Friday, January 01, 2010


Of course this is a phrase that is being used in a mocking fashion now for that hypocrite in the Oval Office who completely decieved the public to get himself elected. The "How is that Hope and Change Working Out For You" bumper stickers are pretty funny. In this blog it is a lead in to how to approach the new year. It is just basic human nature to be excited about fresh starts and to look forward to things being better in the future.

I hope everyone who trades has taken some time to reflect over the last couple of weeks about how they will go about their business this year with the goals in mind that you have set. The topic for this weekend is going to be an inner monologue of what I am going to do differently that I thought people might learn from. Without going into every little detail, I will review my evolution as a trader, and what that means for 2010.


My history as a trader has been for the most part a 3 step process. The initial step was just jumping in and swinging away. During this phase I read as much as I could get my hands on and had the typical ups and downs that many have. I had one period that was amazing, both good and bad. that illustrates how I came to where I am today.

Great Bond Run

I discovered back in the mid 80's a very strong tendency for the Bond Market which began trading in the 70's, to have large gap opens in the same direction as the strong or weak closes. Every time we closed with 2 ticks of the high or low of the day we tended to have a large overnight move in the same direction. As a result I began with a 3K trading account, and just bought and sold the closes, and exited on the following opens, often for very large gains. I ran the 3k into 50K in a flash, due to taking more contracts as the account balance grew. I had some ups and downs, but for the most part it was incredibly easy. I was going to quit my sales job I had at the same time and just trade and make millions............. Here is a chart showing some of these trades, you can see most of them worked quite well with one that I have marked being a loss.

Of course I am building up to the demise of this approach. One day we had a very weak close, limit down for the day and I managed to get a bunch of contracts on right at the close because they were bouncing on and off limit. I was so excited when I got those fills because I was just sure I was going to make a killing the next day. I had called in from a pay phone ( remember those ) and was so happy with myself that I had pulled over and gotten in just under the wire. On the news that night I happened to hear that the German Central Bank had decided to lower their discount rate overnight. Even though I knew very little back then, I knew enough to know I was screwed. Sure enough the next morning the opening call was for a limit up opening. At this point I had been right at that 50K balance and 80% of it was wiped out right on the US opening. Ironically, I exited at the market on the opening which was just below limit up, and of course the market closed unchanged on the day. The market just went straight down from where I got out.

Of course I was absolutely numb at that point, but at your darkest hour insight often comes to you. I realized the potential for this business, and that it was time to really get to work studying this stuff. Ironically I never lost all the gains, but I lost such a high % that it felt like I had been blown out of the game. I did not make any more trades for a couple of weeks or more, I do not remember exactly how long of a hiatus I took but it was substantial. Of course now with the pit session being irrelevant all of this is gone now anyway in this market.

This all led me to what was Step 2. Ultimately I then gravitated into a book by Larry Williams who I had often heard on what is now known as CNBC but was the FNN network back then. As I read more and more of what he taught over the years I realized it was a pretty good fit for what my personality was. My background was as a wrestler and martial arts guy, so discipline was one of my character traits that I had at a level far beyond what most have. It seemed to me that systematic trading was a perfect fit for me. I knew I could follow a regimen better than virtually anyone else, so that should be a good way for me to go. I set out developing trading systems, and left the world of discretionary trading behind.

This led me to have quite a bit of success. Some of the SP 500 and Bond Trading systems I developed did very well. All the while I was still reading about all the other approaches that are out there to see what else might be there. The problem with trading systems is of course over optimizing the results. When you do this of course, the real life performance will always be lousy. It is always a fine line determining when you are and are not doing this. Below is a table of actual results from one of my Bond Systems, there were many but this best illustrates the point I am making here.

You can see the spectactular results I got until 2007 rolled around. It actually returned to profitability last year but by a very small amount. This is typical of trading systems, they have their runs, then ultimately stop working. I do not really know if I was guilty of over optimizing in this case or just my patterns stopped working. However, I have been guilty of the over optimization offense at other times. As I began to encounter this, I realized that I could make more money as a discretionary trader, combining the mechanical techniques with my knowledge and experience. This led me to Step 3 of my career. This step involved using my strength which is discipline in conjunction with my very well rounded background studying so many different approaches to trading. It makes no sense to be disciplined, if that means following the rest of your troops who are just walking off a cliff.

Nowadays my trading features larger picture analysis which is mostly mechanical,  and then combining that with some discretion. For example, my commentary on GOLD is for the most part mechanical. Being bearish is being driven by the huge long small speculator position combined with the historic commercial short position. This is completely mechanical, it is a numeric fact and indisputable. In spite of literally tens of millions of people world wide that have an "opinion" about the "fundamentals" of this market, I stand on the opposite side. This is discipline. All of these possible doomsday scenarios about inflation and the US Dollar could in fact be correct, I really have no idea to be honest and neither does anyone else. However, I do know that basing a trading decision on a numeric fact is a much better approach than basing it on an arbitrary opinion about something that has never happened before taking place. This is where discretionary trading takes people south. They get too emotionally tied up in an opinion on a possible outcome. This is also why most people lose money and buy tops and sell bottoms.

The discretionary aspect of my view on this market pertains more to what I observe on a daily basis. We have G Gordon Liddy telling us to buy GOLD. I have young children asking me how much Gold I have bought. We have the same brokerage firms that missed the stock market top and Real Estate crashes putting out reports predicting Gold of $3,000, $5,000 even $10,000. They are touted as a reason to buy. Why would the opinions of those people so infamous for having been completely wrong about the 2 biggest meltdowns of the last 100 years be a reason to invest in something? So it is my discretionary call that all of this when combined with the mechanical reality of the numbers, says major top at hand. I never ever trade something based on pure discretion alone, it is a small factor in getting me into things. Most people have read that once something makes it to the front page of the newspapers like Real Estate, and we all remember Nazdaq 10,000 predictions, that the top is in. These are really more anecdotal things that are icing on the cake.

So in summary, the way my trading has evolved over the years into a combination of mechanical things and some discretion, has led me to the view on the GOLD market that I have as well as most other things I post here. I just use this as an example because I have posted often about this market recently.

One of my pledges to myself this year is along the lines of not straying too far from markets that are setup for big moves. I tend to get too involved sometimes in the little daily nuances. This can keep you busy but will not make you big money. I posted a trade setup the other day for Cattle. This market in my view on a bigger picture basis is setup to rally, so that is why I posted that daily trade setup. Most of what I post in here will be that. I will post shorter term entries in markets that are setup fundamentally to move a long ways in that direction.



Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!

Chris Johnston said...

Thanks, I was not putting the effort into it that I am now, so I guess that shows. Blogger also updated the software to make this alot easier and faster to do. I get very busy with so many different things that at times it was such a burden to do the blog posts when it took an hour. Now I can get them done fast, so I will be much more active.

robert said...

Chris, I completely agree with the previously poster.

Your analysis of the markets and your patience and discipline for only putting on the right trades at the right time proves why you are a successful trader.

Although I can't remember the trader's name, I'll always remember the statement he made about there are only a few great "low-risk" trades in every market every year.

And those were the trades he advised most traders to wait for.

I love your patience - and that's why I read you everyday.

Robert Campbell

Chris Johnston said...

Thanks Robert

I wish I could convine others I know well who trade to do the same thing

robert said...

In practicing patience, all you can do is lead (and educate) by example, Chris.

Most people trade more like gambler's than patient and well-disciplined risk-takers.

And that's why most traders are not successful in the long-run.


Chris Johnston said...

Trading is best when it is boring not exciting. It needs to be approached as a business like anything else. I do not know why people don't get that. You need to focus on what will get you the best results for your business, whatever that approach might be and just follow it.