Wednesday, May 09, 2012






The topic of today applies to all of the items listed underneath it and I will cover them in order.

First, 16/18. This is something I have really been having trouble with and since this is essentially an expression of my inner monologue, it is time to get this one out in the open. I have been showing Bond trades live in here, even though there have not been many, from a system I use to trade them. The purpose of doing it was to give it a spin live before potentially offering it as a subscription service. It has been crappy so far, only generating 3 trades, two small wins and one loss that was larger than the two wins combined. It once again today had no trades. With any system there are periods like this so there is no point for concern about it yet. 

One of my mentors recently offered a service for trading that I signed up for. I was mostly hoping to see how he was using one tool of his I use that at times I struggle with interpreting, it is very subjective. This tool has made me a lot of money at times, so I did not want to walk away from it even though at other times it has given me fits. I thought I would be able to tell, since I think he uses it to trade, how he was resolving the dilemma's with it I was having. Incredibly at this point the service has lost on 16 of the last 18 trades, with another open trade about to get stopped out for a loss. This is mind boggling and something I have really struggled with. On one had you have one of the greatest traders of all time, who has made millions of dollars almost every year trading, on an incredible losing streak. All else being equal, you would think this would be the time to bet on him not walk away. However, with anything from a marriage to an illness, to many other things in life, you have to have an uncle point. There always has to be a point where the pain gets so severe you have to walk away and move on.

Generally using a moving average of equity is a good way of doing this. You wait for it to break then once it gets back above the average, you go back in. With systems at times when they break it they just completely go south and never come back. At other times you wind up exiting at the worst possible time on a draw down, and miss the good trades that bring it back in line. There is no perfect solution to this dilemma. In my case what I have done here is initially I only took these trades in one of my accounts, and with very small size, just one contract a piece. This has been a life saver. I was able to make more money in my own trades than what these were losing, so I was able to over come them. After this streak got to about 9 out of 10 losses, I started trading them in a second account looking for the reversion, still just one contract just in case it continued to go south like it has. Another good decision from the standpoint of the low risk. However, now it has gotten twice as bad, and I am unsure what to do with it. It is having a huge negative effect now, and it might be time to just admit it was a bad decision and get on with things kicking it to the curb. The only reason I have not done this is that I know over the course of a year this person rarely if ever has had a trading loss, and these are trades I think they are actually doing. The thinking was it will turn around at some point. At this point it has gotten so bad I am just not sure now.

Because all the markets move together, there are no trades separate from these setting up for me, so I find myself in a spot where I can't overcome them at the moment by trading separately. Net net I am not quite sure what to do on this, but thought I needed to get this out since it has really been troubling me now for a few weeks. It makes me very hesitant to offer this trading service live with Bonds even if the trades wind up working out. I am someone who really cares about others and I can't imagine how bad I would feel if something like this happened with something people were paying me for. I am sure I would change it to free until it became profitable, but at the same time as a system, I would never allow a streak to get this bad before the circuit breaker would hit and it would be stopped. Pretty much anything along the lines of 4 losses in a row is pull the plug time on a system like this.

Here is the worlds favorite market, GOLD. Once again everyone is saying put your money here for the impending disaster. That same video calling for something huge to happen in the next month or two is out there. Of course it has been out there for two years so at some point chicken little has sailed there one would think. What I have drawn in is what would be the bullish argument for this market. There is a nice inverse head and shoulders pattern forming here, with the right shoulder not yet established. We do have the COT picture looking the way we would want it to here, big buying by the commercials and big selling by the small specs. The problem is that price is not cooperating and it is free falling at the moment.

Most readers know that I think this market is doing to decline more than 50% bigger picture, and we may well have begun that move. One trick to using COT stuff is that at times when a trend changes, the commercials shift to the opposite side too soon and give false signals for a resumption of the old trend. I have never figured out a sure fire way of determining when that is happening and when it is not. Here we have to let price guide us. If we penetrate the low where I have the arrow, the game is over here for probably a decade or more, or at least a huge decline. If we hold above that level, then make higher short term lows, we can buy break outs from there and life could still be good here. We have to let price be our guide now. Fundamentally we appear to have a good setup for a buy. It remains to be seen if price will cooperate or not. I have this in the Overdue category more because of the big decline that I think is overdue than for the shorter term buy that appears to be setting up.

Here is basically the same chart I showed previously. The ES is setup for a decline and is months overdue for one. We know the FED and Barry don't want one and here is one thing I rarely hear mentioned but it very relevant. Earnings on Wall Street have been very good so bulls can point to that as to why the market is actually undervalued here. Just on the surface that is correct. However, if you were to strip out the effect that low interest rates have had on the balance sheets of companies, and put rates at a 10 year average, I would wager earnings would be terrible. The whole world is window dressed at this point, it is what it is.

At this point this pullback is just that, we have not broken any major support points. The problem with this move and with all manipulation moves, is they leave no logical support levels to buy against. This is what leads to these huge air pockets down we see time and time again. Look how far we have to fall to hit any meaningful support levels. It is 200 points down in the ES to where any real support should be lurking. I am hoping for a bounce here to short just about everything since most trends are declining now.

Once again, no trade in the Bond System today.

Good Trading


Michael Tredr said...

i like your analysis regarding the low interest rate and its effects on corporate balance sheets. i've also come to the conclusion that the current financial climate makes it so that dangerous amounts of leverage is the prime way corporations can get anything back on their Cap-Ex and ultimately EPS. window dressing, it really is. i put up a short vlog this morning just for kicks and basically, I'm just wondering if instead of a "crash" per se, we get a laddering move - like trading ranges for a month on the major indices before another leg down and then, repeat. what do you think?

Matej Marek said...

Hello Chris,
did Larry make any comment on why he has not been doing well lately?

I read an interesting article from a respected trader (chartist) who believes that intraday violation of significant chart pattern bacame meaningless in markets nowadays (mainly due to algorithmic trading. btw, he puts much more stress on closing prices because impact of HFTs is even out). Would you agree with this? Could it mean that chart patterns that Larry is using are no longer(or less) meaningful?

Thank you
(I appologise for bad English)


Anonymous said...

Chris, In your assesment of gold COT data you are seeing "big buying by commercials & big selling by small specs" - I see commercials, who are always short this market, covering some of their shorts into selloff, small specs who are not as long as in the last several months actually bought the market in the last couple of weeks, while large specs maintain their longs at relatively low level for this group. The market lost $80 since last tuesday so we can assume that long reduced reduced their positions & commercials bought them back.It seem to me in order for this market to start moving up, at least from COT data point of view, small & large specs have to start buying in much bigger way & so far we have not seen evidence of that.
I have been reading your blog for the last 6 months on a regular basis & generally like it, the lingering question is how well you have been doing this year? I am also most curious to know what is net $ amount you have taken aout of the markets during 25 year carrer? I know it is a lot to ask but it is the most important question re this very hard business!

numbersgame said...

When people come out and brag, they tend to pay the price. Calling a trading service the really big fish, or whatever LW calls it, was asking for trouble in my opinion.

I too wonder how he justifies it?

Chris Johnston said...


I am not sure on that you could be right. I think overall we are going to move down for the next few months whether it is sharp or gradual I have no idea.


Larry has offered some comments on his performance. Knowing him the way I do I am sure nobody feels worse about it than he does.

As far as the last comment. You may be right on the COT stuff, that is very subjective what you have suggested. I try to keep the COT stuff a bit more objective than that. However, reading that data is an art and I am not always right in my interpretation of it. It does not matter because I only use it to look for markets that are setup. The actual entries have nothing to do with COT stats.

As far as those other questions, this year has not been as good as last year up to this point. As far as the other question, that is an inappropriate question for a free forum where I provide my views. Why would I disclose that to some stranger who does not even use a name when posting a comment? For all I know you could be an IRS agent or one of Barry's henchmen.

I am being more guarded about actual dollars made in trades by design this year, it is not reflective of my trading directly. I was too open in the past about such things as amounts made in trades etc..

If you require that to keep reading I guess you won't be reading any more here. It does not matter to me, I don't make a penny off this. I often wonder to myself why I does this in the first place?

Chris Johnston said...

What we have seen with LW's service is what unfortunately we all know too well. Your worst periods always come right after your best ones. He doubled his account in January, so was probably feeling pretty confident, and then he gets hit with this. I think the spirit of the name was more trying to catch larger moves, than a self agrandizing prop. In any event, it has been a disaster so far.

Anonymous said...

I am a student of Larry Williams also. Your blog is great keep it up.

I am in the complete opposite camp when it comes to Golf though. Driver about 220 but good from 100 in.

Gold went into a paunch yesterday. I am long Gold and i really think trading this market you have to pay attention to currencies.

If you have the aussie and euro lineing up with the comercials then gold is a buy. Then we have the technicals and seasonals lineing up also.

I have found success using currencies as a predictor of capital flows.

Anonymous said...

Just a few thoughts...

Love the blog, thank you Chris.

Due to the number of computers that are working the markets, I have given up on any signals that do not occur at close on fridays... So weekly indicators are all that I use...