ten week moving average of the Friday closes. That is, all
Friday closes for the last ten weeks. Scoot your decimal point over one digit and you
have the ten week average.
TEN WEEK AVERAGE ... RULES
1. Assume the commodity is bullish and expect higher prices if, and only if, the ten
week moving average is going upward.
2. Assume the commodity is bearish and expect lower prices if, and only if, the ten
week moving average is headed down.
3. Assume the fundamentals are unknown and a trading range will persist if, and
only if, the ten week moving average is flat. I f there is a bias to be given, it would
be in favor of the 10 week trend prior to going flat.
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HOW PRICE SMOOTHING DETECTS THE TRUE TREND
When you run a ten week moving average you smooth out all the fluctuations in
price action. By doing this, you can develop a smooth line indicating the
underlying trend. Elementary physics tell us that once a force is set in motion,
that trend persists. We know we have a reliable tool to help us see the price
structure.
Allow me to interject at this point; the ten week trend method works best on
commodities — not stocks. One needs other tools for stocks.
HOW TO USE THE FUNDAMENTAL DIRECTION INDEX
Now that you have constructed the ten week moving average, you have isolated
fundamentals. You have a key, and some insight to the future. As long as the
line is slanting upwards on your charts, you should work only the long side of the
market. When the line goes flat, you will go long and short on %R signals, and
when the line heads downward, you will work just the short side of the market.
Should you choose to buck the ten week line, remember you are bucking the
underlying fundamental strengths of the market. Why do it?:
The examples here will give you a pretty fair idea of the workings of a ten week
trend line. Notice that what appears to be a sloppy market in Wheat and Oil were
actually fundamentally strong, telling the trader to be a buyer on the big
pullbacks.
A NEGATIVE NOTE
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While the ten week trend method is quite good, we must keep in mind that its
purpose is not timing our optimum selection. Its purpose is to point out the
bullish and bear-
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ish markets. Crossing of price above or below this line has absolutely no bearing or
significance. It is the trend of this line that is meaningful.
Also keep in mind that the index is always correct during moves but will never call a top
or bottom. That's the function of the shorter term tools.
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WHAT A " L E A D - P I P ; - I N C H " TRADE LOOKS LIKE
Using and combining the various fundamental indices about which I've talked,
let's refer to Copper during August and September.
Observe: 1) the big decline in Open Interest, 2) the bullish price premium
(October Copper was at 89¢, December 83¢ and January 81¢), 3) nearby
Coppers gaining on distants and 4) the ten week trend is flat to up.
For timing purposes, two %R buy signals were given right at the lows. This is
an example of a trade where the odds are overwhelmingly in your favor.
Regardless of what chapter you find most helpful I believe this one will require
your most astute attention and, if you are like most of us, will demand a
number of readings in order for you to thoroughly comprehend and absorb the
material. Once you have developed a working feel for all the indicators, and
have a good grasp of the indices, you will be primed and ready to begin
trading.
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F. CYCLES — Don't be deceived. There are only two cycles I know of that you
can make money trading.
1. VOLATILITY Trading ranges (daily, weekly or monthly), cycle from

small ranges to large ranges. The best time to trade is following small
ranges.
2. CLOSE/HIGH - CLOSE/LOW RELATIONSHIP. Markets move from a

low point, where price has been closing near to the lows, to a high point,
where prices close at or near the daily high.
3. Typical cyclical studies fail, in my opinion, as they measure TIME, not

PRICE. In this business, we get paid in dollars, not time. Thus,
successful trading needs magnitude. All too often a cycle will come in,
at the expected time, but price only stabilizes, never rallying enough to
present a decent profit.
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IV PREDICTING THE FUTURE — There are as many ways of
predicting the future as there are traders. Here are the
techniques I use:
A. PATTERNS IN THE FOREST —As Julie Andrews would say, these

are a few of my favorite things.
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SHORT SELLING SECRETS OF THE S&P 500
There are numerous price patterns that act as catapults to short-term up and
down moves in the stock market. These can be traded best, in my opinion, in the
S&P 500. I'd like to now explain some of these patterns to you.
Perhaps the most important thing I can tell you about shorting the S&P 500 is
that there is a very strong bias for this market to decline on Thursday and
Friday, leading into a short-term low being made on Monday and/or Tuesday.
Most major S&P breaks start on a Thursday, build up a real head of steam on
Friday, and complete the crash on Monday. Thus, the aggressive short seller
should pay close attention to this end-of-the-week selling opportunity.
Accordingly, I have developed a handful of useful trading systems based on this

strong tendency.
PATTERN #1 -This pattern combines a very weak market with our day-of--the-
week pattern. The requirement is that on Thursday the S&P market closes lower
than the previous day's low and that the range for Thursday is greater than the
range for the previous day. If so, we then await the next day's opening. Should
that open be greater than the previous close, we will sell at the previous low, on
a stop. 78% of 50 trades made X41.450 with a hefty $819 per trade average
profit.
SEP INDEX ROLL - All trades
Test # 4 of 5 Space bar to toggle display
Total net profit $ 841,450.00
Gross profit $ 866,975.00 Gross loss $-25,525.00
Total N of trades 30 Percent profitable 76%

Number winning trades 39 Number losing trades 9
Largest winning trade $ 1 6, 9 7 5 . 0 0 Largest losing trade $-2,550.00

Largest losing trade $1 , 7 1 7 . 3 1 Average losing trade $-2,320.45
Ratio avg win/avg lose 0 .7 5 Avg trade (win & loss) $829.00
Max consecutive winners 3 Max consecutive losers 2

Avg N bars in winners 1 Avg # bars in losers 1
Max closed-out drawdown $- 6 , 8 5 0 . 0 0 Max intra-day drawdown $8 , 9 7 5 . 0 0

profit factor 2. 62 Max # of contracts held 1
Ac co un t s i z e r e qu ir e d $11,975.00 Return on account 346%
System tested using Omega System Writer
PATTERN #2 - Outside days (those with a higher high and lower low than the
previous day) do not take place often. But we should be on the alert, as they set
up powerful sell signals.
Given that today is an outside day with an up close, sell tomorrow at the price
of today's low. This made $13,625 from 25 trades. This short sell works well on
every day except Tuesday.
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Total net profit $13,625.00
Gross profit $28,925.00 Gross loss $-15,300.00

Largest winning trade $8,825.00 Largest losing trade $-2,550.00

Largest losing trade $1,522.37 Average losing trade $-2,550.00

Max closed-out drawdown $-2,550.00 Max intra-day drawdown $2 , 5 5 0 . 0 0

Ac co u nt s i z e r e qu ir e d $5,550.00 Return on account 245%
System tested using Omega System Writer*-
PATTERN #3 - How about this: a pattern with a 90% success rate! On a Thursday or Friday,
we will sell at the previous day's low, if we have what I call a False Out pat-tern. (Other
people call this a "key reversal day.") At times a market will in fact reverse on one of these
days; if not, though, look out!
Fake Out requires a day with a lower high and low than the previous day, BUT, with a close
greater than the previous close. Also, the day prior to the Fake Out day must have a lower
high, lower low and lower close than the day prior to it.
If the Fake Out day occurs on a Wednesday or Thursday, we will sell the following day at the
low of the Fake Out day. There have been 21 trades netting $14,025, with an average profit
per trade of $667.



Max closed-out drawdown $-2,550.00 Max intra-day drawdown $-4,575.00

profit factor 3 .7 4 Max # of contracts held 1
Ac co un t si ze r eq u i re d $7,575.00 Return on account 185%
System tested using Omega System Writer-
PATTERN #4 - This formation has had many occurrences over the past 14 years. All we
require is for a Thursay close to be lower than Wednesday's close. Then, on Friday, we will
sell at Friday's opening, minus 30% of Thursday's range. You can see that of 160 trades,
81% were winners, and it made $47,550.
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Largest losing trade $907.12 Average losing trade $-2,345.83
Ratio avg win/avg lose 0. 47 Avg trade (win & loss) $297.19

Max closed-out drawdown $0.00 Max intra-day drawdown $-5,450.00

A cc o u nt s i z e r e qu i re d $8,450.00 Return on account 562%
System tested using Omega System Writer —
PATTERN #5 - If the close on Thursday is greater than Wednesday's high, an over-bought

condition exists. I will sell the S&P on Friday at its open, minus 20% of Thursday's
range. This trade has been selected 110 times. .. 82% were winners, with a nice $490
average trade profit.
Total net profit $53.975.00




A cc o u nt s i z e r e qu ir e d $5,575.00 Return on account 960%
System tested using Omega System Writer—
PATTERN #6 - This pattern allows us to sell on Monday or Tuesday, if the previous day
closed at a price less than the opening of that same day. Yet the close for that day must be
greater than the previous day's close. Given this unique pattern, we will sell at the low of
this up-close day (that closes above the previous close) on the next day. The $12,500 of
profits on 19 trades produces a large average profit per trade of $657.





System tested using Omega System Writer—
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PATTERN #7 - Here is a nifty little pattern. All it requires is a Wednesday with a lower
low than both previous trading sessions, and the low of the day prior to Wednesday be
higher than the low of the day before that. With this condition we will sell, on Thursday, at
Wednesday's low. $32,425 of profits with 76% accuracy is attractive, as is the $853
average profit per trade.
Total net profit $32.425.00

Largest winning trade $6.625.00 Largest losing trade $-2,550.00

Largest losing trade $-2.550.00 Average losing trade $-2,550.00

Max closed-out drawdown $-3.675.00 Max intra-day drawdown $-4,675.00

A cc o u nt s i z e r e qu ir e d $ 7, 67 5. 00 Return on account 422%
System tested using Omega System Writer,
PATTERN #8 - This pattern is similar to the one above. We require that Thursday's low be
less than Wednesday's low, and Wednesday's low greater than the low the day before that.
As above, Thursday's low must also be lower than the low two days ago. This pattern
venerated 39 trades: 31 turned out winners, with $16,225 of profits.




Max closed-out drawdown $0. 0 0 Max intra-day drawdown $-,400.00

System tested using Omega System Writer,

PATTERN #9 (ALONG WITH 10) - These are also patterns with similar elements. If
Wednesday's close is less than the low seen on Tuesday, sell on Thursday at the opening
minus 40% of the previous day's range. This one generated 136 trades, with 109 (80%)
winners. For a system that trades frequently, the average profit of $361 is substantial.
97



Max closed-out drawdown $-4,875. 0 0 Max intra-day drawdown $-6,375.00

profit factor 1 .7 2 Max # of contracts held 1
PATTERN #10 - is the same trade formation as #9, but it must occur on Thursday. And
we'll be selling on Friday at 80% of the previous day's range subtracted from the opening.
Note how the average profit here jumps up to $748, displaying the Friday effect I have
already mentioned.



Max closed-out drawdown $- 2, 5 50 . 0 0 Max intra-day drawdown $-,400.00

A cc o u nt s i z e r e qu i re d $ 5, 55 0. 00 Return on account 1,0533%
PATTERN #11 -We'll finish with one of my favorites. It requires that today's low in the
S&P be at least 15 points (that's 3 ticks) greater than the previous high. This is an
indication of a blow-off gap and lower prices. The sell signal comes the day following the
gap day, if and only if, prices decline 45% of the range of the blow-off day from the next
day's opening. The 90% accuracy is a dream come true for short sellers.
Test # 4 of 5 Space bar to toggle
display



Max closed-out drawdown $-2,575. 0 0 Max intra-day drawdown $-2,575.00

profit factor 5.28 Max # of contracts held 1
98
BUYING IN A BEAR MARKET
Imagine ... being bearish, and buying long! Can it be done? You bet. In fact, some of the best short-term rallies
come in Bear markets--when the Bears all cover short. and the Bulls hop aboard. These are very explosive
rallies; they just don't last very long. And the reverse is equally true in a Bull market: sharp one or two day
declines can generate almost obscenely easy profits.
The only problem is in identifying when they are present.
There are several stock market patterns that tip the hand to these rallies. The first is an outside day that closes
lower than the previous close. You can use such a formation to buy individual stocks or, better yet, the S&P
500. I ' m showing here the track record of buying the S&P 500 at 20% of the range of the outside day added to
the next day's opening. These days, obviously, set up excellent rallies.





System tested using Omega System Writer TM
Another highly reliable pattern of a short-term rally is when the opening price of the S&P on a Monday or a
Tuesday is lower than the previous day's low. If so, and if price should rally back up to that low of the day
before, buy. The results here are about as good as it gets in this business of speculation.




99
Finally, if the close (on any day except Thursday) is lower than the previous low, and the close of thai day is
also lower than the low of the day before that. then buy the next day at the price of die low 2 days prior. The
illustration below should clarify the pattern, and the results speak for themselves.





OPTION EXPIRATION also present us with an excellent buy point, even in a Bear market. The trade is a
leisurely one to follow: buy long the S&P 500 on the close of the Friday of the week prior to the option
expiration, and exit on the first profitable opening. Use a $2,750 stop. The results, shown here, are truly
unbelievable.


Number winning trades 12 4 Number losing trades 17



100
MONTHLY INFLUENCES--The first and last Monday of every month is also a time to expect strong, Bullish
influences due to Funds dressing their portfolios. All you need to do is add 10% of the previous Friday's range to
Monday's opening, and buy at that level.



Ratio avg win/avg lose 0.44 Avg trade (win & loss) $573.71


Account size required $9,175.00 Return on account 1,331%
System tested using Omega System Writer T.
101
PATTERNS TO PROFITS
Since stocks and commodities first started trading several hundred years ago, traders
and investors have scanned their charts to see if there are some types of patterns that
predict future price action in the marketplace.
If you are fortunate enough to find some of the old, old stock and commodity market
books, you'll see that most of the early research was devoted almost exclusively to
patterns.
Yesteryears' masters were looking for broad general patterns, such as double tops,
double bottoms, and head and shoulders, as well as the more sophisticated patterns,
such as flags and pennants.
With the advent of the computer, we are able to test these patterns to see if they are
successful or not.
Before you're through reading this chapter, you will have more knowledge about price
patterns than all but a handful of professional traders.
I say that because the data in this chapter is revolutionary. It is going to shatter some
old traditions about what were supposed to be profitable patterns and will also reveal to
you new patterns that are in fact profitable.
Market folklore over the years has been that there are four or five basic patterns that
are extremely reliable for trading. I'll be looking at the first one of these patterns ... a
key reversal day ... and showing you that it is not nearly as significant a pattern as
authors, advisors and brokers would have you believe.
The importance of these price patterns is that you do not get sucked into believing
that your position is going to do something the following day because one of these
patterns occurs. I f a pattern discussed in this chapter occurs, you can then refer to this
chapter to see the probability of the market moving in your favor over the next few
sessions. You will know, with hard cold statistics, what to expect, as opposed to what
the folklore of market wisdom says will happen.
Many trading systems have been sold based on price patterns. You'll see that these
patterns, for the most part, are not nearly as efficient as sellers of the system would
lead you to believe. Additionally, if you happen to be purchasing a system in the
future, you'll be able to look at these price patterns to see if in fact the author of the
system is feeding you good material or not.
I suppose that of all the chapters in the book, this one will have the most use for
traders. You will be able to look at your position at the end of each day's close and then
refer to this chapter as more or less a bibliography of price patterns, to see what your
102
expectations should be for tomorrow. I have codified the most significant market pat-
terns, as well as broken down patterns that will occur in every single market every
day. Regardless of what any market does at any time, you will be able to turn to this
chapter and say, "Aha. Yes, there is a high probability of tomorrow closing up," or
"There is a low probability of tomorrow closing up." The answers to many of your
questions will be in this chapter.
First, let's talk about exactly what a price pattern is. My definition of a price pattern is
going to be specific and absolute. In the past, many people have talked in general terms
about price patterns. The terms are so general that they can justify whatever position
they're looking for, because their definition is so loose. They can fit their definition to
market conditions that support their thesis. The definitions of the pat-tern are so loose
that they can also find a way to alibi a bad projection, saying it didn't exactly fit all of the
rules.
For our purposes here, we'll be looking at the relationships between opens, highs,
lows, and closes, as well as relationships between one day and the next day in terms of
highs, lows and closes. This is all defined, modified and tested by the hard reality of our
computers.
A REVERSAL ON THE KEY REVERSAL
The first price pattern I want to talk to you about is one that is simply a legend in its
own time. It involves a price reversal day. We'll use the definition that traders have
used for the last 50 or 60 years. We will call a reversal day any day whose low was
lower than the previous day, but whose close is higher than the previous day's close.
This indicates a reversal, since the market went down to new lows for the day, then
came back, with buying pressure, closing higher than yesterday's close. This is a
simple key reversal. Depending on which trader you talk with, this is either a phe-
nomenally good, or an astoundingly good buy point.
The records indicate otherwise.
The following table shows the performance of these key reversal days in Standard and
Poor's, Kansas City Value Line, Silver, Treasury Bonds, Pork Bellies, Beans and the
Swiss Franc. The study covers 5 years in the nearby month ; from 1982 through 1986.
The only exceptions are the Stock Indexes, which started trading in 1982, and Silver,
where we used 1981 as a start point because 1980 was such an extraordinary year.
As you read down the column you will see the percentage of times that prices are
higher X number of days after the occurrence of the reversal.
To make certain that we weren't getting just any day for the first set of data here, we
made certain that the low of the key reversal day was the lowest low of the last eight
103
market sessions. This tells us the market was in fact oversold. Thus we should have an
expectation of a rally.
The numbers are most impressive for the Standard and Poor's. Notice that one day
after the occurrence of the reversal, we closed higher the next day 63.01%n of the time.
64.62% of the time we were higher two days later and five days later we were higher
52.31% of the time. I f we go all the way out to 15 days after the occurrence of the key
reversal in the Standard and Poor's, we close higher 70.70% of the time! It looks like
we've got something here ... this looks interesting. Let's turn our attention to the Value
Line and look out 15 days later as well. Bingo, again we've got a good number, 62.50%
of the time we were higher 15 days later.
It looks like we may have a trading strategy here. Wait for a key reversal, buy, then sell
15 days later, because we know that over 60% of the time prices will be higher 15 days
later. This suggests to us that perhaps there is something of value to the key reversal
as a buy signal.
Unfortunately, it's not quite that easy. I f you turn your attention to Silver next you'll
see that 15 days later we were higher only 47% of the time. I f you take a look at
Treasury Bonds, we were higher 65.1% of the time, higher 53% of the time in Pork
Bellies, higher only 44% of the time in Soybeans and higher only 46% of the time in the
Swiss Franc.
We've clearly demonstrated, using five years of data for each market, that this pattern
seems to be only significant to the Standard and Poor 's and Value Line ... two markets
that were in a strong bull uptrend during the time of this study.
104
Buying a Key Reversal bottom where the key reversal day is the
lowest low of the last 8 days.
S&P VAL BNDS SLVR S BNS P BEL S FRANC

1. 63.08 41.54 40..18 43.75 46.27 47.89 33.33
2. 64.62 53.85 50.00 52.08 46.27 55.71 35.56
3. 60.00 47.69 53.a5 58.33 53.73 54.29 46.67
4. 61.54 55.38 65.39 62.50 55.22 58.57 40.00
5. 52.31 50.77 65.38 45.83 46.27 57.14 35.56
6. 55.38 53.85 67.31 50.00 40.30 52.86 40.00
7. 50.77 50.77 65.3B 52.08 44.78 52.86 40.00
8. 61.54 53.85 65.38 52.08 43.28 50.00 37.7B
9. 60.00 53.85 65.38 47.92 38.81 50.00 42.22
10. 58.46 52.31 63.46 52.08 36.36 51.43 46.67
11. 58.46 50.77 65.38 54.17 31.82 50.72 44.44
12. 60.00 56.25 61.54 47.92 31.82 47.8o? 51.11
13. 66.15 59.58 65.38 45.85 32.31 46.38 42.22
14. 67.69 59.38 67.31 45.85 36.92 47.83 44.44
15. 70.77 62.50 65.38 47.92 27.69 44.93 46.67
16. 63.08 57.81 69.23 50.00 27.69 46.38 42.22
17. 61.54 59.38 63.46 45.8= 24.62 43.48 43.18
18. 63.08 59.3e 65.39 47.92 29.23 42.03 38.64
19. 61.54 59.3B 63.46 50. 00 26.15 44.12 39.64
20. 60.00 57.81 67.31 45. 83 32.31 47.06 34.09
21. 63.08 57.81 63.46 43.75 33.B5 50.00 34.09
105
This flat out simply doesn't work in trading other markets, particularly the currencies.
The next time a broker or advisor tells you that you must get in a market because
there's been a key reversal, as we have defined it so far, rest assured he does not know
what he's talking about and you can prove it to him with these tables. We have done the
painstaking research to see if this pattern is indicative of future market action or not. It
simply isn't. Notice, not only is it not effective 15 days out, it doesn't seem to be effective
even one day out! The Value Line, one day after the pattern, closed higher only 41%0 of
the time, Silver 43% of the time, Bonds 4 0 % n of the time, Bellies 4 7 % of the time, Beans 4 8 %
of the time and the Swiss Franc only 33% of the time.
It appears that any time we have a reversal we have a high probability that the following
day will close down, not up! Notice that not only did we use a simple market pattern
here, but we also went to the trouble of making certain the market was over-sold ... it
had made an eight day low ... on this basis alone we have high odds that the market
should rally, simply because prices have been depressed.
The lesson we learn is that if we do have depressed prices and a key reversal day occurs,
as presented here, there's absolutely no indication to believe, with exception of Standard
and Poor's and Value Line, that you will be seeing higher prices in the next 15 days. In
short, this basic pattern is not profitable for traders.
In my way of thinking, to show that a pattern has statistical validity it must be as

effective trading Silver as it is trading Soybeans, as effective trading Gold as it is trading
Garbanzo Beans. The fact this simple reversal pattern appears to work in the Standard
and Poor's and Value Line could be rationalized away because these are, after all, the
biggest of the public markets and are representative of stock market averages. Someone
could tell you that and there is some credibility to it.
However, I am inclined to think that if a pattern is not effective in all markets, the fact it
is effective in one market is indicative of random behavior. Accordingly, in my personal
trading, the only patterns I am interested in taking action on are patterns that generally
have the same forecasting significance in all markets. Then I know I am dealing with
something that is of merit, something that deals with the heart of the problem of
forecasting.
I am also presenting you with what happens when this pattern occurs following a four
day low. You can look at the reverse for a sell, using a higher high and lower close
following a day with any close.
Technicians have made wild claims about how this "tops" markets. Does it work? No, not
with any consistency.
106
Buying a Key Reversal bottom where the key reversal day is the lowest
low of the last 4 days.
S&P VAL BNDS SLUR S DNS P BEL S FRANC

1. 58.59 45.92 43.48 43.24 43.00 50.00 37.70
2. 58.59 51.02 50.00 48.65 41.00 57.14 37.70
3. 55.56 48:98 52.17 50.00 48.00 51.43 47.54
4. 55.56 54.08 61.96 54.05 51.00 53.55 44.26
5. 48.48 52.04 61.96 44.59 45.00 54.29 44.26
6. 57.54 50.06 64.87 45.95 41.00 51. 4 45.90
7. 49.49 51.02 64.13 48.65 45.00 49.52 47.54
8. 55.56 55.06 63.04 45.95 40.00 44.76 47.54
9. 58.59 54.08 65.22 41.89 38.00 47.62 50.82
10. 56.57 54.08 65.22 43.24 93.33 49.52 54.10
11. 56.57 56.12 64.11 44.59 51.91 49.04 52.46
12. 55.56 57.73 61.96 43.24 33.53 46.15 55.74
13. 60.61 58.76 62.64 39.19 92.65 47.12 49.18
14. 62.65 56.70 62.64 41.89 34.69 48.00 50.82
15. 64.65 59.79 67.03 44.59 29.59 47.12 47.54
16. 59.60 56.70 67.03 47.30 29.90 49.04 45.90
17. 59.60 58.76 67.78 43.24 29.90 47.12 46.67
18. 60.61 58.76 66.67 45.21 31. 96 45.19 43.33
19. 60.61 58.76 64.44 47.95 28.87 46.60 46.67
20. 57.58 57.73 66.67 46.58 51.96 50.49 40.00
21. 61.62 57.72 62.22 45.21 32.99 53.40 76.67
107
Buying a Key Reversal bottom where the key reversal day is t h e

1. 62.50 39.02 36.67 35.71 45.45 51.92 30.30
2. 64.58 46.34 43.33 50.00 45.45 60.78 33.33
3. 60.42 43.90 46.67 64.29 52.73 54.90 39.39
4. 62.50 48.78 50.00 60.71 56.36 58.82 36.36
5. 52.08 43.90 53.33 46.43 45.45 56.86 27.27
6. 54.17 51.22 63.33 42,86 41.62 58.82 36.36
7. 50.00 41.46 63.33 46.43 47.27 54.90 36.36
8. 60.42 48.78 63.33 46.43 43.64 49.02 33.33
9. 60.42 51.22 63.33 42.86 41.82 49.02 39.39
10. 58.33 48.78 56.67 50.00 38.89 54.90 42.42
11. 56.25 43.90 56.67 50.00 37.04 54.00 42.42
12. 60.42 48.78 53.33 42.86 38.89 52.00 45.45
13. 66.67 51.22 60.00 39.29 35.85 50.00 30.30
14. 70.83 53.66 60.00 39.29 41.51 48.00 33.33
15. 75.00 53.66 60.00 39.29 30.19 44.00 36.36
16. 70.83 53.66 66.67 42.86 30.19 48.00 33.33
17. 64.58 56.10 60.00 42.86 30.19 44.00 3:1.3
18. 68.75 56.10 63.33 42.86 35.85 42.00 33.33
19. 66.67 56.10 60.00 50.00 32.08 44.00 30.30
20. 64.58 53.66 66.67 46.43 35.85 46.00 27.27
21. 68.75 53.66 60.00 42.86 37.74 50.00 30.30
108
Buying a Key Reversal bottom where the key reversal day is t h e
1. 35.23 43.18 42.11 29.73 51.79 55.84 46.67
2. 51.14 39.77 44.74 43.24 53.57 54.55 50.00
3. 44.32 36.36 47.37 54.05 55.36 55.84 50.00
4. 42.05 37.50 48.68 54.05 56.36 55.84 50.00
5. 42.05 37.50 47.37 54.05 56.36 55.84 50.00
6. 44.32 44.32 44.74 56.76 54.55 58.44 53.33
7. 37.50 42.05 46. 05 51,35 54.55 51.95 56.67
8. 37.50 39.77 43.42 51,35 50. 91 51.95 53.33
9. 34.09 37.50 43.42 51.35 48.65 57.14 46.67
10. 31.82 42.05 43.42 48.65 58.18 53.25 46.67
11. 36.36 42.05 40.79 51.35 56.36 51.95 43.33
12. 36.36 42.05 44.74 54.05 56.36 50.65 43.33
13. 36.36 38.64 39.47 59.46 50.91 55.84 46.67
14. 29.55 36.36 39.47 64.86 65.45 58.44 50.00
15. 35.63 38.64 40.79 64.86 56.36 55.84 46.67
16. 36.78 36.36 39.47 64.86 56.36 55.84 46.67
17. 34.48 34.09 38.16 62.16 61.82 53.25 43.33
18. 33.33 37.50 38.16 75.68 60.00 51.95 46.67
19. 35.63 37.50 38.16 72.97 58.18 55.84 40.00
20. 36.78 41.38 34.21 70.27 58.18 55.84 36.67
21. 35.63 40.23 38.16 70.27 67.27 53.25 33.33
109
Selling a Key Reversal top where the key reversal day is the
highest high of the last 4 days.

1 35.48 43.55 44.34 36.49 49.48 53.64 46.00
2 50.81 42.74 40.57 48.65 45.36 51.82 50.00
3 45.16 43.55 43.40 63.51 49.48 54.55 52.00
4 43.55 45.16 46.23 60.81 59.38 53.64 48.00
5 45.16 41.94 45.28 58.11 57.29 59.09 48.00
6 44.35 45.16 44.34 56.76 54.17 55.45 52.00
7 37.10 41.13 45.28 56.76 57.29 51.82 50.00
8 40.32 41.94 43.40 62.16 53.13 52.73 48.00
9 36.29 39.52 41.51 55.41 56.25 54.55 44.00
10 34.68 41.94 41.51 58.11 55.21 51.82 46.00
11 39.52 41.94 39.62 52.70 57.29 50.91 46.00
12 36.29 41.94 42.45 52.70 56.25 50.91 44.00
17 35.48 39.52 39.62 56.76 52.08 53.64 48.00
14 32.26 39.52 42.45 60.81 60.42 52.73 48.00
15 37.40 39.52 43.40 59.46 57.29 56.36 46.00
16 38.21 37.10 41.51 62.16 56.25 53.64 48.00
17 35.77 35.48 38.68 59.46 60.42 52.29 48.00
18 34.15 33.87 40.57 67.57 58.33 50.46 52.00
19 34.96 38.71 39.62 63.51 58.33 53.21 48.00
20 37.40 40.65 37.74 62.16 60.42 53.21 42.00
21 35.77 39.84 38.68 60.81 63.54 50.46 40.00
110

1. 32.81 47.06 35.19 34.62 48.72 53.06 42.86
2. 51.56 42.65 46.30 46.15 48.72 51.02 52.38
3. 42.19 36.76 48.15 61.54 46.15 53.06 47.62
4. 39.06 39.71 50.00 57.69 53.85 59.18 57.14
5. 40.63 38.24 46.30 57.69 53.38 59.18 61.90
6. 45.31 47.06 46.30 65.38 46.15 59.18 48.98
7. 39.06 42.65 48.15 53.85 46.15 49.98 66.67
8. 37.50 38.24 46.30 53.85 46.48 53.06 57.14
9. 34.38 36.76 46.30 53.85 56.41 55.10 47.62
10. 31.25 42.65 46.30 50.00 53.85 51.02 47.62
11. 32.81 39.71 40.74 53.85 48.72 48,98 42.86
12. 31.25 39.71 44.44 61.54 48.72 53.06 47.62
13. 32.81 36.76 42.59 69.23 66.67 53,06 52.38
14. 29.69 35.29 42.59 73 08 64.10 59.18 47.62
15. 36.51 39.71 42.59 73 08 73.08 55.10 47.62
16. 36.51 38.24 40.74 73.08 56.61 53.06 42.86
17. 34.92 35.29 42.59 65.38 66.67 53.06 42.86
18. 28 57 36.76 42.59 80.77 64.10 55.10 47.62
19. 31.75 39.71 44,44 76.92 58.97 55.10 38.10
20. 33.33 41.79 38.89 73.08 61.54 53,06 33.33
21. 33.33 38.81 44.44 73.08 69.23 53.06 28.57
111

1 35.48 43.55 44.34 36.49 49.48 53.64 46.00
2 50.81 42.74 40.57 48.65 45.36 51.82 50.00
3 45.16 43.55 43.40 63.51 49.48 54.55 52.00
4 43.55 45.16 46.23 60.81 59.38 53.64 48.00
5 45.16 41.94 45.28 58.11 57.29 59.09 48.00
6 44.35 45.16 44.34 56.76 54.17 55.45 52.00
7 37.10 41.13 45.28 56.76 57.29 51.82 50.00
8 40.32 41.94 43.40 62.16 53.13 52.73 48.00
9 36.29 39.52 41.51 55.41 56.25 54.55 44.00
10 34.68 41.94 41.51 58.11 55.21 51.82 46.00
11 39.52 41.94 39.62 52.70 57.29 50.91 46.00
12 36.29 41.94 42.45 52.70 56.25 50.91 44.00
17, 35.48 39.52 39.62 56.76 52.08 53.64 48.00
14 32.26 39.52 42.45 60.81 60.42 52.73 48.00
15 37.40 39.52 43.40 59.46 57.29 56.36 46.00
16 38.21 37.10 41.51 62.16 56.25 53.64 48.00
17 35.77 35.48 38.68 59.46 60.42 52.29 48.00
18 34.15 33.87 40.57 67.57 58.33 50.46 52.00
19 34.96 38.71 39.62 63.51 58.33 53.21 48.00
20 37.40 40.65 37.74 62.16 60.42 53.21 42.00
21 35.77 39.84 38.68 60.81 63.54 50.46 40.00
112
AN INSIDE LOOK AT OUTSIDE DAYS
For a long time chartists have talked about outside days as having a significant fore-
casting value. An outside day is a day whose high is greater than yesterday's high and
whose low is below yesterday's low, hence the worst "outside," as the day's activity was
outside of the previous day's high and outside of the previous day's low.
There are a wide variety of ways of looking at these unusual days.
Our first attempt is to simply look at an outside day with an up-close and see what
prices did following the occurrence of that pattern. Second, we look at an outside day
with a down-close to see if there was any special significance to that pattern.
The tables are shown here so you can see for yourself, but let me quickly state that an
outside day with an up-close does not seem to have any reliability in forecasting that
prices will go higher, which is the usual prediction of chartists.
PERCENTAGE OF TIME GAP FROM LAST NIGHT'S CLOSE

TO THIS MORNING'S OPEN IS FILLED
Value Line 79.98%

Standard & Poor's 78.31%
Pork Bellies 67.39%
Soybeans 65.95%
Treasury Bonds 61.71%
Silver 60.78
Swiss Franc 52.17%
Total for All 7

Commodities Studied 66.55%
113
P e r ce n tag e of time you close u p X d ay s af t e r a n o u t si d e d a y w h e re t he
o u t si d e d ay closes up.
S&P VAL BNDS SLVR S B NS P B EL S F RA N C

1 4 5.00 39.34 48.39 3 0 . 16 4 3 . 33 5 1 . 29 4 0 . 82
2 46.67 40.98 54.84 4 1 . 27 3 8 . 33 4 8 . 05 4 4 . 90
3 50.00 50.82 53.23 3 6 . 51 4 6 . 67 4 4 . 16 4 6 . 94
4 50.00 50.82 61.29 4 4 . 44 4 5 . 00 4 6 . 75 5 5 . 10
5 43.33 47.54 61.29 4 7 . 62 4 0 . 00 5 3 . 25 4 6 . 94
6 45.00 49.18 61.29 4 2 . 86 3 8 . 33 5 0 . 65 4 6 . 94
7 46.67 49.18 70.97 4 3 . 55 4 1 . 67 4 8 . 05 4 4 . 90
8 57.63 52.46 70.97 4 5 . 16 4 8 . 33 4 5 . 45 5 1 . 02
9 54.24 49.18 70.97 3 8 . 71 4 3 . 33 4 5 . 45 4 8 . 98
10 52.54 52.46 66.13 3 5 . 48 4 1 . 67 4 6 . 75 4 8 . 98
11 52.54 54.10 64.52 3 3 . 87 4 0 . 00 4 5 . 45 4 6 . 94
12 53.45 50.82 62.90 3 7 . 10 3 8 . 33 4 1 . 56 4 8 . 98
13 51.72 52.46 61.29 3 2 . 26 4 0 . 00 4 8 . 05 4 2 . 86
14 56.90 49.18 56.45 3 0 . 65 4 6 . 67 5 0 . 65 4 4 . 90
15 48.28 47.54 63.93 3 3 . 87 4 1 . 67 5 3 . 25 4 2 . 86
16 48.28 42.62 60.66 4 0 . 32 4 0 . 00 5 3 . 25 4 2 . 86
17 48.28 52.46 59.02 3 3 . 87 3 8 . 33 5 0 . 65 4 6 . 94
18 51.72 54.10 62.30 2 9 . 03 4 1 . 67 5 0 . 65 4 4 . 90
19 53.45 50.82 65.00 3 7 . 10 4 3 . 33 4 9 . 35 4 2 . 86
20 53.45 47.54 65.00 3 8 . 71 4 1 . 67 4 9 . 35 4 6 . 94
21 51.72 47. 54 61.67 3 3 . 87 3 6 . 67 4 9 . 35 4 8 . 98
114
P e r c e n t a g e o f t i m e y o u close d o w n X days after an outside day where
the outside day closes up.

1. 55.00 60.66 51.61 69.84 56.67 48.72 59.18
2. 53.33 59.02 45.16 58.73 61.67 51.95 55.10
3. 50.00 49.10 46.77 63.49 53.33 55.84 53.06
4. 50.00 49.18 36.71 55.56 55.00 53.25 44.90
5. 56.67 52.46 38.71 52.38 60.00 46.75 53.06
6. 55.00 50.e2 38.71 57.14 61.67 49.35 53.06
7. 53.31 50.82 29.03 56.45 58.33 51.95 55.10
8. 42.77 47.54 29.03 54.84 51.67 54.55 48.98
9. 45.76 50.82 29.03 61.29 56.67 54.55 51.02
10. 47.46 47.54 23.87 64.52 58.33 50.25 51.02
11. 47.46 45.90 35.48 66.13 60.00 54.55 53.06
12. 46.55 49.18 37.10 62.90 61.67 58.44 51.02
13. 48.28 47.54 38.71 67.74 60.00 51.95 57.14
14. 43.10 50.82 43.55 69.35 53.33 49.35 55.10
15. 51.72 52.46 36.07 66.13 58.33 46.75 57.14
16. 51.72 57.08 39.34 59.68 60.00 46.75 57.14
17. 51.72 47.54 40.98 66.13 61.67 49.35 53.06
18. 48.28 45.90 97.70 70.97 58.33 49.35 55.10
19. 46.55 49.18 35.00 62.90 56.67 50.65 57.14
20. 46.55 52.46 35.00 61.29 5B. 32 50.65 59.06
21. 48.28 52.46 38. TO 66.13 60,Z3 50.65 51.02
115
Percentage of time you close down X days after an outside day where
the outside day closes down.

39.39 56.58 44.44 39.34 56.25 46.58 40.00
54.55 53.95 36.51 50.82 36.51 46.58 48.57
46.97 44.74 47.62 52.46 50.00 50.00 48.57
50.00 47.37 47.62 55.74 53.13 54.17 51.43
51.52 55.26 44.44 54.10 50.00 61.11 40.00
48.48 51.32 36.51 50.82 48.44 61.11 45.71
45.45 48.68 46.03 50^82 53.13 58.33 37.14
46.97 44.74 44.56 54.10 51.56 55.56 37.14
53.03 47.37 44.44 54.10 57.81 61.11 34.29
46.97 52.6Z 46.03 55.74 60.94 55.56 37.14
50.00 53.95 38.10 54.10 56.25 51.39 42.86
50.00 51.32 42.86 55.74 54.69 51.39 42.86
51.52 51.12 39.68 55.74 57.81 50.00 48.57
45.45 40.68 42.86 54.10 60.94 54.17 45.71
45.45 50.00 42.86 57.38 59.38 58.33 48.57
46.97 48.68 38.10 57.38 60.94 56.94 51.43
43.94 50.00 36.51 54.10 60.94 53.52 54.29
48.48 49.33 36.51 57.38 65.63 56.34 48.57
42.42 48.00 36.51 49.18 60.94 59.15 48.57
45.45 49.33 41.27 54.10 64.06 53.52 48.57
42.42 52.00 36.51 54.10 60.94 52.11 45.71
116
Traditionally, chartists will also say that the reverse of this phenomena, an outside day
with a down close, should see prices going lower. Here the data is a little bit stronger,
but suggests prices don't go lower, they go higher!
As an example: in the Standard and Poor's 20 days later you are higher 54.5% of the
time, following the supposed sell information. In the Value Line you were higher 50.6%
of the time, Treasury Bonds higher 58.7% of the time, Silver higher only 45.9% of the
time, Beans higher 39.0% of the time, Bellies higher 42% of the time and the Swiss
Franc higher 54.2% of the time.
You can study the statistics yourself to see if you can find something that I haven't. It
looks like the occurrence of an outside day with a down-close may have a slight bullish
impression on the market over the next few trading sessions.
We took the study one step further and said, "Well, perhaps it is more significant if we
have an outside day with an up-close if prices have been coming down." This would
certainly indicate the market has reversed itself. The next set of tables, accordingly,
shows what happens when we have a 10 day low made, that is also the low of an
outside day, and that closes up for the day. Sorry to disappoint you, but if you look at
the figures, you will see that this is not exactly an overwhelming way of accumulating
capital! Far from it. The pattern does not seem to have any statistical reliability in
forecasting that prices will go higher the next 1 to 21 days following the occurrence.
The mirror image of this pattern would be an outside day with a down-close, with the
high of the outside day being the highest high of the last 10 days. This, you would
think would be very bearish. It isn't.
In the Standard and Poor's we were higher 47% of the time 20 days later, higher
almost 55% of the time 20 days later in the Value Line and on it goes, being bullish in
the Stock Indexes and not nearly as Bullish in the other commodities. It is interesting to
see the Swiss Franc rallying 71% of the time following this "perfect" bearish pat-tern.
It makes one wonder if chartists have been making their money trading the market, or
just selling their chart books.
AN OUTSIDE LOOK AT INSIDE DAYS
First, let's define what constitutes an inside day. An inside day is exactly the opposite of
an outside day. That is, today's high is less than yesterday's high and today's low is
greater than yesterday's low. Hence the terminology inside day, as all of today's price
range or trading activity took place inside of yesterday's range.
An inside day is usually thought to be an indication of congestion. A price could not

exceed the previous day on the upside nor could it break below the previous day's low on
the downside.
117
Chartists and authors have not paid very much attention to inside days over the years.
They have mac1P note of them, but this is the first time, to my knowledge, that anyone
has made a serious study of the impact of inside days.
And, wouldn't you just know it ... inside days are one of the most reliable forecasting
patterns to occur in the marketplace!
In all the literature of market trading, the only inside day technique I have seen
mentioned is one that suggests that if prices have been coming down, that is prices are
lower today than they were over the last several trading sessions, and you have an inside
day with a down-close, there is a high probability of a rally to come.
There does s0em to be some validity to this. The following chart shows what happens
when we have an inside day with a down-close while prices are lower than they were 10
days ago.
In the Standard and Poor's, 71% of the time you were higher the next day. This may not
even be as significant as the fact that 71% of the time you were higher 20 days after this
occurrence. In the Value Line, price is higher 50% of the time after the occurrence, and
in Treasury Bonds it's higher 75% of the time.
The pattern in Silver was not nearly as bullish, which surprised me because I had used
this trading technique in Silver with some success ... which just goes to show you!
In silver, only 36% of the time you were higher 20 days following the occurrence of the
pattern. Soybeans were higher 57% of the time, Bellies 50% of the time and the Swiss
Franc, where so far we have not found a pattern that forces prices higher, you were up
only 22% of the time.
For a moment, though, let's take a look at just the occurrence of an inside day. What
happens when we simply have an inside day with a down-close? Does that, on its own
merit, forecast any significant market activity? The results are on the next few pages.
What can you find'?
Then there's the other side of this coin. What happens if we have an inside day with an
up-close? Does this forecast positive action? It appears that it does to some extent. Study
the tables for yourself. I have gone to the computer to give you the results for almost all
possible configurations of inside days. While, quite frankly, much of the data suggests
random-gibberish-behavior, others are relationships that you can find and successfully
trade with.
What you need to focus on here is not that the patterns will always work for you, but that
patterns, like methods, systems and tools, will give you the much needed odds that lead
to successful speculation.
118
I have not exhausted all possible ways of looking at inside days with down-closes,
though I have looked at the majority of the relationships one can study. There are
others. As an example, what happens if prices are higher, or if prices are lower following
an inside day five days later. Does that mean that the down trend will continue? One
could also ask the question about an outside day following an inside day. Is this a
particularly bullish pattern? (It is.) As you can see, your opportunity for research here is
unlimited. If you have a computer, some data, and a desire to study the markets, here is
fertile ground for you to come up with your own great ideas.
119
Percentage of time you close down x days after an inside day where the inside day
closes down and the day prior to the inside day is a 10 day high.

1. 47.37 50.00 37.50 55.00 75.00 50.00 56.57
2. 52.b3 28.57 43.75 70.00 41.67 15.45 52.17
3. 63.16 35.71 71.25 55.00 41.67 40.91 47.83
4. 52.53 50.00 43.75 55.00 58.33 40.91 52.17
5. 57.89 50.00 37.50 55.00 41.67 54.55 47.83
6. 63.16 50.00 37.~0 55.00 23.00 50.00 60_87
7. 68.42 50.00 43.75 55.00 25.00 59.09 47.83
8. 57.89 57.14 43.75 60.00 25.00 63.64 52.17
9. 57.89 57.14 43.75 55.00 25.00 59.09 52.17
10. 57.89 50.00 43.75 60.00 41.67 68.18 60.87
11. 52.63 42.83 50.00 70.00 33.33 68.18 60.S7
12. 63.16 50.00 50.00 70.00 77.13 68.18 56.52
13. 57.89 50.00 37.50 75.0 0 30.77 59 09 52.17
14. 63.16 50.00 37 50 75.00 38.46 59.09 52.17
15. 63.16 57.14 37.50 75.00 38.46 63.64 52.17
16. 63.16 50.00 37.50 75 00 38.46. 59.09 56.52
17. 63.16 57.14 37.50 70.00 53.85 59.09 47.83
18. 63.13 57.14 31.25 65.00 61.54 54.55 47.83
19. 68,42 57.14 23.Y 3 75.00 59.23 59.09 43.48
20. 73.68 57.14 29.41 7o.00 69.23 50.00 47.83
21. 73.68 71.43 23.53. 60.00 69.23 45.45 43.48
120
Percentage of time you close down X days after an inside day where
the inside day closes down and the day prior to the inside day is a
10 day low.

1. 28.57 50.0025.0036.8442.86 100.00 44.44
2. 28.57 66.67 37.50 42.11 28.57 83.33 55.56
3. 42.86 75.00 12.50 47.37 42.86 50.00 44.44
4. 42.86 58.33 25.00 36.84 57.14 66.67 44.44
5. 42.86 66.67 25.00 47.37 71.43 66.67 55.56
6. 57.14 58.33 37.50 36.84 71.43 50.00 44.44
7. 42.86 66.67 37.50 47.37 71.43 50.00 55.56
8. 57.14 58.33 62.50 42.11 42.86 50.00 55.56
9. 42.86 50.00 62.50 47.37 57.14 50.00 55.56
10. 28.57 50.00 62.50 47.37 42.86 66.67 55.56
11. 28.57 58.33 62.50 52.63 42.86 66.67 55.56
12. 20.57 50.00 62.50 57.8q 62.50 66.67 55.56
13. 28.57 41.67 50.00 47.37 42.86 66.67 55.56
14. 28.57 41.67 50.00 42.11 42.86 66.67 66.67
15. 28.57 41.67 50.00 47.37 57.14 66.67 66.67
16. 28.57 41.67 37.50 57.89 42.86 66.67 77.78
17. 28.57 41.67 37.50 57.89 42.86 66.67 77.78
18. 28.57 41.67 37.50 57.89 42.86 83.33 77.78
19. 2R.57 41.67 37.50 57.89 42,86 66.67 77.78
20. 28.57 41.67 25.00 63.16 42.86 50.00 77.78
21. 28.57 41.67 12.50 63.16 71.43 50.00 77.78
121
the inside day closes up and the day prior to the inside day is a 10
day high.
S & P VAL BNDS SLVR S BNS P BEL S FRANC

1. 50.00 41.67 28.57 61.11 55.56 54.55 66.67
2. 16.67 33.33 42.86 66.67 55.56 54~55 44,44
3. 16.67 25.00 57.14 61.11 88.89 45.45 55.56
4. 25.00 16.67 64.29 61.11 77.78 36.36 44.44
5. 25.00 25.00 61.54 61.11 77.78 27.27 33.33
6. 33.33 25.00 46.15 50.00 55.56 45.45 13.33
7. 33.33 16.67 38.46 55.56 55.56 45.45 13.33
8. 58.33 25.00 23.08 38.89 55.56 45.45 44.44
9. 50.00 25.00 23,08 50.00 44.44 54.5b 55.56
10. 41.07 25.00 15.38 50.00 44.44 54.55 44.44
11. 50,00 25.00 15.38 38.89 44.44 54.55 33.33
12. 50.00 25.00 23.08 38.89 55.56 63.64 44,44
13. 33.33 25.00 23.08 55.56 66.67 58.33 55.56
14. 33.33 33.33 23.08 61.11 66.67 50.00 44.44
15. 25.00 2S.00 30.77 66.67 44.44 50.00 44.44
16. 25.00 08.33 23.08 72.22 66.67 58.33 33.33
17. 41.67 33.33 30.77 66.67 66.67 66.67 33.33
18. 4l.67 33.33 38.46 55.56 55.56 66.67 33.33
19. 50,00 50.00 38.46 50.00 66.67 58.33 33.33
20. 50.00 33.33 30.77 55.56 77.78 58.37 33.33
21. 50.00 41.67 23.08 38.89 66.67 66,67 33.33
122
Percentage of time you close down X days after an inside
day where the inside day closes up and the day prior to
the inside day is a 10 day low.
S&P VAL BNDS SLVR S DNS P BEL S FRANC
1. 41.18 55.56 61.54 64.52 45.45 65.22 57.14
2. 47.06 44.44 69.23 58.06 63.64 39.13 52.38
3. 47.06 44.44 76.92 61.29 54.55 56.52 57.14
4. 41.18 44.44 69.23 70.00 54.55 54.55 61.90
5. 17.65 33.33 61.54 63.33 54.55 63.64 57.14
6. 23.53 38.89 76.92 66.67 54.55 54.55 66.67
7. 23.53 33.33 69.23 53.33 36.36 54.55 71.43
8. 29.41 3B.89 76.92 58.62 63.64 54.55 71.43
9. 29.41 44.44 69.23 58.62 50.00 54.55 70.00
10. 35.29 33.33 64.29 58.62 50.00 54.55 60.00
11. 29.41 38.89 64.29 58.62 50.00 68.18 65.00
12. 35.29 33.33 42.86 65.52 50.00 73.91 65.00
13. 29.41 38.89 50.00 65.52 50.00 59,09 60.00
14. 29.41 44.44 57.14 62.07 50.00 59.09 65.00
15. 29.41 44.44 57.14 62.07 40.00 68.18 65.00
16. 35.29 50.00 50.00 62.07 30.00 68.18 65.00
17. 35.29 38.89 50.00 58.62 30,00 59.09 65.00
18. 29.41 39.89 42.86 62.07 20.00 54 55 70.00
19. 23.53 33.33 42.86 58.62 10.00 54.55 70.00
20. 23.53 27.78 35.71 58.62 20,00 54.55 75.00
21. 23.53 27.78 42.86 55.17 30.00 50.00 75.00
123
Percentage of time you close up X days after an inside day where the
inside day closes down and the day prior to the inside day is a 10
day high.
S&P VAL. BNDS SLVR S 8NS P BEL S FRANC

1. 52.63 50.00 62.50 45.00 25.00 50.00 43.48
2. 47.37 71.43 56.25 30.00 58.33 54.55 47.83
3. 36.84 64.29 68.75 45.00 58.33 59.09 52.17
4. 47.37 50.00 56.25 45.00 41.67 59.09 47.83
5. 42.11 50.00 62.50 45.00 58.33 45.45 52.17
6. 36.84 50.00 62.50 45.00 75.00 50.00 39.13
7. 31.58 50.00 56.25 45.00 75.00 40.91 52.17
8. 42.11 42.86 56.75 40 00 75 00 36.36 47 83
9. 42.11 42.86 56.25 45.00 75.00 40.91 47.83
10. 42.11 50.00 56.25 40.00 58.33 31.82 39.13
11. 47.37 57.14 50.00 30.00 66.67 31.82 39.13
12. 36.84 50.00 50.00 30.00 66.67 31.B2 43.48
13. 42.11 50.00 62.50 25.00 69,23 40.91 47.83
14. 36.84 50.00 62.50 25.00 61.54 40.91 47.83
15. 36.84 42.86 62.50 25.00 61.54 36.36 47.83
16. 36.R4 50."U 62.50 25.00 61.54 40.91 43.48
17. 36.84 42.86 62.50 30.00 46.15 40.91 52.17
18. 36.84 42.86 68.75 35.00 38.46 45.45 52.17
19. 31.58 42.86 76.47 25.00 30.77 40.91 56.52
20. 26.32 42.86 70.59 30.00 30.77 50.00 52.17
21. 26.32 28.57 76.47 40.00 30.77 54.55 56.52
124
inside day closes down and the day prior to the inside day is a 10
day low.
S&P VAL 8NDS SLVR S BNS P BEL S FRANC

1. 71.43 50.00 75.00 63.16 57.14 0.00 55.56
2. 71.47 33.33 62.50 57.89 71.43 16.67 44.44
3. 57.14 25.00 87.50 52.63 57.14 50.00 55.56
4. 57.14 41.67 75.00 63.16 42.86 33.33 55.56
5. 57.14 33.33 75.00 52.63 28.57 33.33 44.44
6. 42.86 41.67 62^50 63.16 28.57 50.00 55.56
7. 57.14 33.33 62^50 52.63 28.57 50.00 44-44
8. 42.B6 41.67 37^50 57.S9 57.14 50.00 44.44
9. 57.14 50.00 37.50 52.63 42.86 50.00 44.44
10. 71.43 50.00 37.50 52.63 57.14 33.33 44.44
11. 71.43 41.67 37.50 47.37 57.14 33.33 44.44
12. 71.43 50.00 37.50 42.11 37.50 33.33 44.44
13. 71.43 58.73 50.00 52.63 57.14 33.33 44.44
14. 71.43 58.33 50.00 57.89 57.14 33.33 33.37
15. 71.43 58.33 50.00 52.63 42.86 33.33 33.33
16. 71.43 58.33 62.50 42.1l 57.14 33.33 22.22
17. 71,43 5J.33 62.50 42.11 57.14 33.33 22.22
18. 71.43 58.33 62.50 42.11 57.14 16.67 22.22
19. 71.43 58.33 62.50 42'11 57.14 33.33 22.22
20. 71.43 58.33 75.00 36.84 57.l4 50.00 22.22
21. 71.41 58.33 87.50 36.84 28.57 50.00 22.22
125
inside day closes up and the day prior to the inside day is a 10
day high.
S&P VAL BNDS SLIP S BNS P BEL P FRANC

1. 50.00 58.33 71.43 38.89 44.44 45.45 33.33
2. 83.33 66.67 57.14 33.33 44.44 45.45 55.56
3. 83.33 75.00 42.86 38.89 11.11 54.55 44.44
4. 75.00 83.33 35.71 38.89 22.22 63.64 55.56
5. 75.00 75.00 38.46 38.89 22.22 72,73 66.67
6. 66.67 75.00 53.85 50.00 44.44 54.55 66.67
7. 66.67 83.33 61.54 44.44 44.44 54.55 66.67
8. 41.67 75.00 76.92 61.11 44.44 54.55 55.56
9. 50.00 75.00 76.92 50.00 55.56 45.45 44.44
10. 58.33 75.0084.62 50.00 55.56 45.45 55.56
11. 50.00 75.00 84.62 61.11 55.56 45.45 66.67
12. 50.03 75.00 76.92 61.11 44.44 36.36 55.56
13. 66.67 75.00 76.92 44.44 33^33 41.67 44.44
14. 66.67 66.67 76.92 38.89 33.33 50.00 55.56
15. 75.00 75.00 19'23 33.33 55'56 50.00 55.56
16. 75.00 91.67 76.92 27.78 33.33 41.67 66.67
17. 58.33 66.b7 69.23 33.33 33.33 33.33 66.67
18. 58.33 66.67 61.54 44.44 44.44 33.33 66.67
19. 50.00 50.00 61.54 50.00 33.33 41,67 66.67
20. 50.00 66.67 69.23 44.44 22.22 41.67 66.67
21. 50.00 58.33 76.72 61.11 33.33 33.33 66.67
126
Percentage of time you close up X days after an inside day where the inside day closes up and the day prior to the inside
day is a 10 day low.
S&P VAL BNDS SLVR S BNS P 8EL S FHANC
1. 58.82 44.44 38.46 35.48 54.55 34.78 42.86

2. 52.94 55.56 30.77 41.94 36.36 60.87 47.62
3. 52.94 55 56 23.08 38.71 45.45 43.48 42.86
4. 58.82 55.56 30.77 30.00 45.45 45.45 38.10
5. 82.35 55 56 38.46 36.67 45.45 36.36 42.86
6. 76.47 61.11 23.08 33.33 45.45 45.45 33.33
7. 76.47 66.67 30.77 46.67 63.64 45.45 28.57
8. 70.59 61.11 23.08 41.38 36.36 45.45 28.57
9. 70.59 55.56 30.77 41.38 50.00 45.45 30.00
10. 64.71 66.67 35.71 41.38 50.00 31.82 35.00
11. 70.59 61.11 50.00 34.48 50.00 40.91 40.00
12. 70.59 55.56 42.86 37.93 50.00 40.91 35.00
13. 64.71 50.00 50.00 37.93 70.00 31.82 35.00
14. 64.71 61.11 50.00 41.38 70.00 40.91 35 00
15. 70.59 55.56 42.S6 37.93 60.00 31.82 35.00
16. 70 5q 50.00 50.00 37.93 70.00 31.82 35 00
17. 64.71 61.11 50.00 41.38 70.00 40.91 30.00
18. 70.59 61.11 57.14 37.93 80.00 45.45 30.00
19. 76.47 66.67 57.14 41.38 90.00 45.45 25 00
20. 76.47 72.22 64.29 41.38 80.00 50.00 25.00
21. 76.47 72.22 57.14 44.83 70.00 50.00 25.00
127
the inside day closes up.
S&P VAL BNDS SLVR S DNS P BEL S FRANC

1. 46.43 52.46 46.30 62.11 55.32 56.45 56.45
2. 41.07 34.43 53.70 53.68 57.45 48.39 46.77
3. 42.86 44.26 61.11 52.63 70.21 54.84 51.61
4. 41.07 39.34 59.26 59.57 61.70 54,10 51.61
5. 30.36 32.79 56.60 52.13 63.83 57.38 43.55
6. 32.14 37.70 52.83 54.26 68.09 63.93 50.00
7. 33.93 36.07 50.94 51.06 59.57 65.57 53.23
8. 42.86 37.70 49.06 51.61 70.21 65,57 56.45
9. 35.71 39.34 49.06 56.99 63.04 63.93 57.38
10. 37.b0 37.70 46.15 58.06 63.04 63.93 54.10
11. 41.07 39.34 44 23 59.14 58.70 68.85 50.82
12. 46.43 37.70 38.46 58.06 56.52 68.85 54.10
13. 39.29 37.70 40.38 63.44 63.04 60.66 54.10
14. 41.07 42.62 40.38 61.29 60.87 52.46 55.00
15. 37.50 37.70 42.31 61.29 58.70 59.02 55.00
16. 39.29 40.98 38 46 61.29 56.52 62.30 53.33
17. 42.96 40.98 42.31 58.06 54.35 60.66 53.33
18. 39.29 42.62 42.31 54.84 52.17 59.02 55.00
19. 39.29 44.26 40.38 52.69 56.52 57.38 55.00
20. 37.50 37.70 38.46 53.76 60.87 57.38 61.67
2 1 . 39.29 39,34 36.54 47.31 60.87 55.74 60.00
128
inside day closes down.

1. 54.00 51.79 69.05 51.90 42.31 50.00 49.15
2. 48.00 50.00 57.14 50.63 48.08 50.00 50.85
3. 42.00 42.86 66.67 50.63 44.23 55.36 55.93
4. 48.00 48.21 59.52 48.10 42.31 50.00 52.54
5. 46.00 48.21 66.67 49.37 50.00 46.43 55.93
6. 38.00 55.36 59.52 49.37 48.08 51.79 52.54
7. 36.00 51.79 64.29 48.10 46.15 46.43 57.63
8. 44.0P 58.93 57.14 45.57 46.15 48.21 54.24
9. 44.00 57.14 52.38 45.57 46.15 44.64 54.24
10. 44.00 58.93 54.76 44.30 42.31 37.50 52.54
11. 48.00 57.14 50.00 36.71 46.15 37.50 50.85
12. 46.00 55.36 52.38 39.24 42.31 39.29 52.54
13. 48.00 56.36 5q.52 37.97 44.2Z 44.64 50.85
14. 46.00 54.55 59.52 39.24 44.23 42.86 50.85
15. 46.00 52.73 57.14 34.l8 42.31 42.86 50.85
16. 46.94 54.55 66.67 32.91 48.08 44.64 49.15
17. 48.9B 54.55 64.29 32.05 44.23 46.43 52.54
18. 51.02 56.36 61.90 34.62 40.30 48.21 5P.54
19. 46.94 58.18 69.05 32.05 38.46 44.64 54.24
20. 46.94 60.00 69.05 33.33 34.62 48.21 52.54
21. 46.94 56.30 71.43 41.03 30.77 50.00 35.93
129
Percentage of time you c l o s e up X days after an inside day where the
inside day closes up.
S&P VAL SLVR BNDS S 8NS P BEL S FRANC

1. 53.57 47.54 37.89 53.70 44.68 43.55 43.55
2. 58.93 65.57 46.32 46.30 42.55 51.61 53.23
3. 57.14 55.74 47.37 3S.89 29.79 45,16 48.39
4. 58.93 60.66 40.43 40.74 38.30 45.90 48.39
5. 69.64 67.21 47.87 43.40 36.17 42.62 56.45
6. 67.86 62.30 45.74 47.17 31.91 36,07 50.00
7. 66.07 63.93 48.94 49.06 40.43 34.43 46.77
8. 57.14 62.30 48.39 50.94 29.79 34.43 43.55
9. 64.29 60.66 43.01 50.94 36.96 36.07 42.62
10. 62.50 62.30 41.94 53.85 36'96 36.07 45.90
11. 58.93 60.66 40.86 55.11 41.30 31.15 49.18
12. 53.57 62.30 41.94 61.54 43.48 31.15 45.90
13. 60.71 62.30 36.56 59.62 36.96 39.34 45.90
14. 58.93 57.38 38.71 59.62 39.13 47.54 45.00
15. 62.50 62.30 38.71 57.69 41.30 40.98 45.00
16. 60.71 59.02 38.71 61.54 43.48 37.70 46.67
17. 57.14 59.02 41.94 57.69 45.65 39.34 46.67
18. 60.71 57.38 45.16 57.69 47.83 40.98 45.00
19. 60.71 55.74 47.31 59.62 43.48 42.62 45.00
20. 62.50 62.30 46.24 61.54 39.13 42.62 38.33
21. 60.71 60.66 52.69 63.46 39.13 44.26 40.00
130
Percentage of time you close d own X d a ys a f te r an i n s i d e d a y w h er e
t h e i n side day closes down.

1. 46.00 48.21 30.95 48.10 57.69 50.00 50.85
2. 52.00 50.00 42.86 49.37 51.92 50.00 49.15
3. 58.00 57.14 33,33 49.37 55.77 44.64 44.07
4. 52.00 51.79 40.48 51.90 57.69 50.00 47.46
5. 54.00 S1.79 33.33 50.63 50.00 53.57 44.07
6. 62.00 44.64 40.48 50.63 51.92 48.21 47.46
7. 64.00 48.21 35.71 51.90 53.85 53.57 42.37
8. 56.00 41.07 42.86 54.43 53.85 51.79 45.76
9. 56.00 42.86 47.62 54.43 53.95 55.36 45.76
10. 56.00 41.07 45.24 55.70 57.69 62.50 47.46
11. 52.00 42.86 50.00 63.29 53.85 62.50 49.15
12. 54.00 44.64 47.62 60.76 57.69 60.71 47.46
13. 52.00 43.64 40.48 62.03 55.77 55.36 49.15
14. 54.00 45.45 40.48 60.76 55.77 57.14 49.15
15. 54.00 47.27 42.86 65.82 57.69 57.14 49.15
16. 53.06 45.45 33.33 67.09 51.92 55.36 50.85
17. 51.02 45.45 35.71 67.95 55.77 53.57 47.46
18. 48.98 43.64 38.10 65.3S 59.62 51.79 47.46
19. 53.06 41.82 30.95 67.95 61.54 55.36 45.76
20. 53.06 40.00 30.95 66.67 65.38 51.79 47.46
21. 53.06 43.64 28.57 58.97 69.23 50.00 44.07
131
percentage of time you close up X days after an inside day where the
inside day closes up and +h= next day has a lower open.
S&P VAL BNDS SLVR S BNS P BELS FRANC

1. 45.34 41.46 44.74 38.03 51.72 47.66 52.38
2. 51.22 65.85 42.11 43.66 44.83 50.00 57.14
3. 48.78 51.22 34.21 42.25 34.40 48.69 45.24
4. 48.78 53.66 36.54 34.29 41.38 50.66 47.62
5. 70.00 60.98 42.11 42.86 37.93 50.09 50.00
6. 65.00 58.54 42.11 42.86 37.93 50.28 47.62
7. 67.50 60.98 47.37 48.57 44.37 48.03 45.24
8. 60 00 63.41 44.74 46.30 34.48 47.09 42 86
9. 62.50 53.66 47.37 43.48 43.38 48.50 42.86
10. 60.00 58.54 52.63 40.58 41.38 49.25 47.62
11. 60.00 53 66 55.26 40.58 51.72 48.21 50.00
12. 55.00 53.66 65.70 42.03 51.72 47.83 47.62
13. 57.50 53.66 63.16 36.23 44.83 48.21 50.00
14. 55.00 48.78 60.53 40.58 48.28 47.03 47.62
15. 57.50 51.22 57.89 40.58 48.2B 47.55 47.62
16. 57.50 51.22 63.46 42.03 48.28 47.64 47.62
17. 60.00 51.27 57.89 44.93 51.72 49.34 47.62
18. 62.50 48.78 60.53 47.83 58.62 48.30 45.24
19. 55.00 51.22 13.16 49.28 51.72 47.63 47.62
20. 67.50 56.10 65.79 47.23 48.28 47.63 40.48
21. 62.50 56.10 63.16 52.17 48.28 47.63 40.48
132
p e r c e n t a g e o f t i m e y o u close u p X d a y s a f t e r a n i n s i d e d a y where the
i n s i d e d a y closes d o w n a n ~ t h e n e x t d a y h a s a hi g h er o p e n .
S&P VAL BMDS SLVIR S BNS P BEL S FRANC

1. 50,00 52.50 68.97 51.85 44.74 52.66 45.00
2. 44.74 52.50 55.17 51.92 55.26 50.00 37.50
3. 44.74 57.50 58.62 48.08 44.74 49.52 50.00
4. 50.00 45.00 55.17 51.92 44.74 50.10 47.50
5. 50.00 52.50 65.52 51.92 47.37 50.00 50.00
6. 42.11 55.00 58.62 51.92 47.37 48.57 42.50
7. 36.84 52.50 62.07 46.15 50.00 48.08 45.00
8. 44.74 57.50 58.62 38.46 47.37 48.08 42.50
9. 42.11 55.00 51.72 38.46 52.63 47.70 42.50
10. 47.37 60.00 48.28 40.38 47.37 47.02 40.00
11. 47.37 62.50 44.83 32.69 50.00 48.37 45.00
12. 47.37 60.00 44.83 36.54 47.37 48.46 43.59
13. 47.37 57.50 51.72 32.69 44.74 46.05 43.59
14. 47.37 57.50 51.72 32.69 42.11 46.53 46.15
15. 44.74 55.00 51.72 25.00 39,47 47.30 46.15
16. 44.74 57.50 58.62 26.92 44.74 47.68 43.59
17. 47.37 57.50 58.62 25.49 39.47 49.52 46.15
18. 50.00 57.50 55.17 33.33 42.11 50.10 46.15
19. 47.37 57.50 68.97 33.33 39.47 49.90 4R.72
20. 44.74 60.00 65.52 35.29 36.84 49.61 48.72
21. 44.74 55.00 68.97 43.14 34.21 49.13 48.72
133
p e r c e n t a g e of time you close up X days after an inside day where the
inside day closes down and the next day has a lower open.
S&P VAL BNDS SLVR S BNS S FRANC P BEL

1. 69.23 50.00 63.64 48.00 41.67 53.33 44.62
2. 61.54 43.75 63.s4 48.00 41.n7 80.00 50.77
3. 38,46 18.75 81.02 52.00 33.33 73.33 49.23
4. 46.15 56.25 72.73 40.00 41.67 73.33 61.54
5. 38.46 37.50 72.73 44.00 41.n7 71.43 55.38
6. 30.77 50.25 63.64 44.00 66.67 71.43 58.46
7. 30.77 50.00 72.72 48.00 50.00 85.71 52.31
8. 46.15 62.50 54.55 56.00 41.S7 85.71 51.56
9. 46.15 62.50 54.55 56.00 50.00 85.71 48.44
10. 30.77 56.25 72.73 48.00 33.33 78.57 50.00
11. 46.15 43.75 63.64 44.01 33.33 71.43 50.00
12. 38.46 43.75 72.73 44.00 41.67 71.43 46.88
13. 50.00 53.33 81.8T 48.00 33.33 64.29 51.56
14. 41.67 46.67 81.82 4O.00 50.00 64.29 53.13
15. 50.00 46.67 72.73 52.00 50.33 71.43 57.01
16. 54.55 46.67 90.91 44.00 18.33 71.43 50.00
17. 54.55 46.07 81.82 44.00 66.67 71.43 48.44
18. 54.55 53.33 81.S2 36.00 66.67 71.43 46.38
19. 45.45 60.00 72.73 28.00 41.67 71.47 48,44
20. 54.55 60.00 81.82 28.00 41.67 71.43 51.56
21. 54.55 60.00 72.73 32.00 33.77 78.57 50.00
134
inside day closes up and the next day has a higher
S&P VAL BNDS SLYR S BNS P BEL S FRANC

1. 66.67 60.00 73.33 38.10 33.33 61.43 18.75
2. 80.00 65.00 60.00 52.38 38.89 67.14 43.75
3. 80.00 65.00 53.33 61.90 22.22 57.14 56.25
4. 86.67 75.00 46.67 57.14 33.33 58.57 50.00
5. 73.33 80.00 50.00 61.90 33.03 52.86 75.00
6. 73.33 70.00 57.14 57.14 22.22 51.43 56.25
7. 60.00 70.00 50.00 47.62 33.33 50.00 50.00
8. 46.67 60.00 64.29 52.38 22,22 52.86 43.75
9. 66.67 75.00 57.14 38.10 29.41 48.57 37.50
10. 66.67 75.10 53.85 42.86 29.41 45.71 37.50
11. 53.33 70.00 53.85 42.86 23.53 45.71 43.75
12. 46'67 80.00 46.15 42.8v 29.41 45.71 37.50
13. 66.67 80.00 46.15 3S.10 23.53 42.86 31.25
14. 66.67 75.00 53.85 38.10 21,53 45.71 37.50
15. 73.33 85.00 53.85 36.10 29.41 47.14 37.50
16. 66.67 75.00 53.85 33.33 35.29 41.29 43.75
17. 46.67 75.00 53,85 38.10 35.29 40.00 43.75
18. 53.33 75.00 46.15 42.86 29.41 44.29 43.75
19. 46.67 65.00 46.15 47.62 29.41 40.00 37.50
20. 46.67 75.00 46.15 47.62 23.53 58.57 31.25
21. 53.33 70.00 61.54 61.90 23.53 45.71 37.50
135
the inside day closes down and the next day has a lower open.

1. 30.77 50.00 36.36 52.00 58.33 55.38 46.67
2. 38.46 56.25 36.36 52.00 58.33 49.23 20.00
3. 61.54 81.25 18.18 48.00 66.67 50.77 26.67
4. 53.85 43.75 27.27 60.00 58.33 38.46 26.67
5. 61.54 62.50 27.27 51.00 58.33 44.62 28.57
6. 69.23 43.75 36.36 56.00 33.33 41.54 28.57
7. 69.27 50.00 27.27 52.00 50.00 47.69 14.29
8. 53.85 37.50 45.45 44.00 58 33 48.44 14.29
9. 53.85 37.50 45.45 44.00 50.00 51.56 14.29
10. 69.23 43.75 27.27 52.00 66.67 50.00 21.43
11. 53.85 56.25 36.36 56.00 66.67 50.00 28.57
12. 61.51 56.27 27.27 56.00 58.33 53.13 28.57
13. 50.00 46.67 18.18 52.00 66.67 48.44 35.71
14. 58.33 53.33 18.18 52.00 50.00 46.88 35.71
15. 50.00 53.33 27.27 48.00 41.67 42.19 28.57
16. 45.45 53.33 09.09 56.00 41.67 50.00 28.57
17. 45.45 53.33 18.18 56.00 33.33 51.56 28.57
18. 45.45 46.67 18.18 64.00 33.33 53.13 28.57
19. 54.55 40.00 27.27 72.00 58.33 51.56 28.b7
20. 45.45 40.00 18.18 72.00 58.33 48.44 28.57
21. 45.45 40.00 27.27 68.00 66.67 50.00 21.43
136
Percentage of time you close down X days after an inside d a y where
the inside day closes up and the next day has a lower open.
S&P VAL BNDS SLVR S BNS P BEL 5 FRANC

1. 53.66 58.54 55.26 61.97 49.28 52.34 47.62
2. 48.78 34.15 57.89 56.34 55.17 50.00 42.86
3. 51.22 48.78 65.79 47.75 65.57 51.31 54.76
4. 51.22 46.34 63.16 65.71 58.62 49.34 52.38
5. 30.00 39 02 57 89 57.14 62.07 49.91 50.00
6. 35.00 41.46 57.89 57.14 62.07 49.72 52.38
7. 32.50 39.02 52.63 51.43 55.17 51.97 54.76
8. 40.00 36.59 55.26 53.62 65.52 52.91 57.14
9. 37.50 46.34 52.63 56.52 58.62 51.50 57.14
10. 4o.00 41.46 47.37 59.42 58.62 50.75 52.38
11. 40.00 41.46 44.74 59.42 48.28 51.79 50.00
12. 40.00 46.34 34.21 57.97 48.28 52.17 52.38
13. 42.50 46.34 36.84 63.77 55.17 51.79 50.00
14. 45.00 51.22 39.47 59.42 51.72 52.92 52.38
15. 42.50 48.78 42.11 59.42 51.71 52.45 52.38
16. 42.10 48.78 36.84 57.97 21.72 52.36 52.38
17. 40.00 48.78 42.55 55.07 48.28 50.66 52.38
18. 37.50 51.22 39.47 52 17 41.38 5l.70 54.76
19. 35.00 48.78 36.84 50.72 48.28 52.37 52.38
20. 32.50 43.90 34.21 52.17 51.72 52.37 59.52
21. 37.50 43.90 36.84 47.83 51.12 52.37 59.52
137
Percentage of time you close down X days after an inside day where the
inside day closes down and the next day has a higher open.

1. 50.00 47.50 31.03 46.55 55.26 47.34 55.00
2. 55.26 47.50 44.83 48.08 44.74 50.00 62.50
3. 55.26 47.50 41.38 51.92 55.26 50.48 50.00
4. 50.00 55.00 44.83 48.08 55.26 49.90 52.50
5. 50.00 47.50 34.48 48.08 52.63 50.00 50.00
6. 57.89 45.00 44.38 48.08 52.63 51.43 57.50
7. 63.16 47.50 37.93 53.85 50.00 51.92 55.00
8. 55.26 42.50 41.38 6.5452.63 51.92 57.50
9. 57.89 45.00 48.28 61.54 47.37 52.30 57.50
10. 52.63 40.00 51.72 59.62 52.63 52.98 60.00
11. 52.63 37.50 55.17 67.31 50.00 51.63 55.00
12. 52.63 40.00 55.17 63.46 52.63 5l.54 56.41
13. 52.63 42.50 48.2B 67.31 55.26 53.95 56.41
14. 52.63 42.50 48.28 67.31 57.89 53.47 53.85
15. 55.26 45.00 48.28 75.00 60.53 52.70 53'85
16. 55.26 42.50 41.38 73.08 55.26 52.32 56^41
17. 52.63 42.50 41.38 74.51 6o.53 50,48 53`85
18. 50.00 42'50 44.83 66.67 57.89 49.90 53.85
19. 52.63 42.50 31.03 66.67 60.53 50.10 51.23
20. 55.26 40`00 34.48 64.71 63.16 50.39 51.28
21.
55.26 45.00 31,03 56.86 65.79 50.87 51.28
138
Percentage of time you close down x days after an inside day where the inside day closes up and the
next day has a higher open.
S&P VAL BNDS SLVR S BNS P 8EL S FHANC
1. 33.33 40.00 26.67 61.90 61.90 38.57 8l.25
2. 20.00 35.00 40.00 47.62 61.1] 32.O6 56.25
3. 20.00 35.00 46.67 38.10 77.78 4~.96 43.75
4. 13.33 25.0C 53.33 42.8b 66.67 41.4~ 50.00
5. 26.67 20.00 50.00 38.10 66.67 47.14 25.00
6. 26.67 30.00 42.86 42.86 77.78 4B.57 43.75
7. 40.00 T0.00 50.00 52.38 66.67 50.00 50.00
8. 53.33 40.00 35.71 47.62 77.78 47.14 56.25
9. 33 33 25 00 42.86 61.90 70,59 51.43 62.P0
10. 33.33 30'00 46.15 57.14 70.5& 54.29 62.50
11. 46.67 25.00 46.15 57.14 76.47 54.29 56.25
12. 53.33 20.00 53.85 57.14 70.59 54.?9 62.50
13. 33.33 20.00 53.85 61.90 76.47 57.14 68.75
14. 33.33 25.00 46.15 61.90 76.47 54.29 62.50
15. 26.67 15.00 46.15 61.90 70.59 52.06 62.5v
16. 33.33 25.00 46.15 66.67 64.71 55.71 56.25
17. 57.33 25.00 46.15 61.90 64.71 60.00 56.:5
18. 46.67 25.00 53.R5 57.14 70.59 55.71 56.25
19. 53.33 35.00 53.85 52.38 70.59 60.00 62.50
20. 53.33 25,00 53.85 52.3B 76.47 61.43 68.75
21. 46.67 30.00 38.46 38.10 76.47 54.29 62.50
139
Percent a g e of time you c l o s e up X days a f t e r a day, f o l l o w i n g
an i n s i d e day where t h e inside day close down and t h e next W, c l o n e s r and where
t h e high also exceeds the i n s i d e d a y ' s h i g h
S&P VAL BNDS SLVR S BNS P EEL S FRANC

1. 45.93% 46.43% 48.39% 44.68% 32.00% 50.00% 57.14%
2. 33-33% 46.43% 54.84% 40.43% 44.00% 54.05% 60.00%
3. 37.50% 42.86% 51.61% 51.06% 40.00% 51.35% 45.71%
4. 41.67% 39.29% 51.61% 48.94% 56.00% 54.05% 48.57%
5. 33.33% 57.14% 48.39% 50.00% 52.00% 55.26% 4B.57%
6. 37.50% 53.57% 58.06% 55.32% 56.00% 47.37% 54.29%
7. 41.67% 62.07% 50.00% 42.55% 60.OO% 44.74% 48.57%
8. 41.67% 62.07% 46.88% 55.Z2% 64.00% 43.24% 51.43%
9. 41.67% 65.52% 46.88% 46.31% 60.00% 43.24% 51.43%
10. 41.67% 58.62% 50.00% 42.55% 56.00% 44.74% 48.57%
11. 37.50% 65.52% 37.50% 42.55% 52.00% 43.24% 51.43%
12. 41.67% 5S.62% 50.00% 42.55% 52.00% 47.34% 51.43%
13. 50.00% 51.72% 46.88% 44.68% 56.00% 56.76% 51.43%
14. 58.33% 55.17% 50.OO% 38.3O% 56. OO 55.26% 48.57%
15. 62.50% 62.07% 46.88% 44.68% 58.33% 62.161. 42.86%
16. 58.33% 65.52% 50.00% 34.04% 60.00% 59.46% 42.86%
17. 62.50% 65.52% 53.13% 34.04X 60.00% 55.56% 45.71%
18. 66.67% 68.97% 46.88% 54.04% 52.00% 45.95% 51.43%
19. 62.50% 72.41% 50.00% 38.30% 52.OO% 47.Z7% 48.57%
20. 62.50% 65.52% 56.25% 40.43% 53.85% 50.00% 54.29%
21. 66.67% 65.52% 53.13% 34.04% 57.69% 50.00% 57.14%
140
P e r c e n t a g e of t i m e you c l o w n up X day after a day following an i n s i d e day
where t h e inside day c t o r e s up an, d the next day
closes down and where t h e low also e xc e e d s t h e i n s i d e day's low.
S&P VAL BNDS SLVR S BNS P BEL SFRANC

1. 65.52% 58.06% 28.57% 51.02% 50.00% 61.54% 52.78%
2. 72.41% 58.06% 55.71% 4B.98X. 55.56% 66.67% 47.62%
3. 60.71% 70.97% 46.47% 46.94% 50.00% 53.85% 40.48%
4. 71.47% 64.52% 46.43% 55.10% 50.00% 55.26% 50.00%
5. 67.86% 51.61% 39.29% 57.06% 44.44% 48.72% 45.24%
6. 60.71% 51.61% 42.S6% 57.14% 61.11% 55.26% 47.62%
7. 67.36% 58.06% 75.71% 57.06% 3B.89% 55.26% 42.86%
8. 67.36% 61.29% 75.71% 48.93% 38.89% 51.75% 41.86%
9. 59.26% 58.06% 46.47% 51.02% 33.33% 48.72% 46.51%
10. 59.26% 51.61% 46.47% 44.90% 44.44% 48.72% 46.51%
11. 55.56% 51.61% 50.00% 46.94% 44.44% 51.2B% 39.53%
12. 59.26% 48.79% 42.36% 46.94% 38.89% 51.23% 39.53%
13. 55.56% 40.59% 46.47% 40.02% 38.89% 48.72% 41.86%
14. 62.96% 51.61% 50.00% 42.86% 33.33% 57.39% 41.96%
15. 66.67% 54.34% 46.43% 42.36% 33.33% 55.26% 39.53%
16. 62.96% 54.34% 42.86% 46.94% 44.44% 51.29% 39.53%
17. 66.67% 54.34% 46.43% 45.37% 78.89% 57.95% 39.57%
18. 59.26% 48.39% 57.57% 48.00% 42.11% 56.41% 39.50%
19. 62.96% 58.06% 50.00% 52.00% 47.37% 61.54% 42.36%
20. 66.67% 54.34% 46.47% 50.00% 55.56% 60.50% 40.48%
21. 77.78% 54.34% 50.00% 44.00% 42.11% 65.79% 38.10%
141
P e r c e n t a g e o f t i m e y o u c l o s e u p X days after a day following a n i n s i d e
d a y w h e r e t h e i n s i d e d a y c l o s e d u p a n d t h e n e x t d a y c l o s e s u p and where
the high also exceeds the inside day's high.
5&P VAL BNDS SLVR S BNS P BEL SFRANC
1. 53.06% 56.00% 36.96% 46.94% 35.48% 39.13% 42.50%
2. 57.14% 56.00% 45.65% 48.98% 18.71% 19.15% 50.50%
3. 55.10% 5B.00% 47.83% 44.90% 41.94% 54.17% 55.00%
4. 55.10% 56.00% 52.17% 44.90% 41.94% 45.87% 55.00%
5. 59.18% 58.00% 48.89% 48.98% 35.48% 42.55% 47.50%
6. 55.10% 52.00% 44.44% 48.00% 32.26% 48.94% 50.00%
7. 51.02% 46.00% 48.89% 48.98% 31.25% 45.83% 42.50%
8. 48.98% 46.00% 44.44% 54.00% 32.26% 4C.75% 42.50%
9. 51.02% 50.98% 48.89% 50.00% 37.50% 37.50% 37.50%
10. 51.02% 50.98% 51.11% 42.00% 45.16% 43.75% 42.50%
11. 48.98% 56.86% 57.78% 46.00% 50.00% 53.19% 37.50%
12. 51.02% 54.90% 57.78% 46.00% 45.16% 46.81% 42.50%
13. 53.06% 52.94% 53.33% 34.00% 38.71% 50.00% 42.50%
14. 55.10% 50.98% 57.33% 34.00% 41.94% 47.92% 42.50%
15. 57.14% 52.94% 60.00% 34.69% 45.16% 45.83% 40.00%
16. 53.06% 54.94% 55.56% 40.00% 45.16% 39.13% 42.50%
17. 59.18% 56.96% 57.78% 30.00% 43.33% 40.00% 37.50%
18. 48.98% 60.78% 55.56% 32.00% 45.16% 42.55% 32.50%
19. 52.08% 60.78% 57.78% 32.00% 48.39% 42.22% 32.50%
20. 45.83% 58.82% 57.78% 32.00% 45.16% 48.94% 37.50%
21. 56.25% 60.78% 62.22% 34.00% 51.61% 46.81% 40.00%
143
142
Percentage of time you close up x days after a day following an inside day where
the inside day closes down and the next day closes down and where the low also
inside the inside day’s low.
1. 53.57% 48.39% 63.33% 60.00% 69.23% 58.82% 52.17%
2. 46.43% 54.34% 56.67% 53.33% b0.00% 55.B8% 56.52%
3. 57.14% 54.84% 60.00% 57.78% 65.3B% 48.48% 52.17%
4. 53.57% 61.29% 63.33% 51.11% 65.3B% 42.42% 50.00%
5. 60.71% 5B.06% 56.67% 57.78% 57.69% 50.00% 58.70%
6. 64.29% 54.B4% 56.67% 51.11% 69.23% 47.06% 54.35%
7. 60.71% 5B.06% 56.67% 42.22% 65.3S% 50.00% 54.35%
8. 57.14% 58.06% 50.00% 40.00% 61.54% 54.29% 54.35%
9. 67.86% 64.52% 50.00% 37.78% 46.15% 45.71% 52.17%
10. 60.71% 54.84% 50.00% 40.00% 57.69% 40.00% 47.83%
11. 57.14% 53.06% 56.67% 44.44% 52.00% 3B.B9% 39.13%
12. 60.71% 54.34% 53.33% 46.67% 50.00% 41.67% 41.30%
13. 42.S6% 51.61% 56.67% 42.22% 50.00% 30.56% 39.13%
14. 46.43% 57.13% 56.67% 46.67% 53.B5% 33.33% 34.78%
15. 53.57% 56.25% 63.33% 44.44% 48.00% 33.33% 39.13%
16. 50.00% 56.25% 60.00% 40.00% 46.15% 40.00% 36.96%
17. 50.00% 56.25% 63.33% 40.00% 50.00% 38.89% 39.13%
18. 50.00% 56.25% 53.33% 42.22% 46.15% 37.14% 41.30%
19. 46.43% 56.25% 56.67% 51.11% 46.15% 35.29% 41.30%
20. 46.43% 59.78% 50.00% 44.44% 42.3I% 40.00% 34.79%
21. 42.86% 65.63% 59.67% 51.11% 42.31% 45.71% 43.4B%
143
P e r c e n t ag e o f t i me yo u c lo s e d o wn x d ays af t er a d ay following an insid e da y where t he
i n si de d ay c lo s ed d own a nd t h e next d a y cl os es u p and wh er e the h i gh also exceed s the
i n si d e d ay ’ s h i g h .

1. 54.17% 53.57% 51.61% 55.32% 68.00% 50.00% 42.86%
2. 66.67% 53.57% 45.16% 59.57% 56.00% 45.95% 40.00%
3. 62.50% 48.39% 48.39% 60.00% 48.65% 54.29% 54.29%
4. 58.33% 60.71% 48.39% 51.06% 44.00% 45.95% 51.43%
5. 66,67% 42.86% 51.61% 50.00% 48.00% 44.74% 51.43%
6. 62.50% 46.43% 41.94% 44.68% 44.00% 52.63% 45.71%
7. 58.33% 37.93% 50.00% 57.45% 40.00% 55.26% 51.43%
8. 58.33% 37.93% 53.13% 36.00% 56.76% 48.57% 48.57%
9. 58.33% 34.48% 53.13% 53.19% 40.00% 56.76% 48.57%
10. 58.33% 41.38% 50.00% 57.45% 44.00% 55.26% 51.43%
11. 62.50% 34.48% 62.50% 57.45% 48.00% 54.05% 54.29%
12. 58.33% 41.38% 50.00% 57.45% 48.00% 52.63% 48.57%
13. 50.00% 48.29% 53.13% 55.32% 44.00% 43.24%. 48.57%
14. 41.67% 44.83% 50.00% 61.70% 44.00% 44.74% 51.47%
15. 37.50% 37.93% 53.13% 61.70% 41.67% 37.84% 57.14%
16. 41.67% 34.48% 50.00% 65.96% 40.00% 40.54% 57.14%
17. 37.50% 34.48% 46.88% 65.96% 40.00% 44.44% 54.29%
18. 33.33% 31.03% 53.13% 65.96% 48.00% 54.057 48.57%.
19. 37.50% 27.59% 50.00% 61.70% 48.00% 52.63% 51.43%
20. 37.50%. 34.48% 43.75% 59.57% 46.15% 50.00% 45.71%.
21. 33.33% 34.48% 46.88% 65.96% 42.31% 50.00% 42.86%
144
P e r c e n t ag e o f t i m e yo u c lo s e d o wn x d ays aft er a d ay following an insid e da y where t he
i n si de d ay c lo s ed d own a nd t h e next d a y cl oses u p and wh er e the low also exc eed s t he
i n si d e d ay ’ s lo w. .

1. 34.48% 41.94% 71.43% 48.98% 50.00% 38.46% 47.62%
2. 27.59% 41.94% 64.29 51.02% 44.44% 33.33% 52.38%
3. 39.29% 29.03% 53.57% 53.06% 50.00% 46.15% 59.52%
4. 28.57% 35.48% 52.57% 44.90% 50.00% 44.74% 50.00%
5. 32.14% 48.39% 60.71% 46.94% 55.56% 51.29% 54.76%
6. 39.24% 48.39% 57.14% 42.86% 38.89% 44.74% 52.38%
7. 32.14% 41.94% 64.29% 46.94% 61.11% 44.74% 57.14%
8. 32.14% 38.71% 64.29% 51.02% 61.11% 48.65% 58.14%
9. 40.74% 41.94% 53.57% 48.98% 66.67% 51.28% 53.49%
10. 40.74% 48.39% 53.57% 55.10% 55.56% 51.28% 53.49%
11. 44.44% 48.39% 50.00% 53.06% 55.56% 48.72% 60.47%
12. 40.74% 51.61% 57.14% 53.06% 61.11% 48.72% 60.47%
13. 44.44% 51.61% 53.57% 59.18% 61.11% 51.28% 58.14%
14. 37.04% 48.39% 50.00% 57.14% 66.67% 42.11% 58.14%
15. 33.33% 45.16% 53.57% 57.14% 66.67% 44.74% 60.47%
16. 37.04% 45.16% 57.14% 53.06% 55.56% 48.72% 60.47%
17. 33.33% 45.16% 53.57% 54.17% 61.11%. 46.15% 60.47%
18. 40.74% 51.61% 46.43% 52.00% 57.89% 43.59% 60.47%
19. 37.04% 41.94% 50.00% 48.00% 52.63% 38.46% 57.14%
20. 45.16% 45.16% 53.57% 50.00% 44.44% 39.47% 59.52%
21. 33.33% 45.16% 50.00% 57.89% 34.21% 61.90% 61.90%
145
Percentage of time you close down X days after a day fallowing an
inside day where the inside day closes up and the next day closes up
and where the high after exceeds the inside d ay ' s high.
SF VAL BNDS SLUR S BNS F BEL S FRANC

1. 46.94% 44.00% 63.04% 53.06% 64.52% 60.87% 57.50%
2. 42.86% 44.00% 54.35% 51.02% 61.29% 60.87% 47.50%
3. 44.90% 42.00% 52.17% 55.10% 58.06% 45.83% 45.00%
4. 44.90% 44.00% 47.82% 55.10% 58.06% 54.17% 45.00%
5. 48.98% 42.00% 51.11% 51.02% 64.52% 57.45% 52.50%
6. 44.90% 48.00% 55.56% 52.00% 67.74% 51.06% 50.00%
7. 48.98% 54.00% 51.11% 51.02% 68.75% 54.177 57.50%
8. 51.02% 54.00% 55.56% 46.00% 67.74% 56.25% 57.50%
9. 48.98% 49.02% 51.11% 50.00% 62.50% 62.50% 62.50%
10. 48.98% 49.02% 48.39% 58.00% 54.84% 56.25% 57.50%
11. 51.02% 43.14% 42.22% 54.00% 50.00% 46.81% 62.50%
12. 48.98% 45.10% 42.22% 54.00% 54.84% 52.19% 67.50%
13. 46.94% 47.06% 46.67% 66.00% 61.29% 50.00% 57.50%
14. 44.90% 49.02% 46.67% 66.00% 58.06% 52.08% 57.50%
15. 42.86% 47.06% 40.00% 65.31% 54.64% 54.17% 60.00%
16. 46.94% 45.10% 44.44% 60.00% 54.84% 60.87% 57.50%
17. 40.82% 43.14% 42.22% 70.00% 56.67% 60.00% 62.50%
18. 51.02% 39.22% 44.44% 66.00% 54.84% 57.457. 67.50%
19. 47.92% 39.22% 42.22% 68.00% 51.61% 57.78% 67.50%
20. 54.17% 41.18% 42.22% 68.00% 54.84% 51.06% 62.50%
21. 43.75% 39.22% 37.78% 66.00% 48.39% 53.19% 60.00%
146
Percentage of time you close down X days after a day following an
inside day where the inside day closed down and the next day cl oses
down and where the low also exceeds the inside day's low.
SP VAL HNDS SLUR S PNS P BEL S FRANC
1. 46.43% 51.61% 36.67% 40.00% 30.77% 41.18% 47.83%
2. 53.57% 45.16% 43.33% 46.67% 40.00% 44.12% 43.48%
3. 42.86% 45.16% 40.00% 42.22% 34.62% 51.52% 47.83%
4. 46.43% 38.71% 36.67% 48.89% 34.62% 57.58% 50.00%
5. 39.29% 41.94% 43.33% 42.22% 42.31% 50.00% 41.30%
6. 35.71% 45.16% 43.33% 48.89% 30.77% 52.94% 45.65%
7. 39.29% 41.94% 43.33% 57.78% 34.62% 50.00% 45.65%
8. 42.86% 41.94% 50.00% 60.00% 38.46% 45.71% 45.65%
9. 32.14% 35.48% 50.00% 62.22% 53.85% 54.29% 47.83%
10. 39.26% 45.16% 50.00% 60.00% 42.31% 60.00% 52.17%
11. 42.86% 41.94% 43.33% 55.56% 48.00% 61.11% 60.87%
12. 39.29% 45.16% 46.67% 53.33% 50.00% 58.33% 58.70%
13. 57.14% 48.39% 43.33% 57.79% 50.00% 69.44% 60.87%
14. 46.88% 46.88% 43.33% 53.33% 46.15% 66.67% 65.22%
15. 46.43% 43.75% 36.67% 55.56% 52.00% 66.67% 60.87%
16. 50.00% 43.75% 40.00% 6o.00% 53.85% 60.00% 63.04%
17. 50.00% 43.75% 36.67% 60.00% 50.00% 61.11% 60.87%
18. 53.57% 43.75% 46.67% 57.78% 53.85% 62.86% 58.70%
19. 53.57% 43.75% 43.33% 48.49% 53.85% 64.71% 58.70%
20. 53.57% 40.63% 50.00% 55.56% 57.69% 60.00% 65.22%
2 1 . 57.14% 34.38% 43.33% 48.89% 57.69% 54.29% 56.52%
147
Percentage of time the close is above the open following an inside day
where the inside day closes down and the next day opens down.

69.50% 52.50% 65.00% 70.21% 34.55% 63.16% 55.74%
where the inside day closes up and the next day opens down.
S&P VAL BNOS SLVR S BNS P BEL S FRANC

52.17% 45.83% 45.00% 50.00% 52.82% 51.182 40.59%
where the inside day closes down and the next day opens up.
S&P VAL BNNDS SLVR S BNS P BEL S FRANC

49.85% 50.00% 65.00% 45.00% 42.42% 48.39% 45.00%
where the inside day closes up and the next day opens up.
S&P VAL BNDS SLVR S BNS P DEL S FRANC

62.64% 5Z.25% 51•16%. 37.13% 33.33% 53.49% 18.75%
148
P e r ce n tag e of time the close i s a b o ve the p ri o r c l o se fol l o wi n g a n
i n s id e da y where the inside d a y c l o se s do w n a n d t h e n e xt d a y opens
d o w n-
S&P VAL BNDS BLVR S BNS P BEL S FRANC

69.23% 50.00% 63.64% 49.00% 41.67% 57.37% 44.62%
Percentage of time the close is above the prior close following an inside day where
the inside day closes up and the next day opens down.

46.34% 41.46% 44.74% 38.03% 51.72% 47.66% 52.30%
P e r ce n tag e of time the close i s a b o ve the p ri o r c l o se s Vo 1 1 cw i : g a n

inside Cay where the inside day closes down and the next day opens
up.

50,00% 12.50% 68.97% 53 . 85 % 4 4 . 7 4 % 5 2 .1 5 % 4 5. 0 0%
Percentage of time the close is above t h e p r i or clo s e f o llo w i ng an

i n s id e da y where the inside day close up and the next day opens up.

6 6 . 67 % 60.00% 73.33% 38.10 % 33.33% 6 1 . 43 % 18 . 7 5 %
149
B. HOW SEASONAL TENDENCIES FORECAST FUTURE PRICES
1. Most all stocks and commodities have seasonal characteristics. Why? There are
either seasonal supply factors (such as harvest, weather influences, shipping,
mining, etc.), or seasonal demand factors. On the demand side, we know more
turkeys are eaten at Thanksgiving and Christmas and more eggs at Easter. Also,
more barbecuing is done in the summer and more jewelry is bought at Christmas
time. Thus, there's usually a commercial demand for gold six months before the
holidays.
2. Thanks to Steve Moore (Moore Research, 85180 Lorane Highway, Eugene, Oregon
97405, 1-800-927-7259), I am able to present to you a few of his charts depicting
seasonal patterns in the major markets. Steve has gone way beyond my book,
"How Seasonal Factors influence Commodity Prices, " the first book ever written on
this concept.
3. THE TWO PROBLEMS WITH LOOKING AT SEASONALITY. • They don't always

work. Many other factors influence commodity prices. • Number crunching can
make a tendency appear to be there, when re-
ally it isn't. Flip a coin 200 times, and you vv ill get more of either heads
or tails. Does this mean the coin is biased? No. It is easy to create
numerical relationships that are meaningless.
4. HOW TO BEST USE THEM.

My approach is to use seasonals as a filter for trading, as sometimes they set up a
time period for action. I then wait for the rest for my tools to get me in, or confirm
the seasonal trade.
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151
152
153
154
155
156
C. TECHNICAL TOOLS
The following pages present several of the very best instruments I have employed
for decades. I like to look at them in conjunction. If t wo or three are giving me a
green light at the same time, by all means I proceed.
PREDICTING WHERE PRICE WILL GO
We all want to know where prices will rally or decline to. There is no perfect way to do this.
I have seen hundreds of ratios, support and resistance lines, etc. None, including what I
am going to show you, are on the money all the time. Most are seldom close, like the
typical re-tracements you read about in books.
With that in mind I N,,-ill present Zero Balance, a tool that has is good a record of'
forecasting where price should go as any that I am aware of.
To arrive at a price projection, e must first identify the important price swint points. We
w r
will consider a price high to be any day that has at least six lover highs on both sides of
it. A price low will be a daily low with at least six higher daily lows on both sides. These
high peaks and deep valleys should be easy and quick to slot by anyone.
Once these price points are identified, we can make our prediction of the unknown swing
point the market is now moving towards. We label this unknown level Point h. Counting
back in time (again, the unknown value being Point 8), determine price points 5 and 6.
Add these values together and then subtract price point :1. four answer is where Price 8
should occur. Here is a simple demonstration of Zero Balance: I
Point 8 = Point 6 + Point 5 - Point 3

So,8+5-4=9
There are several ways to use this Zero

Balance technique. The more
common one is to determine that if price is above Zero Balance (Point 8), price is stronger
than where it should be; thus, the situation is Bullish. If price is below Zero Balance, then
price is weaker than should be expected. Price did not rally as high as it should have, and
there is a Bearish outlook on the price structure. Zero Balance is a great selection
technique. Sell short any stocks that are rallying but cannot reach price point 8.
157
Naturally, the larger the gap between Zero Balance and actual price, the more Bullish or
Bearish is the situation.
ANOTHER WAY TO USE ZERO BALANCE
My experience is that at times ZB will have three consecutive up moves, thus not having a
trough in between. This occurrence usually signifies that an important high is at hand. By
the same token, three down swings in sequence, with no rally in Zero Balance, foretells a
low of some importance.
158
159
ZERO BALANCE
Only in the concept of change can we find opportunity; for in a static situation, there is no
possibility for improvement. Gains or losses in the market can only result from a change in
price. It is the heart of change at which zero balance is directed, and thus the essence of its
value.
Zero Balance is essentially a targeting method designed to determine where the ter-minus
of future cyclical price swings should be. In this application of defining targets, you will find
the method inaccurate but in this inaccuracy, you will discover the value use of Zero
Balance. You'll understand what I mean shortly.
DEFINITION OF SWING POINTS
The concept and applications of Zero Balance are predicated upon the analysis of the
establishment of price swings in the market. We wish to analyze prices as they fluctuate
from high to low to high to low, etc. Consequently, we need to begin with some definition
or method of mechanically designating at which points prices "record" highs and lows. The
following method is very easy and is uncanny in identifying the important highs and lows
in the inarket.
IMPORTANT RECORDED HIGH (IR HIGH)
If today's intra-day low is lower than the lowest intra-day low in the past seven market
days, an IR High as formed and is the highest intra-day high since the last IR low.
160
IMPORTANT RECORDED LOW !IR LOW)
If todav's intra-day high is higher than the highest intra-day high during the past seven
market days, an IR Low has formed and is the lowest intra-day low since the last IR High.
'That's all there is to it. Just remember once you have found an IR High, look for an IR
Low until one forms. Then look for an IR High until one forms, and so on. We have
connected the M Highs and Lows by solid lines in our examples in order to assist you in
seeing v.,here these points have formed.
ZERO BALANCE DEFINED
If we consider a succession of cyclical market swings, prices always move from IR Low to IR
High to IR Low, etc., as in the following example:
161
Notice, above, that prices move from 10 at point #1, up to 30 at point #2, then down to 20
at point #3, then up to 40 at point #4, and so on. In our example, we will assume these
are where prices actually occurred in the past, and the points are IR Highs and IR Lows.
Determined by our swing point rules. What we next want to determine is where prices
should have been in order for the sequence of prices (or the sequence of highs and lows) to
be in perfect balance.
THE FORMULA
The ideal level, or Zero Balance level, for each point is determined by the following
formula:
ZB8 = P6 + P5 - p3 Or:
ZERO BALANCE for point #8 equals the price at point #6 plus the price at point #5
minus the price at point #3.
Another way of stating this might be ... the ideal Zero Balance level at point #8 (which is
60 in our example) is determined by adding the actual price at point #6 (50) to the actual
price at point #5 (30), and from this total, subtracting the actual price at point #3 (20).
162
Thus: ZB8 = p6 + p5 - p3
OR: ZB8 = 50 + 30 - 20
OR: ZB8 = 80 - 20 ZB8
= 60
We have found in our example that the Zero Balance level at point #8 = 60. Consequently,
in this situation, actual price at point #8 is the same as the Zero Balance level at point #8;
and thus at point #8, prices are in perfect balance.
To summarize, in order to determine the Zero Balance level for a given high or low,
consider that high or low as point #8. Now, count back in time to the left labeling the next
point #7, then #6, etc.... always moving from high to low to high to low.
Then apply the formula to those prices for points #6, #5, and #3. Your Zero Balance result
will always be less than, greater than, or equal to the actual price at point #8.
When the next point occurs in our example, due to the move from 60 to 50, we will label
this most recent point, point #8, and work back, labeling the points #7, #6, etc., in
succession. Note that what was point #8 before is now point #7; the old point #7 is now
point #6, etc.
Applying the Zero Balance formula at our new point:
ZB8=p6+p5-p3 OR:
ZB8 = 40 + 50 - 40 ZB8
= 90 - 40
ZB8 = 50
163
Well, the Zero Balance level for the new point is 50, and price at point #8 is also 50. And
in this admittedly ideal example, prices are still in perfect balance.
ZERO BALANCE IN REAL LIFE —

AN INSIGHT AS TO WHERE YOU ARE
The price pattern that we have been working with is ideal inasmuch as all points are in
harmonic balance. In real situations, this is rarely the case. Occasionally, prices will
match the Zero Balance level at one individual point, but usually prices are either greater
than or less than the Zero Balance level. It is precisely this reality that provides the
amazing power of this tool. It is this delicate difference that provides predictive value.
Let's consider the following example, where the price pattern represents what actually
occurred in the Dow Jones Industrial Average from May through October 1979. We have
marked the swing pattern and the Zero Balance line in for you.
Note that the low point at 815 (A) is below the Zero Balance point at 828, and hence is
negative. However, the next Zero Balance point is 822. Consequently, once prices traded
above that level, we knew Zero Balance was telling us the market has turned positive. The
Dow rallied to 856 (B); but in pulling back again, dropped below Zero
164
Balance at point C, warning us that the market was weakening. In this case, prices
rallied and again went over Zero Balance, turning positive. The rally ultimately carried
to 905 in October 1979, wherein prices again were under Zero Balance, indicating
weakness.
Now, at this point, let's not worry about Zero Balance's predictive value (we will get to
that). But, I want you to understand how to calculate Zero Balance points and to see
what occurs in reality in terms of Zero Balance's relationship to prices.
What is happening is that as prices are weak and running below the Zero Balance, or
below their ideal level, a negative variance builds up that must be corrected. Yin
changes to Yang, and prices rally. As prices rally and are trading above Zero Balance, a
positive variance builds up and is corrected. This is all well and good in terms of
insight into what type of footing the market is on (strong or weak) at any particular
time, but not very helpful in terms of predictability. Let's look into that aspect next.
PREDICTABILITY
Let's investigate an expanded example of the Dow Jones, covering the time period from
February 1979 through November 1979. The swing points have been indicated and you
should verify their accuracy.
Further more, we have plotted the corresponding Zero Balance points which you should
also work out on your own and verify.
The last point plotted is the IR Low at 792. We determine that this is point #8; and by
165
using our formula, can calculate that Zero Balance for this point is 799.
The next thing to occur is for prices to move up from the 792 low. In fact, they
already have, of course, or we wouldn't know that 792 is low. What we don't
know vet is where prices will actually move to from 792, but that doesn't
matter for the moment. Let's just assume they move to some point which will
become our new point #8. And 792 will then become point #7; 827, point #6;
and so on. (See Dow Jones Chart 11.)
Well, we can determine the Zero Balance point for our next high now, before
the high actually occurs. The new high will be point #8 as follows:
Thus ZB8 = P6 + P5 - P3
= 827 +
796 - 866 ZB8
= 757
Our new Zero Balance point for the now developing high will be 757. Prices
are presently over this level and, thus, have turned positive.
Let's go one step further. After the high occurs, which we are now waiting on,
prices will then move to some future new low (see Dow Jones Chart III which
follows).
166
At some time in the future, this new low will become point #8 for our formula; but since
we only use points #6, #5 and #3, we needn't wait for this low to actually occur. Again,
we can determine its Zero Balance point now.
= 792
P6 P5 = 827 p3 = 905
So Again: ZBg = + P5 - P
p6 3
= 792 + 827 - 905

ZBg = 714
At this point, then we have been able to project the next two Zero Balance points into
the future.
THE ULTIMATE
We can go one step further; we can guess the peak at the third projected Zero Balance
point out into the future. Here's how:
167
In our example, we determined the point for the next new high-, then the next new low.
Now, what about another next new high as we have pictured (see Dow Jones
Chart IV)? Well, if this is point #S, point #6 becomes the first new high we assume
occurred. This is the high that will occur after our last known point — the low at
792. It is the high which will occur in the rally we are presently in. The low at 792
has been made, and we know it's a low because prices are presently rallying. So,
the high is unknown as yet, but points #5 and #3 are known.
Our formula says:
ZBg = p6 + p5 - p3
Where p6 is unknown (x) and p5 = 792 and p3 = 796
ZBg = X + p5-p3
= X + 792 -
796 = X - 4
Thus, our third distant Zero Balance projected point will be the highest level we
have reached in the current rally less four points. And, as we move higher, this
projection
168
will move higher. But we have a fairly accurate idea where it is at any given time. Well,
we have developed cur projected targets or Zero Balance points for the next three swings
in the market.
Zero Balance was first written about by a Dr. Heiser, pretty much as presented to you so
far. What follows is my development of the tool.
THE BIG THREE-STEP RULE
The Big Three-Step Rule is the most important predictive element in Zero Balance. This
is what alerts you to the big turns in the market — the October 1979 crash; October
1978 crash; the November 1978 rally; the December 1979 rally; right through the October
1987 crash and beyond.
Again, we present the Dow Jones Industrial and the Zero Balance points for the period
February 1979 through February 1980.
Note that Zero Balance made a high at 941 at A that corresponds to a market high at 905
on October 5, 1979- We previously discussed this negative (prices under Zero Balance)
situation. But look what the next Zero Balance points are for the ensuing decline.
Zero Balance goes from 941 down to 875; up to 914; down to 799 (Step 1), down to 757
(Step 2); down again to 714 (Step 3). Rather than the typical pattern of Zero Balance
moving up, then down, then up again, it moves down in three successive steps. Since
prices by definition must move from high to low to high, we know that this decline must
move back over Zero Balance, indicating strength. Remember, we were able to project
this three-step sequence in Zero Balance during the rally from 792 to 827 (b). We knew
well ahead of time that this decline was going to form an impor tant market low. We
knew ahead of time that prices wouldn't be able to maintain the negative position with
Zero Balance. We knew ahead of time that an important change was due to occur.
169
Just look back in time on the chart and see where this three-step pattern has set up
before. The February to April 1979 market decline forecast a rally which moved from the
820-30 area to 905, culminating in the October 1979 crash. Note this crash was also
forewarned by Zero Balance's three-step sequence. The resulting slide to the 790 level
again indicated a rally by Zero Balance; and that rally is now into the 918 high area.
FINE TUNING YOUR TIMING
Up to now, we haven't discussed anything very definite in terms of timing. We know how
to use Zero Balance to understand the present under layment (weak or strong) of the
market or commodity under analysis. And we have seen how the three-step rules points
to important changes. Let's now see how we can generate "signals" to prompt us to
action.
170
Simplistically, any time prices penetrate a Zero Balance level and thus change from
positive to negative, or vice versa, we have, a signal. At point A prices had been running
above Zero Balance in the rally. Then at about the 860 level, we have a day (B) breaking
the lowest intra-day low of the last seven days, thus indicating 886 as an IR High. The
high is positive in relation to its 868 Zero Balance, but the next Zero Balance point is
885, which will correspond to the next low, moving down from the 886 high. We
obviously are now negative in terms of Zero Balance and have a sell signal.
A signal then occurs at the very earliest time that you discover you have changed from
running above to below Zero Balance, or vice versa.
As prices moved down from 886 to 815, Zero Balance was negative. The 815 low
indicated on day C was below the 829 Zero Balance level. But the next Zero Balance is
822, and prices are already trading at 830-840 — a buy signal is given.
Note also in both these examples that the three-step configuration was present, indicating
important turning points in the market.
My favorite situation is discovering a last ditch move, such as the rally from 866 to 905
(D). Notice that once we had identified the IR High at 902 for the Dow, we were trading
at 866 — well below the 894 Zero Balance point (which was the second step in the three-
step sequence). At this point, a sell signal is in effect, but we were lucky enough to get a
last ditch rally. We are under Zero Balance; we have the three-step sequence; we need to
rally to 941 to go positive with Zero Balance; a sell signal is in effect ... the perfect rally
to sell.
This same situation will happen with market declines where Zero Balance sets up its
three-step sequence. Price turns positive by moving above Zero Balance; and thus a buy
signal is given. And you get that last ditch effort to sell the market where prices can fall
some distance before going under Zero Balance gain ... the perfect decline to buy.
Look at the chart on the preceding page and see this situation after the October 1979
crash. Prices decline from 827 to 793 after turning positive. Prices would have had to go
below 714 to turn negative — a nice decline to buy.
APPLICATION
Zero Balance will serve you well when applied to any cyclical data — individual stock
issues, market averages, commodities, and one of my favorite applications. . . to oscil-
lators.
The concept of oscillation is incomplete in itself, as the mere fact of being overbought or
oversold is not enough. The markets can stay overbought or oversold for a long
171
time. What is predictive is determining when the overbought or oversold condition has
run its course and is going to change. Zero Balance is very useful in determining this.
I am sure these are only a few possible examples of Zero Balance application. The
technique is now yours and its application up to you, limited only by imagination.
Therein, may my technique be your continued discovery.
PREDICTING TOMORROW'S HIGH AND LOW
Another helpful tool to predict where price will go — on a much shorter term basis —
would be to determine tomorrow's projected high and low. If we want to sell short (and all
the gears are in groove ... that is, all our favorite indicators are now Bearish), we would
want to use tomorrow's high as the price level to sell short. But who is going to be so
kind as to tell us tomorrow's high, today?
To arrive at the projected high and low for tomorrow is really quite easy. Simply add
together today's High, Low and Close. Divide this number by 3, and then multiply that
by 2. Finally, subtract today's Low and "Presto!" Tomorrow's projected high appears.
To calculate the low of tomorrow, just change the last step by subtracting today's high.
This projected low may be a decent place to exit your short sale when the time is ripe.
EX AMPLE OF P ROJECTI NG HI GHS AND LOWS

T o da y H i g h : 3 6 Lo w : 3 0 C l o s e : 3 5
Tomorrow's High = 3 6 + 3 0 + 3 5 = 1 0 1 ; 101/3=33.6; 33 . 6 X 2 = 6 7 . 2 - 30 = 3 7 . 2
Tomorr ow's Low = 67. 2 - 3 6 = 3 1 .2
BALANCING PRICE AND TIME
During the 1970 Bear market, I made quite a bit of money waiting for stocks to break
sharply, then rally back 50% of the number of days they declined. I f a stock had a 24
day decline, I would wait for a 12 day recovery and then be ready to sell short. Usually
the stock's price will also rally back 50% of the decline ... but not always. So I use the
50% of the time theory as yet another alarm to start selling short. The ideal scenario, I
found, was to have either the 50% rally in price or time, then wait for the other 50%
element to kick in ... then you are there!
THE EXIT
For too many of us, we merely think of getting into a position, giving little thought to
why, how or when to get out. This is very wrong. You need to know what will make
172
you exit a trade.
I see four logical reasons for exiting a short sale:
1. Price has moved too far against us, so we are stopped out. Generally speaking, I
use a stop of 3 1/2 points on stocks under $35; 5 1/2 points for stocks up to $55, and 6-
7 points on stocks up to $100.
2. I will exit if an important upside resistance area is taken out on the close, regard-
less of my $ stop.
3. If the market has become very oversold, and a market bounce appears imminent, I
will take the profit (or use very close stops to protect my profits).
4. I also exit on a variety of targets that are Fibanacci retracements and extensions.
These are easy to calculate with the Target Shooter — which I am about to explain.
Let me begin by saying that there is some real magic in the calculations. But, sad to
say, they are not perfect. Yet the simple plastic overlay included with your course is the
very best thing I've found to indicate where short and intermediate term profits should
be taken, as markets usually bottom (or at least bounce) off these price levels.
TARGET SHOOTER:
HOW TO DETERMINE UPSIDE OBJECTIVES IF PRICE IS IN AN UPTREND
When prices are making both higher highs and higher lows, one can only conclude
that price is in an uptrend. It matters not what your time frame is: 5 minute charts,
hourly, daily or weekly. Just use consisten cy, and the Target Shooter targets will
unfold in front of your very eyes.
When price makes a new rally high — above the last market high — place the pivot line
of the Target Shooter across that high. This is done horizontally, with the #1 line
touching the low made prior to the new high. Then draw a vertical line, straight up
from this low. The minimum price objective is where this vertical line touches the
target line.
To arrive at the maximum price objective, slip the #2 line over the low, while keeping the
pivot line horizontal to the high. The vertical line from the low will now touch the target
line at the maximum expected target.
OBJECTIVES FOR PULLBACKS IN AN UPTREND
Let's see now ... price moved to a new high and has now started to pull back. Where
173
can we expect the decline to bottom 01-It?
To use the Target Shooter for this purpose, place a dot parallel to the low that was made
prior to the high prices which are "pulling back" from that low. This dot is to be placed on
the same day (or minute, hour, etc.) that the high was made; so, the dot is directly under
the current high. (See upper-right quadrant of the following diagram to understand how
this works.)
Next, slide the Target Shooter around until the #1 line graces the high, and the target line
touches the dot on the chart representing the low. Price should now drop back to the
pivot line as a maximum downside target.
174
The minimum downside target is a function of placing the #2 line o:. the high,
and the target line on the low; the pivot line now shows where price should
bottom and pivot back up.
HOW TO DETERMINE DOWNSIDE OBJECTIVES IN A DOWNTREND
When the price of your stock makes both lower lows and lower highs, the stock
is in a definite downtrend.
To find the extent of the down move, place the pivot line across the low prior
to the break to new lows. Situate the #1 line so that it touches the high prior to
the break. Now draw a vertical line down from the high (where the #1 line is
touching) to the target line. The price level where these two lines meet will
delineate the minimum downside target.
To ascertain the maximum downside target, position the #2 line across the high,
while r::aintaining the pivot line on the low. The intersection of the vertical
line and the target line is now the price target you are looking for.
DETERMINING THE END OF RALLIES AGAINST THE DOWNTREND
We can also use Target Shooter to tell us about where contra-trend rallies, in a
down-ward move, should top out.
To do this, place a dot on your chart directly above the low that price is rallying
off of and parallel to the high prior to the low. Now set your Target Shooter so
that the target line contacts with the dot and the #1 line is in contact with the
low. The stock should rally to the pivot line as its maximum contra-trend
objective.
The minimum objective would be arrived at by placing the #2 line on the low
and the target line on the dot.
You will find that most stock rallies and declines stop and reverse themselves
at the price objectives gained from the amazing Target Shooter. The device
you have been given will work on all charts where the price scale is equal (i.e. 1
inch always equals $1 in price). I f the chart is in gradients, logarithmic, etc.,
the scale will not work.
175
IX. S&P TRADING PATTERNS
X. MY CIIANNEL TRADING SYSTEM
What you are about to learn is the surest money-making system I have ever seen for
trading commodities. I( is also the easiest. This system has made money, year after
year, without any "curve fitting." Its strength is that it catches moves of real
consequence, lts weakness is that it is not highly reliable when measured by % of
winning trades.
ENTRY RULES:
BUY LONG TOMORROW AT THE HIGIIEST CLOSING PRICE OF TI IE LAST48

DAYS.
SELL SHORT TOMORROW AT THE LOWEST CLOSING PRICE OF TILE L AST48

DAYS.
EXIT RULES:
USE A $ 1,000 PROTECTIVE STOP LOSS
OR
I EXIT AT THE LOWEST CLOSE OF THE LAST 24 DAYS
The optimum use of this system requires the construction of a portfolio. It is best to have,
say, one currency, one bond, one grain, and one whatever, and trading this basket of
commodities.
Near the end of this manual, you will see the results of this system on 14 futures markets
(See MY CHANNEL SYSTEM, PAGES I-4) These results demonstrate (he power of this
system to make money in a wide variety of markets. Notice that the risk / reward ratio
is high, which is what allows for the lower % of accuracy than seen in short-terns
trading.
176
T BONDS ROLL - All trades
Gross profit $ 129,475.00 Gross loss $- 87,793.75

Largest winning trade $ 16,262.50 Largest losing trade $-1,643.75

Largest losing trade $3,011.05 Average losing trade $ -933.90

Max closed-out drawdown $-21,581.25 Max intra-day drawdown $- 2 1 , 5 8 1 . 2 5

A cc o u nt s i z e r e qu ir e d $ 24,501.25 Return on account 169%
System tested using Omega System Writer™

COMEX GOLD ROLL - All trades


Largest losing trade $1,825.23 Average losing trade $ -896.10



COMEX SILVER ROLL - All trades

Largest winning trade $91,650.00 Largest losing trade $-5,750,00

Ratio avg win/avg lose 3. 22 Avg trade (win & loss) $1,012.19


BRITISH POUND ROLL - All trades

Gross profit $173,093.75 Gross loss $--84,968.75


Ratio avg win/avg lose 3. 22 Avg trade (win & loss) $6 8 3 . 1 4


177
CBT MEAT ROLL - All trades
Total net profit $-4,600.00

Largest winning trade $ 3,312.50 Largest losing trade $-1,150.00

Largest losing trade $ 743.60 Average losing trade $-494.19
Ratio avg win/avg lose 1. 50 Avg trade (win & loss) $4 1 . 0 7

Max closed-out drawdown $ - 1 5 1 125.00 Max intra-day drawdown $- 1 5 , 4 2 5 . 0 0

A cc o u nt s i z e r e qu ir e d $ 1 8, 425.00 Return on account -24%
PORK BELLES ROLL - All trades
Total net profit $-3 0 , 7 2 4 . 0 0
Gross profit $ 8 9,632.00 Gross loss $-50,900.00


Largest losing trade $ 1,792.64 Average losing trade $-092.55

Max closed-out drawdown $-6,507.00 Max intra-day drawdown $- 6 , 5 0 2 . 0 0

S ys t e m t e s t e d u s i n g O m e g a S ys t e m W r i t e r ™
NY LIGHT CRUDE OIL ROLL - All trades




Max closed-out drawdown $ - 7 1 870.00 Max intra-day drawdown $- 8 , 1 2 0 . 0 0

S ys t e m t e s t e d u s i n g O m e g a S ys t e m W r i t e r ™
ORANGE JUICE - All trades
Total net profit $ 53,062.50
Gross profit $ 8 1,520.00 Gross loss $-27,657.50



Max closed-out drawdown $ - 4,065.00 Max intra-day drawdown $- 4 , 0 6 5 . 0 0

178
DEUTCHMARK - All trades

Largest winning trade $6,475.00 Largest losing trade $-1 , 6 7 5 . 0 0

Largest losing trade $1,980.32 Average losing trade $-815.00
Ratio avg win/avg lose 2 .4 3 Avg trade (win & loss) $6 3 6 . 4 2

Max closed-out drawdown $6,812.50 Max intra-day drawdown $-6,812.50

JAPANESE YEN - All trades
Total net profit $7 4 , 3 1 2 . 5 0
Gross profit $1 2 7 , 7 6 2. 5 0 Gross loss $-53.450.00

Largest winning trade $13,597.50 Largest losing trade $-2 , 4 5 0 . 0 0


Max closed-out drawdown $11,637.50 Max intra-day drawdown $-11,762.50

SWISS FRANC - All trades


Largest losing trade $2600.45 Average losing trade $-917.95
Ratio avg win/avg lose 2.43 Avg trade (win & loss) $841.25

Max closed-out drawdown $-6,087.50 Max intra-day drawdown $-6.087.50

Account size required $9,087.50 Return on account 1,0184%
COTTONS # 2 - All trades

Largest winning trade $6, 190.00 Largest losing trade $-1. 8 2 5 . 0 0

Max closed-out drawdown $0.00
Max intra-day drawdown $-8,465.00
profit factor 3. 45
Max # of contracts held 1
A cc o u nt s i z e r e qu ir e d $11,465.00
Return on account 134%
179
SUGAR #11 - All trades




SOYBEAN OIL - All trades

Gross profit $47,546,00 Gross loss $-30,222.00




180
a "theoretical value" for the option.
Determining call value
Indeed, this is the term normally used when giving Number of New Total
the price at which the option "should" be available. times out watch Optio value in
of 10 price value 10 times
The theoretical value of an option is the closest you can 5 Not more 0.00 0.00
come to its fair value, given your best guess as to how than $9.95
prices may potentially move. 2 $10.45 0.50 1.00
1 $10.95 1.00 1.00
An option is an option is an option. Whether you are 1 $11.45 1.50 1.50
dealing with the right to buy watches, stock or U.S. 1 $11.95 2.00 2.00
Treasure Total 10 5.50
Average value (5.50 divided by 10)
Test yourself
Now, comer the article and the answers below and see if you per lb. when he returns. Has Jim given you a call on
cart answer these questions. If. you answer "no" to arty trout?
question, explain now. Obviously, you trill not be graded.
This way, however, you can determine whether not you have
understood the critical aspects of the call option. This is Yes No
important because subsequent cuticles will build on that you
hate leaned here.
4. A farther friend, Dewey, is considering planting a
1. You agree to buy Ralph's cat- next Wednesday for half acre of popcorn. You tell him that he can sell you
$300. He agrees to sell the car to you next Wednesday a bushel of the harvest at $3 per bu. if he wants to.
and at that price. Has Ralph given you a call option Have you received a call option to buy popcorn front
on his car? Dewey
Yes No
Yes No
2. Alice has a green thumb and you don t. She is '
planting her garden and agrees to sell you some of' 3. Yellow onions have ranged in price from 10c to 30c per
her tomatoes, if you wish to buy any. Has Alice given lb., with an average of 17c. They are now 13C. You run a
you a call option on tomatoes? Mexican restaurant and want to control costs. You
negotiate with your local food store to buy at a guaranteed
Yes No 13e price for next month's purchase of 30 lb. of onions.
The manager contends that the option is worth at least 4¢
per lb. because 13t is 4¢ less than the average 17c price. Is
he right?
3. Your friend, Jim, is going fishing in Canada. He
offers to sell you 50 lb. of lake trout, if you want it, at
$1.23
Yes No
Answers
1. No. A call option is a right without obligation. You have obligated to make the purchase if Dewey desires to sell. In actuality, Dewey has
an obligation to purchase the vehicle, matching Ralph's obligation acquired an option to sell the popcorn to you, in a specified quantity (1 bu.) at a
to sell. You have bought a "future delivery contract" (or just a specified price ($3 per bu.) if he so desires. He has a "put" option, which will be
"future," in normal terminology) on Ralph's car. covered in the next article.
2. No. A call option has a specified quantity and specified No. The minimum price of a call option involves the relationship between the
price as a part of the contract, both of which are lacking in your
arrangement with Alice. strike and the current market price, rather than the average historical price.
3. Yes. There is no compulsion on your part to purchase, The option is worth at least 2c — 150 minus 130. Whether or not it is worth as
the price is guaranteed a $1.25 per lb., and the quantity is
specified at 50 Ib. All requirements are met. much as 4c depends on how rapidly yellow onion prices fluctuate. This rate of
4. No. You have not received an option to buy (a call) because you fluctuation is called "volatility," another concept which will be dealt with later.
are
181
Bury bond futures, call option contracts have these characteristics. I f you understand the example given for
digital watch calls, you understand all call options.
THE PUT OPTION: YOUR RIGHT TO SELL
Because options strategies and terminology have become more complex as the popu-
larity of the instruments has grown, many readers may not be familiar with some of the
basic features of options. This article is the second in a series which attempts to present
options in a simple, clear manner.
You are setting up a "shoestring" operation to manufacture novelty items — initially,

miniature white oak barrels, which you plan to market as "piggy banks."
You are willing to accept the entrepreneurial risks involved because the local savings
and loan association has already agreed to purchase 5,000 of these novelty barrel
banks for $4 each in December ... if you can deliver them. You have computed your
costs to be $1.50 per barrel in materials and another $1.50 in labor. Therefore, you
have a small but guaranteed profit for the initial period of operation of your enter-
prise.
This "price insurance" that you have gained from the savings and loan association is a
"put" option. The quantity and price at which you can deliver have been guaranteed.
A put option is However, when December rolls around, you discover that a New Jersey
the right to
deliver… firm, "Barrels `R Us," is approaching thrift institutions with a product
almost identical with yours but priced at only $3 each. If you hadn't
gotten the $4 "strike" put option from the savings and loan association,
you would have had to drop your price to $3 to meet the competition ...
and have gained no profit buffer against bad economic times.
As it is, you are able to "exercise" your option and deliver your 5,000 barrels at $4 each —
$1 above the competitive market rate.
In this situation, your option was "in the money." The current market price of $3
apiece made it advantageous to sell your product through the put option at its $4
strike price level. But what if the market price had been "out of the money?"
Let's say you are contacted by a California winery in November. The winery had
planned a promotion campaign featuring its white oak aged wines, including mail-in
coupons that allowed purchasers to get small white oak barrel banks stamped with the
winery's name.
But the winery's supplier goofed. He made his barrels of white pine, not white oak.
With no time remaining to correct that error, the winery has been frantically search-
182
ing for a replacement source.
They hear about your product and offer to purchase all of your 5,000 barrels in December
for $6 each. The "market price" of your special white oak barrels has now gone to $6
each, while your put option would only get you $4 per barrel.
Because the sale of your barrels to the savings and loan is at your discre-
…specific
amount tion — one of the advantages of a put option arrangement — you elect to
of a specified
item at a
sell to the winery at the higher "market price." (Being a nice guy, of
specified price course, you probably would tell the savings and loan company about the
prior to the
expiration of the white pine barrels that are available from another source, probably at a
contract. very attractive price.)
What if the original supplier for the winery had held a put option to deliver its barrels to
the winery, agreeing to provide a specified quantity for a specified price? It would have
made no difference: The contract would have specified the requirement for de-livery of
white oak barrels, a requirement not met by the attempted delivery by that supplier of
white pine barrels.
Another facet of the options instrument can be incorporated into this example.
European
options are
those which Let's assume that the savings and loan association wanted your barrels in
can be December to coincide with its Christmas Club savings account drive.
exercised only
on the day As a result, it worded your options contract, Exercisable only on the
fifteenth o f December 1986."
prior to option
expiration. This is a type of option known as a "European-style" contract, allowing
delivery only on the date specified. With an "American-style" options contract, delivery
could have been made at any time prior to the expiration of the contract rather than on
the single day spelled out by the European-style options contract.
What does this mean to you? Let's say you complete the manufacture of the 5,000
barrels in mid-August. Because you have only a small shop, you must store these
barrels in a rented mini warehouse for four months. The added cost reduces the value of
your $4 put by increasing the costs against which it is measured. Now, your price must
cover not only material plus labor but also storage costs.
Of more value to you in this case would have been the American-style option. You could
have exercised such an option in August and saved the added expense of storage
(especially if you had gotten wind of the "Barrels `R Us" activity).
No matter what the item specified by the option or the option type (put or call), an
American-style option will always be worth as much as, or more than, an otherwise
identical European option because of the difference in delivery specifications.
183
WHAT'S AN OPTION WORTH?
The most observable thing about an option is its price, or "premium."

The premium is
the value The financial section of any good newspaper will report the latest price
assigned to anof options on stocks, bonds, currencies, stock indexes and futures. These
option,
reflecting the
prices reflect the net result of the buy-sell auction that characterizes
sum… the markets where these instruments trade. Unless these markets are
thin, those premiums are far from arbitrary. Rather, they are the result
of careful analysis by market participants. Any trader not having access
to tables of "theoretical values" for options would find himself at such a disadvantage to
the rest of the crowd that, inevitably, he would go broke.
The vast majority of exchange-traded options are American style: They can be acted on
(exercised) at any time before they expire. Because such an option can be exercised at
any time, its value cannot be less than the advantage its strike gives you, compared
with the current market value of the item underlying it.
… of its
current value… I f you hold a $4 strike call on soybean futures that are priced at $4.20
per bu., your option is giving you the right to buy futures 20o below the
market. Its premium cannot be less than 20¢. Otherwise, you could.
exercise the call immediately, sell the futures you receive and lock in a
guaranteed profit.
On the other hand, an option cannot be worth less than zero. A $4 put in the same
market is 20o worse than the $4.20 market price, but no sane holder of that option
would exercise it and lock in a loss. The amount of advantage the option gives its
holder is the current — in floor jargon, "par" or "intrinsic" — value of the option.
The current value of a call equals the greater of zero and the market price less the
strike price. The current value of a put equals the greater of zero and the strike price
less the market price.
In-the-money options are those that have a current value that is greater than zero. All
other options have a current value of zero.
Unless the option is about to expire, its value will be something more than its current
value. Markets move. The value of the option is related to the market price so potential
effects of such moves also affect the premium.
The effect of all such probable moves cannot be a net loss. Because it cannot drop
below zero, the most an option can lose on an adverse market move is its current
premium. On the other hand, a continuing favorable move will cause a virtual open-
ended increase in the value of the option.
184
This effect is always greatest for options having strike prices close to the current market
price and least for options deeply in or out oft .e money.
To illustrate, let's relive an earlier era with a simpler economy. It's 17th century
Germany, plagued with religious wars. You have a munitions plant, manufacturing
cannonballs.
War And Peace
One quarter of the time the electorate is at war, and the armies will buy cannonballs for 5
marks each. One quarter of the time, the electorate is peaceful and quiet, leaving
cannonballs worth 1 mark, the value of the iron from which they are made. The other half
of the time, there are rumors of war, and speculators are willing to buy cannon-balls at
3 marks on the chance of war breaking out.
Now there are rumors of war. A young nobleman, seeking to make his fortune, wants to
purchase a 3-mark call option on 1,000 cannonballs. You take out your 17th century
computer, sharpen it up, dip it in the inkwell and produce the tally that appears in the 3-
mark cannonball call option table on the next page. Because a 3-mark call, with the
market price at 3, has a current value of zero, the total value of that call is 0.50 marks
(0 plus 0.50) times 1,000 equals 500 marks.
Looking over your shoulder, he notices that he would lose his 500-mark investment 75%
of the time. Therefore, he requests that you work up a quote on a 2-mark call, which is I
mark in the money. The total value of the 2-mark call, which has a current value of 1
mark, is 1.25 marks (1 plus 0.25) times 1,000 equals 1,250 marks (see 2-mark call
option table). Now if the situation remains unchanged, he loses only 250 marks — the
"net potential" component of the option value — rather than 500 marks.
… and the
market’s
That 1,250 marks, however, is more than the young nobleman can afford.
opinion of its He does like the 250-mark limit on his losses i f things don't change,
net potential. so he asks for a quote on a 4-mark call (1 mark out of the money). You
produce a computation that shows the total value of that option to be
0.25 (0 plus 0.25) times 1,000 equals 250 marks.
He sees that he still has only a 250-mark "unchanged" risk and stands to make a net
profit of 750 marks if war breaks out because he could buy 1,000 cannonballs at 4 and
sell at 5. That 1,000-mark gain less his cost of 250 marks is 750 marks in profit. So he
buys that contract from you.
Even in the far more complex world of today, the option that has the largest "net
potential" component is that which has its "strike" (guarantee price) closest to the
current market price of the instrument against which it is written. The "net potential"
portion of the option premium is normally referred to as "time value" of the option. When
a contract is about to expire, the value of the option is only its "par" value.
185
The market has no time left in which to
change. `Fly About' Factor
At any point prior to the expiration of the option, the time value assigned to the
option will reflect both time remaining on the contract and the market's opinion of
how- active the price of the underlying instrument will be. The term used for
this level of activity is "volatility," from the Latin word meaning "to fly." The more
an instrument's price tends to "fly about," the more extreme is the potential for
change in price between now and when the contract expires.
Adverse changes cannot bring the value of the option below zero, but that value
can increase by virtually any amount with favorable market moves. Therefore,
any in-crease in the amount by which the instrument's price can change will
increase the value of options on that instrument.
Because the only "subjective" portion of the option value is its time value and
because time value is greatest for options near the money, those options are
affected most by the market's opinion of volatility.
Cannonball option tables
Review what you know about premiums
Three-mark call Enter a plus ( + ) in each box where the option premium component
increases as the item at the head of the column increases. Enter a
Price Option Option Differ- Proba minus (–) if that component decreases as the heading item
(in marks) value now ence bility Net increases
Peace 1 0 0 0 0.25 0.00
Rumors 3 0 0 0 0.50 0.00 1. Current value component
War 5 2 0 0 0.25 0.50 Instrument Option
Net potential market price strike price
0.50
Two-mark call Call option current (par) value a b

Price Option Option Differ- Proba Put option current (par) value c d
(in marks) value now ence bility Net
Peace 1 0 1 -1 0.25 -0.25
Rumors 3 1 1 0 0.50 0.00 2. Time value component
War 5 3 1 2 0.25 0.50 Instrument Time Separation between
Net potential 0.25 volatility remaining market and strike
Four-mark call Call time value a b c

Price Option Option Differ- Proba
(in marks) value now ence bility Net Put time value d e f
Peace 1 0 0 0 0.25 0.00
Rumors 3 0 0 0 0.50 0.00 Answers
War 5 1 0 1 0.25 1a. Plus — the higher the market goes, the more valuable is the
Net potential 0.25 right to buy it at a fixed price that becomes more and more of a
discount from the market price.
1b. Minus — the higher the level at which the price is guaranteed,
the less advantageous it is to buy at that price.
1 c. Minus — the higher the market, the less advantageous is the
right to sell at any given guaranteed price. The market price gets
better and better in comparison to that guarantee.
Id. Plus — the higher the level at which you are guaranteed the
right to sell, the better off you are.
2a. Plus — the greater the volatility, the more prices can change.
The more prices can change, the greater is the net potential
improvement in the value of the option.
2b. Plus—the more time remaining, the more time prices have to
move. And as in the previous answer, any increase in the
potential price change increases the time value of the option.
2c. Minus— the further the option strike is from the current market
price, the less is its time value.
2d. Plus — effect is the same as for calls (see 2a).
2e. Plus — effect is the same as for calls (see 2b).
Minus — effect is the same as for calls (see 2c),
186
Volatility normally is expressed in percent per year. A volatility of 10 on an instrument priced at 200, for
example, implies that the floor believes prices are changing at a rate such that there is about a two-thirds
probability of the price, after a year, being between 180 and 220.
Even if volatility remains unchanged, however, the time value of the option will de-
crease as less and less time remains in the option contract. Just as a person walking at 5
miles per hour cannot go as far in an hour as he can in three hours, an option has less
net potential of improvement in fives days than it has in 50.
This inevitable decrease in the time value of an option is referred to as its "decay." That
decay is the price an option buyer pays for the right to have a contract of limited risk but
unlimited profit potential.
187
SYNTHETICS: SCRATCHING A CALL AND GETTING A PUT
Put and call options are not independent entities. Rather, they are the two pieces of a
jigsaw puzzle that, when assembled, produce the futures, stock or other instrument
underlying the options.
If you buy a
call and sell I f you purchase a call — the right to buy at a guaranteed price — and, at
a put at the
same strike, the same time, sell a put — giving the purchaser the right to sell to you
you will end
up buying the
at a guaranteed price — and the strike prices are the same for both, you
instrument at
the strike
are assured of receiving the underlying instrument at the options strike
price. price at or before the expiration of those options. That assurance is in-
dependent of market price.
To illustrate, assume you are in the market for a West Highlands White Terrier pup. You
know two breeders, Frank and Herb, both of whom are expecting their "Westies" to have
litters in two weeks.
Both Frank and Herb have arrangements with "Puppy Hut," which will purchase any
pups they wish to sell at the going market rate. "Westies" are currently going for $325
each wholesale, and prices have ranged from $250 to $450 under fluctuating demand
over the last year.
You visit Frank. After admiring the antics of his dogs, you tell him you are willing, if he
pays you $25, to buy a puppy from him in two months for $325 — at his discretion.
Frank thinks it over. I f the market price drops, he can unload at least one puppy at the
$325 price. I f it goes up, he can sell the entire litter to Puppy Hut at the higher price. It
seems like a reasonable arrangement, so he writes up an agreement, which you sign,
and he pays you the $25.
As you are driving home, you begin to worry that "Westies" could really go up in price.
Frank has no obligation to sell it to you, and your kids would be very upset if you didn't
buy their puppy for them.
You stop at Herb's. Taking the $25 from your pocket, you offer it to him if he will
guarantee you the right to purchase one of his " Westies," after weaning, for $325. Herb
doesn't expect the price of that breed to rise by more than $25 over the next two months,
so he agrees to the deal. He writes up an agreement, signs it and trades it for your $25.
You then continue home unworried. You will receive, in about two months (two weeks to
birth, then six weeks until weaning), a "Westie" puppy for $325. If the market price is
lower than that, Frank will call you to remind you of your agreement to buy one from
him at $325. I f the market is higher, you will pay a visit to Herb and remind him of the
$325 guaranteed price he gave you.
188
It turns out that the wholesale price has dropped to $300 by the time the puppies are
weaned. So you drive over to Frank's and buy one for $325 as you had agreed.
He mentions that he and Herb had been talking a couple of weeks ago
The difference and your arrangement came up. He tells you that you could have accom-
between the
premium of a call plished the same thing by agreeing, unconditionally, to purchase a
and its matching put
should always be "Westie" from him and giving him $50 "earnest money," which would be
very close…
applied to the pup's price. He says he would have been willing to lock in
the then-existing price of $325 under such a contract — a future-pur-
chase agreement. Test yourself on synthetics

Now, test yourself on how well you understand these
synthetics. Feel free to use the table for reference.
By selling a put to Frank and buying
a call from Herb, you were in exactly 1. You have been long a put in gold as prices dropped.
Now, however, you see the potential for a nice rally.
the same situation as if you had Ideally, you would take profits by selling your put and
arranged a future purchase from then buying an out-of-the-money call. However, your
either. Be-cause each situation put is so far in the money that it is bid below par. How
can you convert that put position into one that mimics
results in the same de-livery at the being long an out-of-the-money call?
same price, they have identical
values. Moreover, if you wished to 2. In your portfolio, you are short 10 futures
contracts, long twelve 360 calls and short eleven 360
transfer your rights to someone else, puts. How can you neutralize this position with two
the value of either arrangement one-lot trades?
depends solely on the current price 3. Expecting volatility to increase, you have
of the puppies. purchased 10 at-the-money calls on British pound
futures. What five-lot trade will convert this position
In this particular case, the strike into a long five calls-long five puts straddle?
at which the call and put were
e s t a b l i s h e d was 4. A simple bull spread may be produced by purchasing
a call at strike "A," then writing another at the higher
To the the same as the strike "B." You are a farmer and expect to have 5,000 bu.
differe "future" price. of soybeans harvested for delivery in November —
nce effectively, you are long one November soybean futures
between Therefore, they had contract. How could you convert this long futures
the the same premium of position into a simple bull spread?
futures $25. If the strike had
price been lower, the call Answers
would have been worth more than 1. Buy a futures contract. This will future conversions” and have
the put. convert your in-the-money
(above-the-market) put into an
eliminated your market risk.
3. Sell five futures contracts.
out-of-the-money call. In calls, Those five shorts will match five
strikes above the market are out of of your long calls to act as it you
The difference between the price of the money. You don't exercise were long five puts. Your final
the call and your right to buy at a higher price
when the market price is lower.
position is long five actual calls
and long five synthetic puts.
2. First, sell one futures contract. 4. Purchase one put at "A," then
Your 11 short futures then match write one call at "B." Your effective
the 11 short 360 puts to behave long futures matches the long put
as if you were short eleven 360 at "A" to synthesize a long "A"
calls. Next, sell the one 360 call call. This particular synthesized
that is not offset by the 11 synthetic bull spread is referred to as a
shorts. You have created 11 hedging "fence."
“short-
189
the price of the put will be the difference between the future-delivery price and the
strike price of the options. Both options are the same distance away from the money, so
they will have about the same time value (minor differences may exist because of the
cost of carry on the options position and because of market buy-sell pressures).
As you recall from last month's article, the immediate value for a call is the price of the
underlying instrument less the strike of that call. For a put, it's the re-verse. In neither
case can the immediate value be less than zero, because
Syntheses:
Six possible pairings options do not require the holder to act on them. The
Long call + short put = long futures
bottom line, therefore, is:
Short call + long put = short futures
Long put + long futures = long call Call – put = future – strike.
Short put + short futures = short call
Long call + short futures = long put The strike doesn't vary, so
Short call + long futures = short put
any change in the futures price must cause a dollar-for-
dollar change in the value of the net options position.
Because the options' strike has no effect on the changing value of your position as the
underlying instrument (puppies, bonds, etc.) changes price, it is normally left out of the
equation. But remember that the strike of the call still must be the same as that of the
put.
Expressing this equivalence in mathematical form, it becomes obvious that other re-
lationships exist. For example, if being long the call and short the put is the same as
being long futures, then being short the call and long the put must be the same as
being short futures.
In fact, six different pairings can be constructed, each permitting a futures or options
position to be created indirectly. These procedures, called "syntheses," enable you to put
together a combination position identical in behavior to the position being synthesized.
This gives you much flexibility. Let's say you think interest rates are about to fall
further, increasing the price of T-bond futures. Examining call premiums, you might find
them overpriced compared with put premiums. Instead of buying a call at strike "A," you
can purchase a put at strike "A" and simultaneously go long a futures con-tract to
create the same profit-loss exposure to the market as you would have had by being long
just the "A" call.
I f you have ridden a rally, profiting from a simple long call, you can switch to a long put
position on indications of a turnaround by simply shorting a futures contract. The
combined call-futures position will perform exactly as if it were a long put.
Memorize any one of these relationships shown in the table in the first column on this
page. The others can be produced by the simple addition or subtraction of elements
190
from both sides of the equation. Better still, cut out the table (or copy it) and place it in a
location where you can see it when you are working out your options trades.
HOW TO SURVIVE THE FIRST FEW MONTHS OF OPTIONS TRADING
The "Options for the Layman" series, which started in the April issue, has given you the
basic concepts necessary for trading options intelligently. This final segment offers
"helpful hints" for avoiding common pitfalls that trip up new option investors.
You should
seldom If ever, go
naked
When you write an option priced high enough to yield a reasonable re-turn
on your investment margin, you are exposed to substantial losses
should the market move sharply against you. Not only will the option
. increase in value with the move, producing losses on your short position,
but that rate of increase also will accelerate with the move.
Purchased out-of-the-money options usually are "cheap," attracting novice traders trying
to control the absolute amount of risk in their first trades. But they are very likely to end
up worthless. The market must move substantially in your favor to break even by
expiration of the option.
Bull and bear spreads permit tighter control of loss potential than "naked" option writes
while permitting you to enter into positions that require less of a market move than
"naked" purchases to generate profits (see "Simple Options Strategies: The Versatile Bull
Spread" on page 206 for more information on these flexible spreading opportunities).
Don't put all
your eggs in one You will have losing trades. It has been said the worst thing that can
basket
happen to a trader is to sustain a series of losses. And the next is to
realize an early series of wins.
In the first case, the trader, who often hasn't developed capital management
skills, runs out of money and must leave the game. In the second, you
forget that you can also lose.
The resulting erosion of loss control discipline sets you up to be wiped out when you do
experience a string of losses. In general, do not risk more than $500 or 10% of your
trading capital, whichever is greater, at any one time in any one commodity. Permit
yourself some flexibility in this, but make your exceptions few and by small amounts.
There are at least a dozen reasonably active commodity options markets and more in
equities. Spread out your risks and you are unlikely to be badly hurt by isolated
distortions in the market.
191
At least 75% of the time, markets are either just holding onto their existing
M a k e some
money during
level of activity (referred to as "volatility," the potential for price
quieting movement) or are quieting down. In these markets, options purchasers
markets.
will lose money. Simple writing of options, although profitable that 75% of
the time, can wipe out your resources in the other 25% because of their
open-ended loss potential.
The solution is to use, in at least half of your positions, bull or bear spreads in which the
written option has a strike closer to the current price of the underlying instrument than
does the option you buy (again, see "Simple Options Strategies: The Versatile Bull
Spread," page 206).
Don’t be
afraid to Markets are sometimes very nice to the trader. I f you have a position that,
“cash in”
early
due to sharply favorable market movement, has realized a sub-
stantial part of your expected profits in a short period of time, consider
taking your profits and looking around for a new play. One of the most
disheartening things that can happen is to experience very good profits on a
nice market move, only to watch as the market corrects and your
profits are decimated.
This is especially important if you are holding a position that loses in a quiet market
— bull or bear spreads in which the purchased option's strike is closer to the market
than the written option's strike or the occasional "naked long" options position.
Know where you

stand.
Don't put on a trade and forget it. Although the trading strategies sug-
gested here and in "Simple Options Strategies" do not require monitoring
during the day, you should take account each evening of the profit or
loss that has accumulated to each trade. Without such regular attention to
your positions, you wouldn't know when it might be time to take early
profits or when it might be best to close out a losing trade.
On the later point, a good rule of thumb is to close out trades that suffer from quiet
markets when they have lost 60%-75% of your maximum risk and to close out those
that profit from quiet markets when they have lost 40%-50% of your maximum risk.
I f your mind tells you to give a trade a bit more leeway, fine. I f your heart is speaking,
ignore it. In other words, waive your loss-control standards grudgingly and only when you
have sound reasons for expecting a favorable reversal of the situation.
Don't press your

entry.
You have worked out a strategy that matches your expectations of the
markets. Checking current prices of the options involved, you compute
what the trade ought to cost. It is always tempting to place your order a
tick or two better than that price. Sometimes you will be filled at the
bettered bid. But the satisfaction you gain by those victories is often offset
by missing good trades in trying to nickel-and-dime the market.
192
The net effect seems also to be an increase in the percentage of losers among the
trades you actually enter. After all, the market had to move adversely to your longer-
term goal to permit the cheaper entry. A good strategy for the beginning trader is to
enter trades at the current price and give the floor trader a tick or two of discretion in
filling your order.
The floor trader, paid by the number of orders he fills, will have an easier time filling
this. As a result, he is likely to be willing to work a little bit to get you an improved
price when possible ;, thus promoting your continued use of his services.
This is the flip side of the previous thing. With the exception of near-the-money, nearby-
contract options in a handful of the most liquid option markets, "at-the-market" option
orders seem to produce cackles of demonic glee on the trading floor-. Bids and offers
seem to momentarily flex to engulf the maximum from your beneficence — not always,
but too often to really be funny.
Use the price-with-discretion form that is suggested above. Your granted

Don't place market
orders.
discretion_ will insure that the vast majority of your orders will be filled,
while keeping "slippage" within the bounds of your specified amount of l s.
discretion. A corollary of these last two hints is contained in the old
saying I just made up: "A good floor trader is worth his weight in
commissions."
Give your floor trader elbow room, but don't tempt him. The end result will
be a good working relationship that profits both of you. By the way, when you get a good
"fill," be sure to try to get the name of the floor trader who did it. And request him next
time you place an order for execution in his trading pit.
Know the
markets.. I f you are not one of those few individuals who religiously follow the
markets, it is to your advantage to tape the minds of those who do. Sub-
scribe to a newsletter, enroll in a hotline or cultivate that neighbor who
has been doing technical analyses on his personal computer. You should
have a goal of becoming about as good at predicting market behavior as
your local weatherman is at predicting whether it's safe to go on a picnic.
That's not asking much.
Some brokerage houses offer analyses of about that level of accuracy and not always at
the cost of a higher commission rate. Use whatever information you can get. Be-cause
your risks are controlled, a batting average even slightly over .500 should generate
profits.
Remember, you can be wrong in your trading. Do not overextend yourself — based on a
given market expectation — to try for a home run. Joe DiMaggio had a better batting
average than did Babe Ruth.
193
Use a
brokerage Even though commodity options have been around for almost four years,
house an alarming number of brokerage houses are staffed with order takers
whole
personal who have not been brought "up to speed" on these instruments. As option
comprehend orders become a larger and larger portion of total commission volume this
options.
situation is gradually — but very gradually — improving.
It is quite possible that you, as a novice trader, will occasionally request a trade you
don't really mean. A competent person on the other end of the telephone may catch
some of those mistakes and thus save you from sticking your neck out further than you
had intended. It is a good idea to ask around.
The best source of information on how literate a brokerage house is in options is a

regular option investor who uses the brokerage house. A little effort expended initially
in finding a knowledgeable partner in trading — your broker — will be repaid many
times over.
Have fun ! By understanding what's going on with your option trades and profiting
from the mistakes of those who have gone before — by taking the above
options trading hints to heart — you should be able to invest or hedge or
play-the-game in options with the same level of excitement and satisfac-
tion that accompanies other challenging but profitable endeavors. You will
be able to sleep nights.
And when you do have losses, they will be of the "Darn!" sort, rather than "Oh, my
god!" Assuming you have a good mix of strategies and markets, coupled with the
slightest bit of market feel, a return of a solid 20%-30% or better on your trading
activities is within reason. A leisurely pace of trading and monitoring the trades is
sufficient to control your positions.
Overall, you have created from a dangerous, high-profit-potential set of investments a

well-contained strategy that leaves the big profits, the big risks, the sleepless nights and
the haunted eyes to others. Have fun!
194
SIMPLE OPTIONS STRATEGIES: THE VERSATILE BULL SPREAD
A hare and a raven meet at the base of a tree. The conversation turns to their common
enemy, the fox.
"I know a hundred ways to escape him," the raven brags.
"I know but one," the hare replies, "and that is to run away."
The raven titters his superiority.
Just then, the fox appears. Quickly, the hare runs away. While the raven stands
around trying to decide which of his strategies to use, the fox gobbles him up.
Moral: Sometimes simple is best.
The option trader also can call on a wide range of strategies (see "19 Option Strategies
and When To Use Them," Futures, June 1934 — reprints $2 each).
The selection process — weighing risks, rewards and responses iri the expected market
— can become a mind-wracking exercise, however.
Simple Bull Spread
This month, we will drop to a simpler level. bike the hare, we will take a single trading
tool — the bull spread — and reverse it, stretch it and duplicate it to fit a full range of
expectations of market price and volatility.
The bull spread is produced when you purchase one option — either a put or a call —
and sell a higher strike option of the same type. It always has limited risk (at its
maximum, should the market close below the lower strike on expiration of the option),
with that protection being paid for by accepting limited profit (at its maximum, should
the market close above the higher strike).
Whenever the market is expected to rise, some version of the options bull spread is an
appropriate strategy.
When you expect the market to be bearish, the bear spread — which is nothing more
than a reversed bull spread — is appropriate. In a bear spread, you purchase the
higher strike option and sell the lower strike option.
You make maximum profits if the market closes below the lower strike price. Maxi-
mum losses are realized on a close above the higher strike price. As in the bull spread,
the bear spread may be established with either puts or calls.
195
When you have no directional bias or you expect the market to remain in a tight
trading range, you can enter both a bull spread and a bear spread and thus create
either a butterfly or a condor spread.
The diagram below illustrates the appropriate versions of these strategies across the
full range of volatility and market price expectations. A review of the rationale under-
lying each of the strategies is outlined in the spread-by-spread diagrams on the fol-
lowing pages.
Remember that the strategies shown on these pages are not the only strategies that
may be used in each market opinion. They are just among the simplest.
196
Very Bullish Strategies Moderately Bullish Strategies
The strong bullish viewpoint of With a moderate bullish viewpoint,
the trader is reflected by the trader should still use the bull
implementing b u l l spreads in spread. But the moderation of a
which the purchased and sold position implies that the trader
options are two to three strikes holds greater fear of a market
apart. This increases the profit decline. Here, options that are
potential in a rising market while only one (or at the most two)
permitting greater (but strikes apart are used. This buys
controlled) losses if the market tighter protection at the expense of
falls. a lessened maximum profit potential.
A sharp decline in volatility is expected. In
Volatility is expected to decline sharply. such a situation, bullish moves cannot be
Therefore, although prices are strongly expected expected to amount to much. An option that is at
to rise, the absolute increase may well be small. or below the market is written so any movement
On the other hand, falling volatilities imply a other than a decline will reap the maximum
limited down-side risk as well. An option at or possible profit. The lower-strike option
below the market is written to immediately capture profits from purchased will not kick in to stop losses until the market has
any rally, while an option that is two or three strikes lower is dropped significantly, but the sharply lower volatility that is
bought for "disaster insurance" Remember that falling expected would not be characterized by such a move. Some
volatility occurs when the size of price swings decreases. A profits are realized in this strategy even if the market slips a
sharp sell-off is therefore not very likely. little.
Volatility is expected to decline some-what. Volatilities are expected to decline a little. Price
Since this lessened decline will have less of a moves, therefore, will be some-what less than the
dampening effect on prices, a bit more of an current pattern — but not a lot. A slightly higher
absolute in-crease in prices is expected. pair of strikes (with the purchased option still
Concurrently, the risk of a significant decline is some-what further from the current market
somewhat greater than in the previous scenario. than the written one) is employed. This tightens
A strike a bit above the market is written, acknowledging the up the loss Protection and increases the maximum profit
larger potential bull move. The option purchased two or three attainable. In return, more of a rally is required to gain that
strikes lower than the one sold produces a tighter loss control, maximum profit level. If the market doesn't move, enough
reflecting the greater risk of market decline. profit to pay commissions should still be realized.
Volatility is expected to remain about where it Volatility is expected to remain about the same
is. The purchased option and the written option as it is now. Selling an option above the market
are just about the same distance from the by about the same amount as the written option is
current market price. A greater maximum profit below it establishes a balanced profit and loss
has been achieved while pulling the down-side potential. The time values of the two options
protection even a bit closer. The market must should be about the same, so there would be no
rally a moderate amount to reach that maximum, but a steady loss or gain in a quiet market. A tighter protection has been gained,
volatility coupled with a strong bullish market opinion justifies the and a somewhat higher maximum profit level has been established.
expectation of such a level of moderate market improvement. In effect, this position mimics a long-futures position while the
market remains between strikes.
A somewhat increased volatility is expected. Somewhat higher volatility is expected. As the
A higher price move is thus possible, but the market increases its potential for movement, the
downside potential is also increased. The protective long option is pulled in to just below
purchased option is established a bit below the the current market price. The written option,
current market to tighten the insurance level. having been pushed a bit higher, requires that a
The option written, two or three strikes higher larger upside move occur before maximum
than that of the option sold, requires a larger move to achieve profits are reached. Those profits, however, are greater than in the
maximum profit, but that profit level has been increased. A prior moderately bullish plays. If the market does not move, minor
steady market will produce minor losses. But steady markets losses will be realized. The increasing volatility makes this rather
are unlikely in conjunction with rising volatility. unlikely, however.
Volatility is expected to sharply in-crease. The If volatility is expected to be significantly
absolute price increases possible in this higher, the purchased option should be at or
scenario are the greatest of all — as is the slightly above the current market price —
potential for a sharp reversal. By purchasing an with the written option one (or at the most two)
option that is at or above the market and strikes higher. This gives the trader the
selling at two or three strikes above that level, greatest profit on a strong upside move while
a very tight downside protection has been established. Although a offering the lightest protection on a slip in prices. The trade
static market will produce losses and prices must rally off is that a significant move is required to capture the
significantly to cause the maximum profit level to be realized, that maximum amount of profit. And should the market not move,
profit level is the highest of all these strategies. the maximum loss will be realized.
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Moderately Bearish Strategies
No Directional Bias Strategies
If there is no directional bias, Having a bearish opinion of the
implement both a bull and a bear market, the trader will be establishing
spread. Set the spreads up to profit on bear spreads – the purchased option
moves away from the current market will have a strike higher than the one
if volatility is expected to increase. If sold. Since the traders opinion is only
volatility is expected to decrease, moderately bearish, the options should
then set up the spreads to profit from be of adjacent strikes (or at most strike
market stagnation. between them)
If the trader feels volatility will decline sharply, he A sharp decline in volatility is expected. This
should sell those options that have strikes at the will tend to reduce the size of moves in either
current market price. The purchased options may
be the next-closest strike if expiration is more than a direction. To profit from a quiet or slightly down
few weeks away. Otherwise, it is better to move out market, the written option is established at or
two strikes in each direction. The effect of the
combined bull and bear spreads is to produce a "long above the currents market price. The option
butterfly." This spread has tight loss control in either purchased above if provides only very loose
direction but has a pinpoint maximum profit zone
The trader is counting on near-total stagnation. protection against loss if the market rallies sharply. But, as stated,
large moves in either direction do not go wish falling volatility.
Maximum profit is realized if the market falls – or even falls to
rise.
With only a somewhat lessened volatility expected, Volatility is expected to decrease somewhat. To
the trader should implement the bear spread just get a more immediate protection from adverse
above the market and the bull spread just below. moves while accepting the need for the market
His loss protection, although absolute, is a bit to drop a bit to realize maximum profit, the
looser. His range of maximum profit, however, is written option is established a bit below the
widened. Maximum profit is achieved if the market market. The purchased option still has a strike
is anywhere between the two written options when they expire. This is further from the market than that reach maximum profit – but that
the "long condor" spread. Be sure that the bear and bull spreads have profit is greater. Minor profits are still captured in a quiet market,
identical option-strike separations. Other-wise, market risk will be and losses are stopped sooner on the upside.
uneven.
With no change in volatility expected (or, at With a stable volatility expected, the trader
least, no bi as to whether it will increase or should place his written and purchased options
decrease), the trader should implement the at strikes that bracket the current market price
"golden strategy." This is the strategy used by evenly. The time values of the options should
the experts to handle those situations when they be about the same, giving no loss or gain in, a
have no market opinion—do nothing! One of quiet market. More of a market drop is required
the hardest learned and most profitable lessons in trading is that to reach the maximum profit, but the loss-controlling purchased
there are times when one should leave the table — either to await option is going to kick in sooner if the market star's to rally.
the formation of directional or volatility signals or to move to a Between the two strikes, the trader's profit and loss will parallel
commodity upon which he has an expectation. those of being short the instrument.
Volatility is expected to increase somewhat. When volatility is expected to increase a bit, the
Establish a bull spread just above the market and written option can be placed yet a bit lower than
a bear spread just below. Any reasonable move before. The increased volatility makes down
will be captured as profit, while stagnation will moves more likely to reach that lower strike. The
cause losses that are moderate. The moderate purchased option is now just above the current
maximum loss nature of this strategy is paid for market to make loss control fairly immediate.
by the requirement that the market move outside the range of the Because the purchased option is closer to the current market than
two purchased options for that maximum loss to be avoided. This the written one, this strategy will generate minor losses in a
is the "short, condor" trade. The option separation of the two stagnant market. incremental losses in an up market. But even a
spreads should be equal to balance profits quiet But the potential maximum profit is the greatest thus far.
When a sharp increase in volatility is expected, When volatility is expected to increase sharply,
the bull and bear spreads should have their the purchased option Is established at or below
purchased options struck at the current market the market, with the written option lower still. A
price. The written options should be evenly moderate decline is required to break even, but a
placed on either side. The closer they are, the substantial pullback produces impressive profits.
lower the profit and loss Potentials of the trade. By establishing the purchased option at or below
Widening the stake separations increases both potential loss and the current market level, the trader has immediate protection from
profit. The "short but- tartly" spread has been created. Maximum market realizes the maximum loss possible. In compensation, that
loss occurs` expiration at the strike of the purchased options loss is relatively small.
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No Directional Bias Strategies Moderately Bearish Strategies
If there is no directional bias, The basic bull spread is created by purchasing one call and
implement both a bull and a bear matching that with the sale of another call having a higher strike
spread. Set the spreads up to profit on price.
moves away from the current market With calls, premiums
if volatility is expected to increase. If increase as you move to
volatility is expected to decrease, lower and lower strikes.
then set up the spreads to profit from The right to buy at lower
market stagnation. and lower prices becomes
increasingly attractive.
Volatility is expected to decrease Because the purchased call
sharp-'Although the trader is very will cost more than you get
bearish, this implies the extent of from the call you write, the
the move will not be great (nor is a
large rally probable). To gain the spread is entered for a net
maximum profit on any down move debit.
— or even in a stable market — the
strike of the written option is If the market ends up
placed at or above the current market. The higher below the lower strike —
strike purchased provides only distant protection the call option that you
against a hard rally. But, again, hard moves of any kind are
unlikely when volatility sharply declines. purchased — the spread is
value-less, and you lose
Volatility is expected to decline some-what. your investment. If the
Because the residual level of market market winds up at or
performance should be adequate to permit a below the strike price of the
bit more net slippage in the market, the
strike of the written option is established option you have written,
below the current market level. The that option is still
purchased option, with a strike further from
the market than that of the option sold, is still closer to the worthless. Your profit is the
market than in the value of the "long" call (market price less strike) less, your
prior strategy. This provides closer protection against somewhat- investment. If the market price ends up above the
more-possible upside losses it he is wrong higher strike, the cost of covering that call
Either volatility is expected to remain about the offsets any profits on the first option
same, or there is no bias. By placing the strikes beyond the profit realized if the market
of the purchased and sold options at the same ends at the higher strike. This is your
distance from the current market, a position is maximum profit, as the printout of the table
established that acts like a short-instrument at right reflects.
position between those strikes. The maximum One can imply from the conversion relationships that the same
loss on the position will be about the same as the maximum profit and loss should exist as well with puts:
profit. Since the time premiums of the options will be nearly the + put = + call and – instrument
same, a stagnant market will result in a "wash" trade— no profit – put = – call and + instrument
and no loss (not counting commissions). If you buy a put at strike A, your position equals being long a
call at A and short the instrument. Selling a put at B equals being
Volatility is expected to increase a bit. This, short a call at B and long the instrument. Doing both, the
coupled with the strong bearish expectation of instruments cancel each other. Therefore:
the trader, suggests that a moderate downside + put A – put B = + call A – call B
move is possible. That increase in volatility, The bottom table above demonstrates that the put version
however, also increases the risk of a significant behaves identically to the call version.
upside move if he is wrong. By purchasing an The bear spreads are created simply by selling a bull spread.
option with a strike just above the cur-rent market, the loss Thus, the effect is no more than to change the signs on the profit
protection is fairly immediate. The and loss (P/L) column figures.
option written, with a strike further below the market than the one The bull and bear spreads remain among the most popular of
bought is above, gives nice profits on a good pullback. spreads for a number of reasons:
Sharply increasing volatility is expected. The They are simple, requiring few commissions.
potential for a significant decline is possible. They are easy to understand.
Upside risk is also increased. An option is They never expose the trader to open-ended risk.
purchased at or below the current market to Quiet markets produce smaller losses than with simple long
give immediate loss protection. The well- options.
below-the-market option written leaves One can enter positions that take advantage of decay.
room for very significant profits, should the decline On that last point, the time premium of options is always greatest
potential be fulfilled. A moderate decline, however, is for those having strikes near the cur-rent market price. Thus, if
required before any profits are generated at all. A stagnant the written option has a strike closer to market than that of the
market will lead to the maximum potential loss. one bought, time passage will earn profits in a stagnant market.
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VI. SYSTEM EVALUATION
A. ACCURACY
B. RISK/REWARD RATIO
C. DRAWDOWN TIME/PRICE
D. AVERAGE PROFIT PER TRADE
E. SAMPLE SIZE
ON BUILDING A SYSTEM
On the general observation that things don't work very well, people have attempted to
develop systems to make things work quite well in all forms of human endeavor.
Whether it is trying to figure out which nag will win the Belmont Sweepstakes, if the
Dolphins will crush the 49er's, how to stay happily married, healthy, wealthy and wise
or how to beat the markets, mankind seems devoted to developing systems to make life
easier. 'What follows are some general observations I have had on developing systems. I
have spent a good deal of my life in system development, not only for markets but for
other research endeavors. My general observations on systems should help you in the
development of any system you might seek to develop. The most important axiom of
system development is that if your system is complicated it won't work.
There is a reason for this happening: the more complicated something is the more
opportunities it has to self destruct.
Worse yet, since there are many elements in a complicated system you may not see the
blowup for a long period of time. In short, there are an infinite number of ways a
complicated system can go wrong. There are an unlimited number of parameters from
which wrongness can develop. Hence, in developing systems I have tried to place my
emphasis on simplicity as opposed to complexity. One way to go about doing this is to find
out how many variables are in the data under observation, then start limiting variables.
Complexity does not make a system better. Many system developers, especially
mathematicians, college professors and computer wizards, seem to think complexity
creates the system. In fact, it doesn't. The more work you have to do in developing your
system ... fine tuning it ... the more likely you are to have developed a system that will
not be successful.
Twisting a wire here and bending a wire there is the most devastating thing you can do
if you're trying to make the contraption you develop look perfect upon completion.
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It will quickly fall apart. A screw you tighten in one area for which you think you
accomplish good only throws something out of alignment that you weren't noticing
when you were tightening the screw. But you will notice when you begin to operate the
system. Fabricating the system doesn't help. You need to spend more time in
examination and study of the subject matter than in adding whirly-gigs to your system.
Complexity, for my money, is a sign of failure.
In retrospect, when I think of all the various fellow system developers I have seen ... at
least in the marketplace ... I think there is a general underlying tenor to those who have
been very complex in their approach ... they have been losers! I mean big losers ... I
recall a computer hot-shot in the mid-1960's who had an extremely complicated model
that lost all of his money and all of his clients' money about four months after
developing the "perfect system." It is as though system developers, and investment
advisors, hide behind complexity in their development. I f they don't have the truth of
the matter then they simply razzle-dazzle us with complexity. But complexity alone does
not create profits. Only being correct creates profits when it comes to trading the
markets.
HOW TO CREATE A PROFITABLE SYSTEM
It is quite simple: the best way to create a profitable system, whether it is trading the
stock market, commodities, or making a marriage work is to always remember that
systems work better when they are developed to run downhill.
g hatI mean by this is that when a system is designed to the natural flow of the subject
matter being studied, it is more likely to be correct. Hence my emphasis is on study of
the subject matter versus study of system development. I f you are with the natural flow
of the item you are more likely to find success.
Success, in system development, comes from alignment as opposed to force. This goes
hand in glove with my statement that a system cannot be "made to work." Things
either work or they don't work. They work because they are in alignment with some
natural phenomena. They don't work because they are not in alignment with the
natural phenomena. What is difficult is finding the natural phenomena.
HOW TO MAKE YOUR BEST SYSTEM DISCOVERY
The best system discoveries are made by accident, not by work, effort or inspiration. I
believe that the best system discoveries come from the combination of inspiration and
perspiration that produce some accidents along the way, leading us to realize one
thing or another.
It is a sad state of affairs to think that we, by and large, did not come up with the
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brilliant ideas ourselves but noticed them from looking at our data. Hence, the more
data you look at the more opportunity you have for accidental success! The more LIJ
opportunity you have for accident, accordingly, the greater opportunity to find what is
important about the subject matter at hand! If you doubt my comments, consider that the
people who invented the airplane were bicycle mechanics, that the molecular structure of
the gene was discovered by James Watson using x-ray crystallography.
Watson himself was not only not a chemist, he was not even an x-ray crystallographer.
But it seems a truism that great advances do not come from people who are trying to
create great advances. Penicillin, synthetic rubber and shatterproof glass are just a few
more examples of accidents that made great discoveries.
This development of systems, then, is most murky.
CONFESSIONS OF A SYSTEM-AHOLIC
Let me get it off my chest ... let me give you my confession of being a system-aholic.
Tuaybe it will help you break the chains that systems may have had around you.
The problem with being addicted to systems is that just as you get one system, you go off
in pursuit of another system.
This can be particularly dangerous trading commodities.
I recall days when I was trading one system but got new data from another system off our
computer and immediately began trading that system!
A system trader is just that ... a player of systems. Hence his problem is that once he has
a good system he will continue looking for an even better system. Hence, he will not
follow the good system that he has.
System players tend to like systems better than they like the results of systems! You need
to watch out for that to be on guard against it. As it has been stated so often, the perfect
system is that there is no perfect system. Continue your system research, but until you
find that perfect system continue using the system that has worked the best for you in
the past.
After all, if it is not broke, why fix it?
I f the system you have works relatively well, why keep adapting it or trying to develop
another system? Go with what works as opposed to going with the unknown. Just
because you have found what appears to be a new and perhaps better system does not
mean it is better than the current system you are using. I f the current system has been
researched and has been used in real time trading, it has proven itself in the real
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world. The world of system searchers, using your computer or somebody else's , is yet
unproven in the real market place, thus has no immediate value. You have not yet
found and solved the problems and complications that can arise from use of that system.
You know all those facts about the system you have been using. Hence, you can judge its
performance. You can't do that with a system that appears good on paper but has not yet
run head-on into the wall of fire.
HOW YOU SELF DESTRUCT YOUR SYSTEM
An inexperienced commodity trader or a student of systems, will think that destruction

of systems comes from simply not following the system. That may be partially true.
However, I believe there is a larger factor that causes people to self destruct their own
systems, even good systems.
It has to do with the psychology of people who follow and create systems. We system-
aholics are perfectionists. That is why we created the system. We want the system to give
us the best possible results given all considerations, given all the variables in all the data
at hand. Hopefully, the system will do better for us than we can do ourselves.
The pursuit of perfection can be quite painful, instead of being the pleasurable experi-
ence that we would like it to be.
That is because since we are perfectionists we will want to beat the system itself. I f the
system says to buy at 65.80 we will ,,rant to buy at 65.40 because we will make just a little
bit more money.
We are taking action early on the assumption that if 65.40 is triggered, we will have to
go to 65.80.
We are not content people. That is why we deal with systems. It is our discontent that
causes us to want to do better than the system itself. We are not content to simply sit
rack and flow with gravity as we should. We want to not only beat the market but beat
the system. Our greed comes into play more than others ... we develop the system to
make money but our greed tells us that we can make more money if we get in a little bit
earlier so we try to develop a system within a system. A system that gets us in a little
sooner than our original system then enables the original system to take over.
That is where self destruction comes from. A
SYSTEM IS A COMPLETE SYSTEM
The whole of the system is the system. You cannot tinker with the parts and then
203
have the same whole.
There are not systems within a system. If there are it is probably a very dangerous
way to trade the market. Your system must be taken on its own, as it is, without the
tinkering that we are so prone to do. Over-tinkering is just another name for what
mathematicians call optimization. Here they try to optimize systems, which is not
unlike breeding dogs. The more you breed a dog the worse temperament you are likely
to get. The more you tinker or optimize your system, the worse results you are likely to
achieve. At first the product will look very beautiful, just like the show dog. But try to
hunt with it, try to get it to fetch your newspaper, sit on your lap, or roll over. It won't
do it. It has been tinkered with too much.
The psychological strangeness of systems is that people are searching for a panacea.so
they decide the system will be the panacea. Then once they create the system, they no
longer want panacea one, they want panacea two, three, four or five. They want a new
improved version of panacea, not the original version.
You need to learn and know that there is a great deal of "slop," whether it is in the
market, in building cars, working with woodcraft or even high technology space age
machines. There is always "slop," it may be a millionth of a micrometer, but there is
slop there. There is a particularly large amount of slop in dealing with the market-
place.
Therefore, I think one needs to have psychological preparedness to say I am going to

have losing trades. There will be bad days as well as good days, and I cannot and
never will attain total perfection in the marketplace.
NO PAIN, NO GAME
It is the days when things are not perfect that cause us to try to change the system.
Because that pain, in its own way, was an unbearable experience for us, we attempt to
alter the system or ourselves in some fashion, hoping to avoid pain in the future.
What successful traders realize is that pain is part of the game. The old athletic
expression is that without pain there can be no gain. The commodity expression is
that without pain there can be no game. Once you realize that we happen to be playing
a very painful game, then you understand that pain is simply part of the process. Part of
the fun, if you will, of trading commodities. It should be an expectation, not something
to avoid. You may wish to avoid as much of it as you can but some of it will always be
there. You simply must acknowledge that and learn to live with it.
Keep in mind that if profits are part of your system, there must be a counterpart ...
losses ... you cannot have one without the other. You must learn to live with both of
them.
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VI. MONEY MANAGEMENT
A. THE OFFENSE AND DEFENSE OF TRADING

You can do it all right, but you'll still lose if you don't manage your money
correctly.
RULE #1 — Limit your losses. This means have predetermined exit points based
on either dollars or market price points, levels, etc. Usually an $800 to $1000
stop is all you want to risk.
RULE #2 — Use real stops, not desk or mental stops that simply don't work.
RULE #3 — There is no "them" out to get you. Don't be paranoid, be intelligent,

and don't psyche yourself out.
RULE #4 — Never add to a losing position. Ever.
RULE #5 — When you make an error (maybe you bought when you wanted to
sell, etc.) exit as soon as the mistake is discovered.
RULE #6 — Follow the method you have decided to use. Stick to it, without
changing horses midstream. Technicians spend hundreds of hours developing
logical, tight, mechanical systems, and then develop emotional reasons not to
follow them.
RULE #7 —As, you make money, increase your commitment to the market,
more contracts per trade. As you lose money, decrease the commitment, fewer
contracts per trade.
This rule is at the heart of KELLEY MONEY MANAGEMENT, a technique

Ralph Vince has mastered. And it is ... HOW I TOOK $10,000 TO $1,100,000
IN 12 MONTHS.
My formula for following KELLEY is to determine the margin plus largest

drawdown in the system. Let's say that's $13,000. You would then trade one
contract for every $13,000. As you make more money, increasing your equity by
$13,000 you would then trade one more contract. Dip down $13,000 and you cut
back one contract.
There are three unique features to the Kelley formula for optimal geometric growth.
The first advantage the system has is that your chance of ruin is small. This is true
because as your equity declines, that is when losing money, your commitment to the
market decreases so you are never putting all you have behind any one trade. You
always have money left over. Theoretically you can never run your account down to
zero.
205
The second advantage to the money management program is that, according to Thorpe, "
... if someone with a significantly different money management system is in the same
game, your total bankroll will probably grow faster than his. In fact, as the game
continues indefinitely, your bankroll will tend to exceed his by any preassigned multiple."
The third advantage of the formula is that it gets you where. you want to go in a shorter
period of time than any other management approach. It will take you fewer trades to get
to a goal if you preassign yourself an investment objective of how much money you want
to make. The Kelley formula is as follows:
F=E/A
In this formula: F = Amount of capital to trade

E=(A+1)p-1
A = Pay-off Ratio
P = Probability
H you want to run the formula out yourself, you certainly can. We have already done it
for you, however. The following sheet shows you the money management break-downs.
Essentially, what the formula is doing, for you non-mathematicians, is to crank in the
accuracy of a system with its risk/reward. From these two factors it gives you a per-
centage of how much of your capital should be behind each and every trade.
As an example, if you have a system that is 40% accurate and the average profit is two
times the average loss, you would invest 10% of your capital on each and every trade.
For those who are not aware of it, let me define the average win, average loss ratio as the
number arrived at by dividing the average loss into the average profit to see how many
dollars you get back for every dollar you risk.
If you have a system that is 80% accurate and has a 2:1 risk/reward ratio, you would
have 70% of your capital behind each and every trade.
Clearly then, you can use the matrix to help you identify and compare one system to
another.
If you will simply find the column for accuracy and then move over to the right until you
find the column with the risk/reward ratio, you will get a number that tells you what
percent of your capital you want backing your trades in that particular system. The
higher this percentage figure, the better the system is.
206
HOW TO USE THE PERCENTL -FIGURE
Once you have arrived at the figure you will use, you will then multiply the capital you
have to trade commodities by that percentage. So, if you have $30,000, and the
percentage figure is 33%, you will have $9,900 to put behind every trade in that par-
ticular commodity. Divide that number, the $9,900, by the margin for the contract ...
let's say you're trading bonds and the margin is $3,000, you would have 3.3 con-tracts
to trade.
207
PayOff Ratio (Avg Win/Avg Loss)
2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00
40% 0..20 0.22 0.23 0.24 0.25
41% 0.12 0.13 0.17 0.20 0.21 0.23 0.24 0.25 0.26
42% 0.13 0.16 0.19 0.21 0.23 0.24 0.25 0.27 0.23
1.00 1.00 1.00 1.00
RULE #8 — Don't trade thin markets. You need liquidity to get in — and out.
RULE #9 — "If you are sleeping well at night, you are not risking enough. I f you
can't sleep at all, you are risking too much." This business is about risk. Don't
fear it.
MONEY MANAGEMENT
THE MOST IMPORTANT CHAPTER IN THIS COURSE
"Money Management is the most essential element to actually winning money

from the casinos"... Bobby Singer, the most successful blackjack player in
history.
It is the words of Bobby Singer, not Bernard Baruch, that should be handed out to all
commodity traders.
The speculative challenge Singer chose to take up, gambling at blackjack, is a game
where the odds are stacked against the player. Commodity traders are lu(-ky, ,A-,c, ,nay
stack the odds in our favor, but consider for a moment the above words from a man
who has made more money than anyone in the history of the world playing blackjack.
He did not say that his system is the most essential element to winning money from the
casinos. No, he said his money management was what actually allows him to make
money.
Imagine what successful money management can do in a game that is stacked in your
favor!
THE ODDS OF DOUBLING YOUR MONEY
We can figure out mathematically what the odds, or chances, are of a commodity tr~~ der
doubling his initial capital given two independent criteria. The first significant criteria
is the advantage that you have over the game. In this case, the game is commodity
trading. The advantage, for our purposes, will be the odds that each trade will be a
successful one. I f the odds were dead even, it would be a 50-50 chance of making
money on any given trade.
The second criteria will be the percent of capital used on each individual trade.
On the following chart is depicted the advantage you have over the market combined
with the amount of capital at risk on each trade. The resulting number will be the
chance you have of doubling your money. Finally, the 4th column shows the average
number of trades you will have to make to double your money.
208
There are two significant readings to be gleaned from this chart. The first is that it is
possible to have a riskless approach to trading commodities if one has a large enough
advantage in the game and uses a small commitment of total capital to trade the
markets.
Who would ever think it was possible to have a 99% probability of being successful in
the market? Not many people.
209
TABLE IX
BET SIZE SELECTION TABLE

TRADE SIZE AS CHANCE OF WINNING AVERAGE NUMBER
YOUR ADVANTAGE PERCENTAGE OF DOUBLE YOUR OF TRADES TO
OVER THE GAME MARGIN MONEY* DOUBLE MONEY
5% 3% 97% 620
4% 92%
5% 88%
6% 84%
10% 73%
7.5% 5% 95% 220
90% 125
7%
82% 75
10%
78% 50
12%
10% 5% 99% 170
92% 95
9%
75
10% 88%
40
15% 79%
15% 5% 99% 110
95% 60
10%
15% 88% 35
20% 82% 20
20% 10% 98% 50
94% '
15% 30
88% 20
20%
210
I f we have a system that is correct 60% (10% advantage) of the time and commit only 5%
of our capital per trade, we do in fact have a 99% probability of doubling our money, if
we are willing to stick around for 170 trades. Interestingly enough, most of the short
and intermediate term systems that I am aware of will require approximately 1 1/2
a
years for that number of trades to develop. Thus, conservative approach to trading
commodities could be said to double your money every 1 1/2 years (if you do in fact have
a method that has a 60% advantage in the game and are committing only 5% of your
capital).
Notice what happens if we have a system that is 60% correct and we commit 10% of our
capital to each trade. Here we drop down from a 99% chance of doubling our money to
an 88% chance of doubling our money. Not much has changed here. The big change,
however, comes in the number of trades needed to double our money. Nov we only have
to have 75 trades to double our money versus having 170 trades.
Accordingly, using the same average trade per system it will take approximately half a
year to double your money.
The trick, of course, is to have a system that is highly accurate and be willing to make a
large commitment of your bankroll.
For practical purposes, most of the good trading systems should give you somewhere in
the area of a 50 to 55 percent win/loss ratio.
Accordingly, if your objective is to double your money with a high degree of reliability,
you will want to commit approximately 4% of your capital on a per trade basis. It will
give you a 92% chance of doubling your money and will take approximately three years
to do so.
It will vary from trader to trader as to what parameters to take, depending on how
large a chance of doubling your money you desire. You can also use the table to deter-
mine how a system should be traded in terms of capital preservation in money man-
agement. If you have a system that is just 50% correct, you are obviously going to have
to trade with only 2 or 3% of your bankroll on any given trade.
The higher the percent of accuracy of the trading system, the more capital you can
commit to it. Additionally, you know how long it should take for success to be at-
tained.
The next table I want to call to your attention is one that can be put to greater advan-
tage by people who have only a small number of dollars for trading commodities.
211
Probability Next T r a d e
will be a w i n n e r i f last x# of T r a d e s h a v e Lost.
64 78.4 87.04 92 222 95.33 97

69.75 83.36 90.85 94.97 97.33 98.48
75 87.5 93.75 96.88 98.44 99.22
79.75 90.89 95.9 98.15 99.17 99.63
84 93.6 97.44 98.98 99.59 99.84
87.75 95.71 98.5 99.47 99.83 99.94
91 97.3 99.19 99.76 99.93 99.98
This table reflects two sets of data. One is the odds that any given trade in a system will
be correct.
The left hand column shows the percent of accuracy of a given system. I have taken five
possible systems: one with 45% accuracy, one with 50% accuracy, one with 55%
accuracy, one with 60% accuracy, and one with 65% accuracy. Then, reading across
from left to right, we have determined the probability that the next trade will be
successful if the last trade was not successful.
I f you have a system that is 45% correct, and the last trade was not successful and is
the first unsuccessful trade, you then have a 59% probability that the next trade will be
successful. I f you have two consecutive losing trades in a row, you have an 83% chance
that the next trade will be successful. I f you have four losing trades in a row, you have
a 90% chance that the next trade will be successful. I f you have had five losing trades
in a row, you would have a 95% probability the next trade will be succespful, and then
if you are unlucky enough to have six losers in a row, you would have a 97% probability
that the next trade will be a winner!
This table yields fascinating and powerful numbers for money management.
212
Again, assuming you have an average system (one that is correct 50% of the time) you
can quickly see that if you have had two consecutive losing trades you have an 85%
probability that the following trade will be successful. Even more importantly, if you have
had three losing trades in a row, you have a 93.7% probability that the next trade will be
successful.
Let me separate the difference between odds and probability.
The odds of the system can never be changed. You will always have 50% odds that the
next trade (in a system that is right 50% of the time) will be correct.
But the probabilities of the next trade being correct are arrived at differently. While the
odds are constant and remain the same ... the odds always being the percent of
accuracy of the system ... the probability the next trade will be correct is based on data
of frequency of occurrences. Obviously, with a 50-50 system about half of the trades
should be correct. But when we have a string of consecutive losers the probabilities of
the next trade being a winner are enhanced, as the above table depicts.
This is great for people trading with a limited number of dollars who are trading a
system that does not have a high degree of accuracy. Wait until you have enough
consecutive losing trades that the probability of being successful is substantially in
your favor.
Look what happens if you have a system that is correct 55% of the time: I f you wait for
four consecutive losers you have an almost 95% probability that your following trade will
be successful, and a 98% probability that if that trade loses the next trade will be
successful.
Those are pretty good batting averages, especially for commodity traders. Let me point
out that both of the above tables only depict figures and statistics. Anything is possible
trading commodities. I have seen some systems have as many as 7 to 10 consecutive
losing trades. Of course, those are systems that have a low percent of accuracy. I also
believe that the average trader has too many emotions rambling around in his head to
consistently use the two tables presented here as his money management strategy.
Unfortunately, most commodity traders are more concerned about picking tops and
bottoms and beating the market than making money.
But if your objective is to win money, it can be done despite what your broker, friends,
neighbors, banker or minister tell you.
It is simply a question of having the intelligence to devise or purchase a method that has
a good probability of winning, and then having the emotions and discipline to correctly
manage money in terms of the commitment you make per trade and the trade selection
criteria.
213
WHY LOSSES ARE SO PROFITABLE
The most significant thing I can tell you about waiting for a consecutive number of
losing trades in any method is that a unique factor also develops. After you have had
three or four losing trades in a row, the probability of the next trade being not only a
winner but a substantial winner is way in your favor.
Let me explain this to you. The way the market moves can be depicted by bases of
accumulation and distribution and then run-ups. Then another base accumulation
and distribution, then a run-down. And on it goes, as it always has. The market moves
into a trading range, out of the trading range, into an explosive move, into another
trading range, and then into another explosive move.
The money is made, of course, in the explosive moves.
If you could simply isolate the explosive moves, you would have the perfect system.
There is a way we can help isolate these explosive moves. The structure of the market
calls for a time period of choppy market activity before substantial moves begin.
During most choppy market activity we will have a succession of losing trades as the
market whips back and forth. I f you are waiting for, say, three losing trades the
probability of a winning trade is in your favor, as we know from the above tables. We
also know from the structure of the market the odds the next winning trade will be a big
winning trade are also increased because of the way the market moves. It goes from
choppy periods to explosive periods, explosive periods to choppy periods. Correct money
management then will show the average win following a number of consecutive losing
trades will be greater than the average win of the system in general.
That bears out in real time application.
In 1980 I wrote about a method of trading for Pork Bellies from 1970 to 1980. The
method was 46.2% accurate, the average profit per trade was $206. The following
reprint from the system manual tells the story.
TRADE SELECTION — HOW TO INCREASE THE BELLY PROFITS $57,166, THE

COPPER PROFITS $21,017.
I have studied so many forms of money management that even I can't believe it; from
the gambler's specials like Martingale to the computer boys % of portfolio increase.
Most are very complicated. What I am about to show you is not complicated at all and
requires little extra margin money to participate in. Most money management systems
suppose you have unlimited dollars. You and I know that is not true.
214
Even worse yet, one "hot" money management method I saw had you buying 600+
contracts of wellies on a signal to achieve their "good" results. Come on, who's kidding
who? It's hard enough to get 60 bellies filled, let alone 600. Needless to say it was
written by a college professor!
The system of money management I have developed for the Belly program is based on
what I call chance control. At no time does it involve pyramiding or chasing a losing
streak with more positions or money.
The idea came to me while fly fishing in Montana. I noticed that the last few times I'd
gone fishing my "luck" was very bad. That was unusual as I normally limit out (if I want
to) yet on this particular trip I again "hit my stride" and had a dandy day of fishing.
That set me to thinking, maybe the markets are like fishing in that after several bad
sessions a good one is coming very, very soon. I f so we might be able to isolate the big
winners.
THE THREE LOSS RULE
I looked at my methods and quickly realized that indeed the theory is correct, given any
method that usually works 50% of the time. I f it falls apart and has THREE
CONSECUTIVE LOSING TRADES then you can start "betting" that a good one is due.
This is a trade selection.
If you apply this concept to Bellies, some amazing things start happening ... you start
catching the big winners and increase the % of accuracy from the standard system's
50% to over 60%!
THE RULE
All one needs do is wait for three consecutive losing trades, then take two contracts on
each trade thereafter until you have a winning trade. Had you done that in Bellies the
net profit would have been increased by $29,736. I'm listing here the trades one would
have taken following the three trade rule.
215
BELLIES THREE LOSS RULE RESULTS
Losing Trades Winning Trades
321 45 571 55 756 1809 311 458

227 1459 19 2430 1834 829 1814
399 346 604 926 65 1075 1582
239 618 461 359 2845 329 223
918 145 511 2003 3815
286 857 312 723 1044 1422
573 286 939 561 31 2407
952 227 154 2728 899 1351
231
NET + 38,060
NET - 8,324
69% Correct
Profit 4.5 times loss
Notice what happened. On balance the system itself was 46%n correct. Since we waited for
three consecutive losing trades, our probabilities increased to almost 70%. That's
staggering!
Most fascinating is that it is right in line with the trade probability, which showed that
after two consecutive trades we have a 60% probability the next trade would be a winner
The wisdom of trading in such a fashion is further enhanced when we realize that it took
474 trades to produce that $97,688 profit.
That means that, on balance, we were trading for $206.00 profit on each trade, whether
that was a winning or losing trade. Yet, when we switched to waiting for three con-
secutive losing trades in a row we then had a net profit of $29,736.00. Divided by 53
trades, this showed that our average trade was for $561.00. In short, we more than
doubled the amount of money made per trade, while at the same time increased our
probabilities that the trades would be accurate. Again, I want to emphasize the fact that
most traders will not be able to exercise enough discipline to trade the market in this
fashion. Still, this is the most reliable and consistently profitable way to trade the
market.
I have shown here that you can increase your return by using a three-tiered approach to
managing money. The first tier is to have a system that gives you an advantage over the
game. Second, commit a correct amount of money based on the chances of winning.
The third tier is to wait for a string of successive loses before entering the market. Once
you have a winning trade then move back to the sidelines and wait for
216
another ruin situation to hit other traders with losses before stepping in.
Next, let me show you a chart that depicts how you should "wager" given that you have,
or do not have, an advantage over the "game." Note that when you do not have an
advantage you have a 0% chance of winning if your bet size is small and can only "make"
money if you bet large (and infrequently), hitting a lucky bet. When the ad-vantage is
with you it all reverses. Here your highest probability of winning will come with small
bets," as over the long run the system will remind you. But if you "have a hunch and bet
a bunch" on any one trade in a winning system it decreases your odds of winning. That
strategy works best in a negative chance game.
217
TRADING SYSTEM EVALUATION
In the old days a commodity system would be sold on what I call the hope, faith and
charity method. The system seller would hope that a great number of people would show
up, he or she would express faith in his method, and hope the students had the charity
to pay him a decent price for the system.
He would show them charts of examples of what the system did in the past. We evolved
to the next stage, which was showing computer printouts to verify that this did take
place in all instances in the past. One had a better sense of how the system did because
of all the research.
However, most of these methods were curve fit and what worked in the past may not work
in the future.
Finally, in 1984, to the best of my knowledge, a system was introduced not based on what
the chart book showed, but what actually happened in real time trading.
In the fall of 1984, Ed Walter and I offered a commodity system that was first traded in
real-time trading for approximately 12 months prior to announcing it to the public.
The last system I offered was sold to the public on a 3017(, down and 70%n to come from the
real trading profits basis. I suppose that is the fairest way to sell a system, but so far no
one else has followed my lead. A good system should have either a real-time track record
or have its costs come from actual future time profits.
I believe, and hope, that in the future all commodity systems will be proven with real time
dollars and real-time accounts prior to being offered to the public.
Believe me, there is a world of difference between what a system shows should hap-pen
and what actually happens, after slippage, emotional factors, and brokerage commissions
are figured in. If you are going to buy a system, please use the caveats and criteria from
this chapter to evaluate the system.
218
VIII. THE PSYCHOLOGY OF SUCCESSFUL TRADING
A. This is a head game; it is about fear and greed. GREED is the stronger emo-
tion. HEED GREED.

B. KING KONG FEELING: What it is, and how to protect against it.
C. DESENSITIZING YOURSELF: The secret to killing fear.
D. PSYCHO-BABBLE VS. A GOOD SYSTEM: How shrinks shrunk traders' bank
accounts. The truth of psychology.
E. THE ONLY DECISION YOU HAVE TO MAKE
219
LARRY WTIL U M S ON FEAR AND GREED
It's been said the best speeches are given by the people most qualified to give them,
that giving a good speech is simply a matter of having earned the right to give that
speech.
Hopefully, it's the same when it comes to writing articles because I feel qualified for this
article on fear and greed ... more qualified than I've ever been in life.
Currently on any given day I will be long or short somewhere over 2,000 Bonds and
who knows how many S&P's.
That means every tick in the Bond market will make ... or lose me ... $62,500. Believe
me, if you want to get in touch with fear and greed there's no better way of doing it
than to have each tick in the Bond market represent $62,500!
While trading commodities does create an unreal sense of value and economic worth,
nonetheless I can appreciate $62,500 ... I can appreciate it leaving me and I can
appreciate it coming to me.
My experience is that trading in large amounts gets you more immediately in contact
with the emotions of fear and greed. It really does not matter how much you are
winning or losing, it's all in relationship to how much you have to win or lose. I know. I
started trading, at one point of my life, with simply what I could charge on all of my
credit cards. The pressures of fear and greed then were almost as great, though not
quite, as now.
The question is, how do traders go about handling fear and greed? What can you do to
compensate or cut back on the impact of these emotions?
Certainly, i f you don't learn to get these two wild horses under control, you will expe-
rience financial difficulties trading commodities.
That's because fear will force you in a strange fashion to either hold on to losing posi-
tions too long or to get out of positions too early, that would have turned profitable.
The problem with greed is just the opposite. Here, pure greed will force you to hold on to
positions you should be getting out of because you always think there's another tick ... or
two ... or several hundred ... left in the market for you. Hope may spring eternal, but
uncontrolled greed will be the demise of commodity traders.
You cannot escape these two emotions of fear and greed. They are just like yin and
yang, they go hand in hand, they are like success and failure, salt and sugar, night and
day; they separate making or losing money.
220
There are several practical ways I have developed to eliminate fear and greed; the first
is to have a System.
WHY A SYSTEM IS IMPORTANT
Don't think this a novel or a new idea. In Homer's Iliad, he tells us, "Let us put our
trust rather in the council of great Zeus, King of mortals and immortals."
That's really what we system followers do. We are putting our trust in the system, our
God; the system thus can eradicate the emotions of fear and greed. These emotions
should have no impact on a system trader.
However, there is a world of difference between "should " and "won't." Fear and greed will
still impact the system trader and I'll talk, in a few minutes, about how I attempt to
handle fear and greed in my system trading.
Those of you who are not system traders have a greater problem. You don't have a Zeus
to whom you can shift responsibility; thus, you must be in a constant state of alert,
battling fear and greed.
So how can you do it ... how can you go after these two dragons, putting them to rest?
First, let's look at what we are dealing with here — emotions. Now I am no psychologist,
but I have had enough winning trades and losing trades to have a sense of how one can
go about desensitizing the impact of emotions.
In fact, the word desensitization is perhaps the most significant psychological tool I could
share with any commodity trader.
Remember the movie The Exorcist?
I f you don't, try to call up any other spooky movie. It's almost certain that the first time
you saw the movie it had its frightening moments. In the case of the Exorcist some
people were scared flat out silly.
However, if those people had seen The Exorcist 30, 40 or 50 times, can you imagine them
being scared on the 39th or 40th screening?
Of course not. Regardless of how scary anything is, if you see it over and over and over it
starts to lose impact and your mind can act rationally, without emotions running
amok.
Thus, one approach to sublimating fear and greed is to desensitize yourself by having a
physical action, involving money, that has thousands of decisions all having fear and
221
greed at stake.
Even an active commodity trader may only feel the tugs of fear and greed on four or five
trades a day.
However, there are other activities involving money that may have you exposed to
literally hundreds of ultimate decisions with money.
To desensitize myself from fear and greed many years ago I wagered small amounts at
gambling casinos, not really caring if I won or lost money. The idea was to repeat the
process over and over and over, literally thousands of times, to desensitize myself from
being pulled into having any emotions about what happens to money. After you win or
lose several thousand decisions you start to gain some control of your emotions .... you
start to realize that you can be in charge of them, rather than having them in charge of
you. This type of desensitization for commodity traders will take a long time and is
something not everyone can do. But if you've got the time and patience, it's one of the
best physical ways I know to go after desensitizing emotions.
Another approach might be to simply come into contact with the reality that simply
nothing matters.
While this may be too much Zen for some, I think it is of great value. Alan Watts said
"Nothing is more important than something, because there is no way of seeing some-
thing without having the background or context of nothing." I f Watts were still living, I'm
certain he would go beyond that statement, telling us that the only real problem in our
life is our mind. So once one learns to escape your mind, which really for the most part is
your ego speaking, you will have escaped the impact of fear and greed.
We commodity traders experience that too. It is the Satori concept, which is truly a
warrior's state of being. But it appears it cannot occur until your mind is totally free of
thought. Once you get all your thoughts and considerations about the world out of your
head, then you become pure awareness. Your body will be active, yet sensitive and
relaxed. In the state of Satori, the commodity trader will also find that prices seem to be
not only in his control, but also moving much slower than usual. There is still a certain
cadence or beat, but now you are in communication with this pulsation.
in this state of Satori, which I have experienced on occasions, there is no concept of fear
and greed. There is simply nothing to pull at you because fear and greed are not
considerations or thoughts.
From this I have deducted that i f one can get to the point that fear and greed are not
considerations ... that fear and greed don't matter, one is less impacted by them.
So, how do we pull this off? The way of getting to that point goes back to the original Zen
comment that nothing has value to it. This may be hard for some readers to grasp
222
or intellectually accept, but it is a truism. This is an intellectual thought, but needs to be
experienced at an emotional level before it will be of value to the commodity trader.
We all express it in one form or another, even in our own humor regarding the market,
when we say, after winning or losing days, it's only money ... it's only more zeros past
the base number; thus, we attempt to give a sense of nothingness to money.
When you get to the point that in fact there's a total sense of nothingness to money or
market success or failures, you will then reach that state of nirvana, or Satori; you have
a realization or transformation that allows you to view what goes on in the market as
simply having no value.
If it has no value, then of course there cannot be fear. You cannot be fearful of losing
nothing nor can you be greedy about gaining something that is nothing. It's like the line
in Kris Kristofferson's song, Bobby McGee, "Freedom's just another word for nothing left to
lose."
Indeed, this is a strange attitude or approach to have, especially towards something that
people covet as much as money. But this is the attitude that will free you of the charge
and emotional trauma that will come from these emotions.
In St. Paul's epistle to the Philippians, he admonishes "Let this mind be in you, which is
also in Christ Jesus, who being in the form of God did not think identity with God as a
thing to be clung to, but humbled himself and made himself of no reputation."
Here you have expressed the exact thing that Watts and the Zen Roshi are trying to say.
When we attach importance to something, you become so screwed up about it 01.11, you
cannot function correctly around it; so it is with our money. When we attach importance
to it, in come our dragons of fear and greed.
We system traders have it a little bit better, because we can intellectualize without going
to the emotional/intellectual level. We need not surgically remove these emotions.
Consider this ... if you are a system trader, you have selected a system to follow. You are
following that system for numerous reasons, some of which may be: it's easy to follow; it
works well in the markets you like to follow. The truth of the matter is you are following
a system for two reasons: 1) it has shown the ability to eliminate losses and 2) the mirror
image of that is it has been profitable for you.
Isn't this really another way of talking about fear and greed? Aren't systems really
created to get us away from these two emotions?
You see, once you start following a system, what you actually have said to yourself is, I
am happy with the profits the system generates, I am pleased with the profits this
223
system generated; therefore, I will follow the system.
If that's true, I then ask you, "If you are happy with these profits, wily in the name of the
commodity god or goddess would one want to try to get more profits from the markets?
Isn't that foolish?" Yes, of course it is.
I f you are satisfied with the system, it means you are satisfied with the profits that
system makes; thus, that satisfaction tells you there is no need for you to be greedy ...
there is no need for you to try to hold on to positions when the system says you
shouldn't. Nor is there a need to try to take trades the system says you shouldn't or add
additional contracts, etc.
I f you're a system follower, you have already admitted to yourself, at an intellectual

level, that you are satisfied with your profits.
The profit satiation the system provides you is your assurance that you do not have to do
anything but follow the system, that you are content with the system's performance.
Therefore, there is no reason for you to try to stretch out the system's performance ... to
cheat trying to eek out an extra buck or two. Be content with the system and you will
have eliminated totally the impact of greed.
Let's next turn our attention to fear. As I said, systems are constructed for two reasons,
one to handle greed and the other to handle fear.
Let me explain this. The reason I have developed systems, and I'm certain everyone else
has developed systems, is to make certain we don't lose money.
After all, the practical reason we develop systems is to make money. But of even more
importance, to not lose money. The key point to having a system is to enable us to not
lose money.
What you're really saying ... if you're a system follower ... is that you have developed a
set of concise rules that have managed the commodity markets and your mc, B e y in such
a fashion that you are able to accept what losses occur in the system, knowing that
losses are a part of the process and also knowing that the system controls these.
Ah, hah! There it is ... the kernel of truth. The system controls losses far better than you
can control losses. Once you grasp that, you will realize there is no need to not follow
your systems. There is absolutely no way your emotions, your consideration, your
friends or whatever, will be able to do a better job of managing losses and money
management decisions than a well thought out system.
Hence, the system becomes your shield, to protect you from the emotion of fear. You can
walk through the valley of evil and fear no death when you have your system. Your
system has clearly told you, yes, there will be losses but I, the system, will man-
224
age and control losses for you.
Once you throw away the shield, you are on your own big boy, and who knows what's
going to happen. You certainly don't! But we do know that you and other people most
always make the wrong decisions when the emotion of fear comes sneaking in.
Yes, if you have a system you don't have to have fear. You can approach the market from
that Satori viewpoint, because there is no need for fear; you have already turned it over
to your Zeus. Your trust is in the system, that it will handle losses ... the origination of
your fear ... greater than you can.
Thus, a system becomes almost a father confessor for its follower. The problem is
system followers have not intellectualized or rationalized to the level I hope I have
brought you, so they buck the system. When the system says buy, they sell. When the
system says take profits, they hold on. When the system has a loss, instead of following
the system, they continue holding the losing trade.
There is no need for system followers to do this once they realize they chose the system
because it has made profits and those profits are satisfactory for them.
Hopefully, this section will help you stab an ice pick_ into the heart of the emotions of
fear and greed and stop these emotions from shilling you.
I assure you that the elimination of all removable risk is the most plausible way of
staying alive. When there is nothing at risk because you have a sense of nothingness,
your life will be vital and well. I f you cannot get to that point, then have a system. It will
control and protect you from risk better than any other alternative.
225
MY PERSONAL TRADING STYLE
1. Short Term
2. Limited number of markets
3. Pattern oriented
4. Seeking a bias
226

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The Future Millionaire's

Confidential Training Course

©1995 by Larry Williams

EXACTLY HOW I MADE MY MILLION DOLLARS

HOW DREAMS COME TRUE

LADY LUCK — DOES SHE EXIST?

WHAT I WOULD DO DIFFERENTLY

THE RAT RACE AND COMMODITY TRADING

Why even go on vacation if you're going to hold onto positions? RANDOM

THOUGHTS ON A NONRANDOM MARKET

STICK TO YOUR GAME PLAN

RELAX YOUR WAY TO EASY STREET

It matters little how you do it —just as long as you do it.

WHY FUTURES AND OPTIONS?

Less to watch — You can invest in thousands of individual companies in the

Access to information — The futures/options trader generally has much better

Information on commodities is not limited to boardroom decisions and

WHAT AND WHERE TO TRADE

Margin — Some commodities require thousands of dollars as your assurance that

Volume — The number of contracts traded each day is an important guide to a

The dictionary defines "fundamental" as relating "... to essential structure,

"Fundamentals" — the common word used in commodity trading lingo — are

The art of forecasting prices through analysis of price patterns is termed

Some technicians scorn fundamentalists who try to forecast prices based on

In fact, both technical analysis and awareness of economic conditions add

STOCKS VERSUS COMMODITIES

TRADING STOCKS VERSUS TRADING COMMODITY FUTURES

Why do commodity futures end up so far out on most people's risk

When an investor buys a stock on margin, the margin represents an equity

Leverage is high in commodity futures trading because, as a percent of

It is this leverage factor that cause commodity futures to be considered a high

THE TIME FACTOR

DAILY PRICE LIMITS

In commodity trading there is no receipt or delivery of certificates with which you

WHO TRADES COMMODITIES AND WHY?

Some people trade commodity futures as a normal adjunct to their business of

Other people trade commodities not as a normal part of producing or marketing

• Middle to upper-middle income class.

The basic economic functions performed by futures markets relate to

Prices on an organized futures market reflect the combined views of a large

Information generated by futures trading through the price discovery process

I f a consumer boycott of a product becomes operative, if a foreign nation raises its

SPECULATION IS NOT A FOUR-LETTER WORD

Commodities ... ? that's Russian Roulette!

WHY DO SPECULATORS SPECULATE?

mother motivating factor is sheer gambling instinct. Some people trade

Even relatively sophisticated investors and investment counselors have been

DO MOST SPECULATORS LOSE?

1—20 22.4 29.5 2,456 2,483 2,808 2,306

21-100 26.3 32.2 8,000 7,126 8,408 7,716

101—200 33.5 36.7 15,888 18,501 16,686 21,989

200+ 44.5 43.2 37,656 44,347 31,731 40,460

All Accounts 26.1 31.7 9,514 7,340 6,942 6,106

Data from Jan—July each year.

although this survey is not scientifically sound as a random sample and it

4. Lack of Discipline A lack of discipline is another frequent pitfall for a new

A word of caution is in order, however: Success in paper trading is no guarantee

A. H OW DO YOU MAKE YOUR MI ND UP? Do you ponder or p lunder?

A. UNDERSTANDING THE SUPPLY/DEMAND EQUATION

B. UNDERSTANDING THE COMMERCIALS — They are the largest players in

1. COMMITMENT OF TRADERS This is the actual report of their net

3. PREMIUMS The public usually buys the distant months, the

FUNDAMENTALS: WHY THEY ARE IMPORTANT

As I've mentioned earlier, the commodity market is unique because it is a realistic