website header 2

website header 2

Monday, November 14, 2016


“… for wide is the gate, and broad is the way, that lead to destruction …” Matthew 7:13 [KJV].

If you were inclined to learn the truth, and had the time to spend with me, I could literally tell you, just from my personal anecdotal experience, dozens upon dozens of stories of Chicago traders who now and forever will reside in the “Trader’s Cemetery”; it’s a very large place, with ornate headstones, well manicured grounds, and large reflecting pools with requisite stone benches for people to sit and reflect.
Obviously, genetics plays the key role in what we look like, but there are 2 factors that determine “who” you really are; 1) your environment [immediate family, where you grew up, family income, etc.], and most importantly 2) your “will”; i.e., to be metaphorically specific, “the engine inside of you that drives your life”.
“You hate your job? You hate where you live? You hate the fact your income isn’t as great as you would like? In other words, you don’t like the life you are leading & living now?”
“You can’t find a decent market to trade? Your trading account is too small and you bitch about it constantly? Profits are a total bitch to pocket & losses are almost on ‘cruise control’ most of the time?
Many years ago [decades now] when I was a “20 something” and thought I “knew it all” and came to study trading under my mentor Bert, what “lit the fire under my ass” to go introduce myself to him when others who were new in the brokerage house wouldn’t, was my desire for change in my life cuz being a stock jockey cold calling people all day and getting harshly rejected 350 times out of 350 calls tends to be a “downer” in your life, producing exactly ZERO income.
Practically every day, Bert would pound into my head in some way, shape, or form [usually with the largest sledge hammer he could find] three essentials that he wanted tattooed on the inside of my eyelids so I’d always remember them; 1) have faith in a trading method and show discipline & patience in following it [and Newbies OMG!, do we not know how hard this is?], 2) maintain “balance”; i.e. never let profits blind you to your ultimate ambitions [“Oh, did you see that wonderful trade I just made and ‘killed it’? Yea, next trade I’m quadrupling my volume cuz I want a frickin’ Porsche NOW baby!!”], and never let small losses define you as a person [“Why has God forsaken me and led me to this loss?”], because trading any market is a binary non personal event, and 3) choose the form of your destruction.
The first two, I have written at length on various occasions and to varying degrees my long time readers/clients know how hard they can be to accept; the third, “choose the form of your destruction” will be the hardest for you to accept, ultimately appreciate, and finally adopt as your trading mantra! Given the absolute bloodbath we have seen on display this past week in the gold [and stock indices] market, not only in terms of price but also insane volatility at times, this seems like a very opportune time for me to share some of what I learned from Bert, my additional thoughts, and how this can translate into making you a more profitable trader.

The other day when I was at the beach, sitting there under the beach umbrella, the dog laying on the beach towel in the shade napping after a Beggin’ Strip & some cold water, and I’m sitting there hypnotized by the singing waves and the beauty of the white sand & turquoise water while engaging in some Vitamin C therapy [an ice cold Corona light with a fresh cut lime slice … “hey, I don’t want scurvy … not takin’ any chances here … it’s ‘medicinal’, Ok?”], and as sometimes happens when my thoughts turn to trading, I think of what Bert taught me.
I had just come back from the order desk, where the order clerk at the brokerage house 2 minutes prior had screamed out my name to pick up a fill from Bert’s managed account pool. Walking back to our desks in the back corner, I see Bert had sold 100 lumber futures contracts, and I’m thinking, “Hmmm, when did he do this? Is he getting short up here?”
I drop the order on Bert’s desk, and while he’s on the phone talking with somebody, I sit back down at my desk in front of his and resume my work. About ten minutes later, when he’s done, is when all this started.
“Kid, get your ass over here … we gotta talk … some really important stuff I have to teach you,” And I look up, and immediately roll my chair from my desk in front of him to back where he was and am looking at him intensely. “Ok, this is important … you paying attention?” And I’m like, “yea, I’m here and looking at you … yea, what?” And he shoots back, “Ok, you listening?” And I’m sittin’ there getting this incredulous look on my face, when I finally say to him, “You want me to sit in your fucking lap? … unbunch your panties for Christ’s sake … I’M RIGHT HERE … WHAT?”
I remember him chuckling a little and then saying, “yea, I know when you get like this you’re paying attention … sorry ... Ok, here’s the deal.”
“Kid, you been doing great … I know you are tradin’ these other markets I don’t completely understand … gold & silver I get, but interest rates and currencies? … how the fuck do you trade an interest rate? … why should anybody give a shit about the Japanese Yen? Christ, a few years ago we kicked their ass in WWII and now we trade their currency? … anyway … you been doin’ great, and I like some of the new theories you got using probability and some of that other higher math I don’t have a great understanding of … but there’s gonna come a day kid … and here’s the deal … you got to CHOOSE THE FORM OF YOUR DESTRUCTION!”
And I’m sittin’ there and hear this, and my first thought is, “Bert, WTF are you talkin’ about”, but say to him, “Ok, I’m not sure I understand where you’re comin’ from, so please explain this concept to me further and why it matters.”
“Kid, you know we pursue the ‘Holy Grail’ of trading; trying to find those things that bring us perfection to our trading model … I know that you know it’s an impossible task … but in the pursuit, in the journey, we learn valuable lessons about markets and about ourselves … that make us better traders and hopefully better people … we choose as traders to stare into the abyss and demand answers … often times those answers we don’t like … kid, now listen to me … you need to first think about, really think about, how A MARKET CAN KILL YOU; END YOUR CAREER BY DESTROYING YOUR PHYSICAL CAPITAL & YOUR EMOTIONAL CAPITAL … in other words, you need to figure out and CHOOSE THE FORM OF YOUR DESTRUCTION! … then develop a solution to defeat it … Oh, and I’m giving you 5 days to think about it, develop counter measures to it, and then lay out for me your ‘battle plan’ first thing Monday morning when we come in; I’ll be here at 7 A.M. to see what you got; any questions?”
And I’m thinkin’ at this instant, “Oh fuck yea, sure … anything else, like maybe world hunger you want me to solve, or cancer … shit, is this all you got?” And I remember saying to him in my most serious of tones and posture, “Nope, got it. I’ll be here at 6:30 A.M. waiting for your ass, and not only will I have what you call a ‘battle plan’, I will blow your mind with what I ultimately show you. And he looks at me not really knowing what to say; part of him knows I’m dead serious, and another part of him is wondering what I got “up my sleeve” that he doesn’t know. Finally he says, “Ok, can’t wait to see it.”, and that’s that.
This was on a Wednesday, and for the next 2 days into the weekend, we didn’t say much to each other, other than me getting some of his orders filled in corn and general comments about the other 2 markets he traded heavily; lumber & cotton. On his way out the door on Friday, he simply said, “Ok kid, see ya bright and early Monday morning”, and then walked off and out the door.
What he didn’t know was that I had already done a tremendous amount of statistical work on silver [my favorite market at that time for trading], with some work done on gold and the 30 year T-Bond, and that I had developed a somewhat crude trading algorithm already that dealt with risk of customer positions. I didn’t call it “choose the form of your destruction”, but Bert’s term aptly fit into what this phrase ultimately means; we can never completely avoid losses in trading, and as traders this is “our destruction”; however, having said that, we can minimize their impact [i.e. choose the form] on our account by making sure they are always small compared to our overall account equity and never really hurt us. And what should be readily apparent to you is, why all these years and decades later, my volatility algorithm’s rules & signals ALWAYS have as their first and highest priority to “KEEP YOUR ASS OUT OF TROUBLE”. When that objective is met, you can then ponder profits; you turn this on its ass, and it isn’t a question of “if”, it’s a question of “when” your next gig is asking people, “Would you like to super-size that order?”

Ok, Monday morning comes and I lay it all out for Bert; takes about 90 minutes. He is blown away; after I finish he says to me, “kid, this is fucking genius level shit … seriously, this is better than good … sometime this week, let’s implement this in lumber, cotton, & corn … good job, now don’t get cocky.” And that’s that; gets up and starts walking up to the order desk while asking ‘got an opening call in lumber?', cuz nobody is at the floor desk in Chicago answering the direct line.
And now, interrupting the narrative for a moment, I find myself laughing out loud in my beach chair, the dog looking up at me “hey, I’m tryin’ to nap here! … frickin’ humans… they’re nuts!” And what has me laughing is what I remember from that moment all those years ago, of what was my immediate reaction to all of this; part joy, part what the fuck? “Ok, yippee I did a good job … errr, wait … what? … cocky? …  Who’s gettin’cocky? … couldn’t you just leave it at ‘fucking genius level shit’ and then STFU and sit down and smile? Hey, don’t walk away from me while I’m …”
Here’s what I didn’t know at the time all this was unfolding, and why Bert was so adamant in pounding this relentlessly into my head … of course, knowing because he was/is/always will be my “Master” mentor … looking into the future and knowing I would be there [and by default someday he wouldn’t] … trading something he most likely knew he had no concept of except it was “trading” … and knowing I would face … unbelievable cataclysmic market moves … up or down, they will be there … nobody will believe what they see happening … cycles forever in the past; cycles forever in the future … “kid, I have to prepare you.”
Up into that Wednesday, for over a week, Bert had not traded lumber; it was locked limit up for over 10 days in a row [$10.00 per front month futures contract per day, and $10.00 = ± $1,000 per 1 lot depending on your position.] I didn’t know he was long; when he got into the position, I was busy at the same time with a silver trade, so he went and put the order in himself. After that following Monday, after I showed him my ‘battle plan’ and the market closed for the day, he called me over and showed me what had happened when I layed that fill on his desk on Wednesday. He showed me the “signal” that got him long and then all the data leading up to his sell order; “kid, everything I follow lined up perfectly 1 day before; North Mode Moon versus Mercury in this Planetary Aspect [I think it was in Mars] … looking back there were always huge moves associated with this on the upside … happens every 5 years or so … and now, at first it started moving up to news of that idiot Carter thinking about imposing import tariffs on Canadian Pine [at the time, mid-late 1970’s, it was the most popular and widely used grade of lumber that was deliverable against the futures contract] … now we got a union strike at the biggest lumber mill in Canada which limits available supply … BOOM! … that order you got earlier, that was me getting’ out of the 100 contracts I was long from $108 ago!” I just sat there, simply fucking stunned in amazement; Bert had just “rung the register” for $108,000 in this one lumber trade, and for 3 trading days plus the weekend in between he didn’t tell me Mr. Jack Shit. When I stupidly asked him why he didn’t tell me on Wednesday, he glances at me with that look of annoyance he always had when I fucked up somehow and just stared at me; finally I say, “Oh yea …balance?”
He stands up from his desk and shouts to the entire room of brokers in a loud voice, “Who says the kid here is a ‘fucking idiot’? C’mon now, I know I heard somebody thinkin’ it!” I look around; all the newer traders are in shock, while the older guys who knew Bert are laughing their collective asses silly looking at me. I see what’s happening and I stand up and take a bow and accept their ridicule cuz I know it’s all in good clean trader fun. When it’s over, Bert grabs me and puts his arm around my neck in a mock choke hold and whispers to me, “You did really good kid, now you got to take a little shit.” And when he’s done laughing and fooling around with the others he knows well, he grabs his coat to go home, and as he’s walking away, he stops and turns around and says to me, “Oh, by the way, that 100 lot sell order? Yea, I told Betty [the order clerk] beforehand to give you credit for that order. See ya tomorrow kid!”  I’m sitting at my desk, and I want to pee my pants cuz we’re talkin’ about $5500 in commissions for me next week from just this one order. But when I look up a few other brokers have heard what Bert said to me and I remember what Bert told me before about things like this; “Kid, act like you’ve been here before and are gonna return a million more times; you earned it, you deserve it, now expect it! Balance, my boy, balance!”
And at once you just instinctively know … “he’s not telling me, he’s showing me; no need for talk … balance … did you see him dancing on top of his desk? … nope, same old Bert; giving me shit and expecting me to understand these concepts so I can carry them forward … Thank you ‘Master’, thank you.”
Understand dear readers, this is the late 1970’s we’re talkin’ about here; new cars cost about $4,000 or so; nice new houses in the best neighborhoods of Madison, WI. run about $80,000 - $100,000; we’re talkin’ about some real money here. But that was just the beginning of me “being amazed”; when I asked why he got out at “limit up”, his answer was that the data showed tomorrow would be the end of the up move and he didn’t want to risk getting caught in a “limit down” move and not be able to get out, so with the sizeable gain why not be a little early and “nail it down” right now? Gets no argument from me, that’s for sure.
Next day, as we approached the open of lumber, I called our desk on the floor [Bert had a direct line to the floor installed per his wishes being directed to the brokerage house CEO, who simply said, “Whatever you want Bert.”] about 15 minutes before the open to get an “opening call”. Guy there simply says “limit up”, and I’m thinkin’, “Hmmm, well maybe later it comes off? … hell, what do I know? … let’s see what happens here.” Market opens “unchanged” from the day before, and within 30 seconds it’s limit down. [Note: After I picked myself up off the floor, I remember it fluctuated widely after that move, eventually closing the day lower, but not limit down.] Looking back at a chart a couple of weeks later, that was the high of the move, and incidentally looking back a full decade later when I was on the floor it was still the high that had not been taken out or seen since.
I want you all to realize the scope of what I presented here today; for me, and for you also if you abide by algorithm rules & procedures, choosing the form of our destruction is simply forcing the market to adopt trading behavior that is nearly impossible given present day market conditions TO DEFEAT US. I didn’t say it was impossible, I said it was “nearly” impossible.
And what are those conditions? Simply, 1) intraday volatility so small you can hardly measure it, and 2) a market that consistently makes small moves that set off algorithm buy signals [gold] before reversing into condition #1 above. Given the fact, not my opinion, that these markets trade upwards of $7 trillion Dollars notional value every single day, you tell me how high the risks are in getting “slapped around”?
That’s not to say on any given day things can’t be slow; most assuredly they can and we’ve seen this in gold at times in September & October; why do you think some days I leave this market alone? And maybe you now understand why you can’t be a “one trick pony”? I’m in my 4th decade of trading [even though I’m still in my 20’s; never been able to figure this out], and from where I sit, I simply don’t know of another algorithm or trading method that has lower risk. And so, when I tell people to send me info on another method if they think it has better risk management, and they laugh at me and say, “Sure!”, I’m being serious and they think I’m trying to be funny or something; I’m not.
And so, automatically built into the volatility algorithms for each market the great question of “what is the form of my destruction”, has already been thought about, addressed, and implemented via the rules & signals; after 4 decades and millions of dollars from trading, I’m still standin’ strong as ever. And while I wish I could claim credit for all of this and proclaim myself “genius”, whatever I do is built upon the work and direction of Gann and mostly my mentor Bert, and I simply took the ball and ran with it. Yea Ok, I’ve had some original insights and creative work [exhaustion lines] that gives me my “trading Ph.D.” [besides the money] and benefits those who understand and see the results in their own accounts, but I certainly don’t view myself as some kind of trading genius.
More importantly to me, throughout my trading career, I have maintained the “fire inside me” to learn more, try and think outside conventional boxes, and maintain that delicate “balance” I wrote about earlier. What motivates me to follow the rules & signals isn’t “genius”; it’s freedom in all its shapes, and a lifestyle free from corporate hassle and harassment. Money from trading buys that. I have no desire to be enshrined in the “trader’s graveyard”, where people can walk by and say ’Oh yea, I remember him … great trader … until …’ and then you can fill in the blanks.
Ultimately, as a trader you have to 1) face the demons, and 2) stare into the abyss; these weighty questions and problems we face primarily come to you as simply “flowery words” until you open an account and think your brains can get you out of any trouble you get into. In most cases, all those trader’s who I remember went “belly up” had uttered at least 2 things before it was over; 1) “this time it’s different”, and 2) “this can’t be happening”. Well, it ain’t different, and it most definitely can happen and does repeatedly.
First and foremost, Friday’s bloodbath lower in gold holds for many of you important trader lessons regardless of whether you made money or not; 1) don’t ever say never when it comes to thinking markets can’t do something, 2) probability is just that; it’s not a guarantee, and 3) situational awareness (which I wrote about earlier) is something every trader has to develop. Having said this, how likely were the third and fourth lower exhaustion moves in gold due to commercials stopping out retail specs getting long gold cuz they thought it couldn’t possibly go any lower on the day [until it did]?
Ok, trading Ph.D. seminar dismissed for the day; time to trade.
Turning to gold today … well, what can you say after Friday? … needless to say, the Asians took it lower right out of the starting gate to 1213 … only to see it rally in Europe off the lows [“Hmmm, I wonder who could have ever seen this coming?], and here we are at in the mid 1220’s. Some days [in fact most days] I look at the action from Asia, and when I think of the literal Chuckleheads they got running trading desks over there, I can’t help but think of Walter Slobchak [John Goodman] from ‘The Big Lebowski’ in the immortal, hilarious scene where he smashes what he thinks is “little Larry’s” car cuz Walter thinks he stole their money, cuz they found his homework in the car where the money was and it ain't there anymore. The clip link courtesy of You Tube directly below. Take 3 minutes out of your life and get a decent laugh. [“Your welcome.”]
And thinking of these Asian traders consistently getting stiffed day-after-day, week-after-week, on and on over the years … you do realize gold would be at $10,000 per Oz. if it wasn’t for New York trading, right? … and ultimately, they’re like Walter … mad as hell, and can’t figure out how to stem the losses …. So what do they do … why buy more every night until they … SELL MORTIMER SELL! … AND THEN IT CAN RALLY!! Nice job Walter, really nice.
So, here we are at the New York open and my gut feel is that there should be a move lower first to see where support [if any] actually is and if it can hold commercial selling pressure; if we start climbing up early, then later in the day I would expect to see them “monkey hammer “ it again lower. Because of the very nasty downside action of last week, the only waterfalls I’ll be buying [for the next week or so] below the white line will be at the exhaustion levels; preferably RM=1 will/should hold, but if that first waterfall doesn’t hold I’ll be switching to RM=2.
At this point, the gains in the stock indices is starting to get frothy; I would expect some lower price action either today or tomorrow, and with that it should support gold; how much support I haven’t a clue.
Ok, that didn’t take long; trade #1 directly below.
We’ve been in a nasty downtrend folks, how excited do you think I am holding a long position for any serious length of time? Exactly; not very. Buy signal on plum slope change above the white line; and when the trade becomes profitable and I’m up over a buck, my mental stop gets lifted to break even on the trade; equities weakness should support and see gold go up some, and as long as I can show profit on the trade [and just as importantly we are above the white line] I’ll hang on; we get another little lift in price that almost sees the upper exhaustion line, and now my thinking changes to one of if I see the first red M1 I’m liquidating [close enough to exhaustion line for government work]; sure enough this spike up proceeding the orange arrow didn’t hold, and when the M1 turned red [orange arrow] I liquidated capturing about $3.50.
Quite frankly, I don’t care where they take it now, the only way I step back into this is if they test the lows and somehow hit RM=1 or preferably RM=2, other plum line slope changes be damned after this first one; my profit goal has been hit and there is for sure no need or desire to chase this stuff higher on signals if that is what happens. Early rallies in this stuff are gonna get sold by the commercials, and if you’re looking for some kind of extended rally to start early and then continue for the day during this week, you don’t know or understand how gold trades; when you get long, it’s mandatory you sell the rallies and not care where it goes after that!
An hour into this and now we’re seeing a steady erosion of price, where the little 2-3 minute micro-bursts of buying get slammed; am seriously wondering if today the bullion banks go for the 1200 level for stops if the day’s low gets taken out. If in fact U.S. equities go lower today from here, and gold can’t rally, look out below in the days to come.
Ok, 2 hours into this mess, and I can see the mild inverse correlation with the SP500 and no real buy interest from anybody except those that are short; we may in fact go lower, but I’m no longer interested in buying a lower exhaustion line hit, if in fact we get one. Adios gold for the day.
I’m almost done with the DOW30 manual; should have it up sometime in the next 48 hours. Almost finished it last night, but parts of it I wasn’t happy with what I wrote, so I’m doing an edit and will be finished shortly. Sincerely hope all of you "got something" to take away from today's post. The dog sees I’m done and is going nuts, and we’re outta here until tomorrow.
Have a great day everybody!

No comments:

Post a Comment