Trading with an Edge. [cJ Bryce Gilmore 200 I Bryce Gilmore's A complete trading seminar TWs ••• f .ak.1 a I.t .f ..." ... cals with a st.Icuo patt_ t. t.clay Buy on lIN .... bock �h le ... 1 lGoy Support By Bryce Gilmore 2nd Edition - All rights reserved [C] 2002 Trading with an Edge. [c 1 Bryce Gilmore 200 I TWAE - Table of Contents: Introduction: 1. Markets - Pure, Impure and Manipulated 2. Who are the Markets? 7 3. Preparations for Success: 11 4. Tools of the Trade: 16 5. Market Mechanics: 23 6. Psychology of Trading: 27 7. Money Now, Later or Never: 32 8. Money Management: 35 9. Monitoring Your Progress: 40 10. Trade Entry Techniques: 42 11. Initial Stops 8t Trailing Stops: 56 12. Trend Indicators: 60 13. Open Interest in Futures Contracts: 69 3 14. The Opening Price, Trend and Day by Day: 73 15. New York World Trade Center Disaster: 92 16. Australian Share Price Futures: 96 17. S8tP500 8t SPI200 Index Futures Trading: 18. Day Trading Short-term Pattern: 144 19. Position Trading: 160 20. Soybean - History 8t Seasonality: 168 21. Contingency. Plans: 180 22. Trading With an Edge: 183 Appendix Contents: 128 APP 1. Soybeans continuation to 13 Open Interest and Reports Available: I-X APP 2. Opening Price 8t Geometric Levels: XI- XIV APP 3. Assorted Charts with notes: XV- XXII APP 4. Liquidity: XXIII- XXV Personal Note Pages: A Trading with an Edge. [cJ Bryce Gilmore 2001 Suggestions on table of contents: I highly recommend to you to create your own table of contents list of important pages you wish to refer to regularly. To list everything in this book will provide no initial help to the user, read the book first from cover to cover at least twice. Highlight the pages you think you need to remind yourself of regularly. Read these pages at least once a week until you have committed them to memory. If you do this you will find you will get the greatest gain from the valuable contents. This text has been written more like a book than a technical manual, most of the examples were written in real time as the markets moved from day to day, the unexpected happened when the WTC was attacked. The author's personal style is reflected throughout and as he felt something necessary to emphasize it appears in the sequence. Create a written trading plan: When you have created a personal trading plan you can reference pages of this book to it. Everyone should have a written trading plan accompanied by a list of known mistakes they have committed. You will learn more about your strengths and weaknesses and be able to correct them far more easily this way. All your trades need to be reviewed after they are concluded, you need to make comments to yourself on how you managed your trades and if you could have managed them better. No two trades are exactly the same yet over time they will fall into categories. Trading for a living is work, you must work at it to be successful. Good Luck, I shouldn't say that because it is up to you to create your own luck. B Trading with an Edge. [c 1 Bryce Gilmore 200 I Trading with an Edge [c] 2001 Bryce T. Gilmore. Introduction: I have been a full time trader in one form or another all my business life, some 21 years ago, I decided to try my hand at commodity futures trading. To begin with I had my ups and downs, luckily I was up in the beginning so I persevered and decided to learn more about the business of trading leveraged markets. My first experience with trading futures markets is probably similar to other business people who jump in the deep end and have a go, because it sounds exciting. When you are used to running a successful business and money is no object everyone else's business looks easy. When I started I knew nothing about charts or technical analysis, only fundamentals. We had just been through a boom and bust in Gold and people around me kept telling me stories of how you could make a fortune trading the paper markets. It all sounded too good to be true so I thought I will have a go. I probably made all the mistakes possible in the 1st 3 months and my broker loved me because I would make my margin calls on time and keep having a go. After 3 months I did my sums and arrived at the conclusion I was wasting my time. The only one making any money over time was my broker. I had made $26,000 in trading profits after losses and he had taken $24,000 of it in commission. At the time the commissions were enormous, I was paying $160 a round turn. I decided to stop trading for a while and investigate some of the things I had seen when I visited the brokerage trading room. They had clerks in the office with charts and some computer equipment pumping out signals to buy and sell at certain levels. I had never done any work on my trading decisions prior to that, all I had done is ring up the broker and ask him the price, he would give me his advice and I would either go his way or against him, depending how I felt from what I had read in the newspapers. At times I just traded things that the broker recommended because I wanted the action, I would ring the night desk and get an update I Trading with an Edge. [c] Bryce Gilmore 2001 and often reverse position if it was going against me. I never traded with a stop loss, there was no need I had plenty of money. I would make a decision to trade on the drop of a hat, one night I was driving home and heard on the radio that King Hussein had been shot. First thing I did when I walked in the door was call the night desk, it was just before the open, and I told them to buy 2 silver on the open. I rang back 40 minutes later after the news was confirmed on the TV and silver was trading limit up. So I told him to sell them, he argued but did it and I was up $4000 in an hour. Silver traded down after that. At the time I thought I was a genius. These were the things I used to do when I first started because I was a gambler in a way. I knew the casino odds, I was a good black jack player, I understood dice and I knew I could win, that was the important part of my makeup. Now after 21 years in this business I have developed a completely different approach, I have done some hard miles, I have cursed at myself and others so many times over the years, for me or them, making obvious mistakes I can't remember. I have seen the highs, I have seen some lows, I have had days where I made $30,000 and days where I lost $25,000, but overall this business has been very good to me. For that reason and that reason only I have been passing on knowledge I have learned in the "trenches" for years now. The money I receive from book sales and seminars goes a long way towards my acceptance of this business as a business. There are no free lunches they say. Someone has to pay the piper. Now the purpose of this book is to lay a foundation for other people to follow who want to make a career out of trading. Before you start you need to know certain things about the vehicles you intend to trade, they are not the "lottery" they look on the surface, and things have become so sophisticated over the years it almost takes a "university degree" in common sense to get your footing right from the start. The business of trading leveraged markets is not easy, that is unless you make it easy or as easy as you can possibly make it. You must know certain things to place yourself in a position of advantage. Then you must know how to conduct yourself. That is what this book is all about. Hope you enjoy it. Bryce T. Gilmore, [C] 2001 2 Trading with an Edge. [cj Bryce Gilmore 2001 Chapter 1: Markets - Pure, Impure and Manipulated: The first part in this exercise of understanding is to describe my thoughts on the various markets that you are likely to trade. Reason being some are easier to trade than others. You might think all markets are the same but alas, you would be wrong. Basically we have individual commodity futures markets, individual stocks, index futures, interest rate futures and currency rate futures. In terms of PURE markets we have basic commodities which follow a trend to some degree with basic supply and demand factors: Individual commodity futures, these could be:- Soybeans, Wheat, Corn, Gold, Silver etc., and others similar. Individual Stocks, these could be:­ Any volume traded market leader. The most IMPURE futures to trade are index futures because they represent a basket of something, each of which could be in a different demand trend to the others. Index Futures and Stock Index futures. The most MANIPULATED futures to trade are futures subject to continued intervention by government agencies, these are:- Currency Futures and Interest Rate Futures. So before we start trading anything we need to learn the basic CHARACTERISTICS surrounding each futures contract. Who are the players, who dominate those markets and why. It is not that important which markets we trade, just so long as we understand the factors which influence the underlying supply and demand for each complex, factors that effect the psyche of the buyers and sellers. Just in case I am confusing you at this stage I have traded them all and I know what I am talking about, I will explain as we move along. 3 Trading with an Edge. [cJ Bryce Gilmore 2001 seasonal Produce a. Individual Stocks Seasonal Produce Commodity contracts I call pure are the seasonal produce contracts, Soybeans, Wheat, Corn etc., These contracts have a specific use in life. They are the official hedging mechanism for the food chain and as a result are subject to supply and demand pressures year in year out. The commercial houses dominate these markets and the volumes and open interest are always good. They are very liquid markets and attract a lot of speculator interest, large hedge funds system trade these markets which gives them a certain degree of predictability at times. The CBOT is still using open outcry pits to transact the business so there is no artificial manipulation from outside. This could change in the future a little with an online computer execution system. The Soybeans for instance is a very stable market to trade, except in times of extreme volatility, the daily range is fairly predictable and the support and resistance from the past 3 days tends to be easily readable. Although I don't often trade Wheat or Corn they tend to hold the same characteristics. The Soybean market tends to be technically readable in time cycles and price levels due to the abundance of traders in the market and the number using various technical techniques to initiate trades. Soybeans is one of my favorite markets. Years ago it used to be Gold and Silver. For the novice the Soybean, Wheat or Corn market would be a good stamping ground to cut your teeth on futures trading. INDMDUAL STOCKS (Market Leaders) Stocks that trade in high volume and have readily available information as to their state of health, earnings and future prospects are good prospects for the technical trader. On occasions fundamental information will excite the speculators, but with a little foresight most times an entry into the stock before that eventuates is possible. These stocks are dominated by the large players, so they always maintain liquidity. Any stock that trades continuous volume is normally a good trading vehicle because it will mostly trend upwards and downwards in an orderly fashion. 4 Trading with an Edge. [c 1 Bryce Gilmore 200 I Stock Index Futures ASX200 - Share Price Index 200 The Australian SPI200 futures index is a derivative of the ASX top 200 stocks. That means that the total capitalization of the 200 stocks are indexed to a value. The futures contract trades with a premium to or a discount against the ASX200 cash index. The impurity of the index can be explained this way:- Of the 200 stocks in the index the top ten account for just in excess of 50% of the total capitalization. The top 20 run about 66.7% of the total capitalization. The ramifications of this are simple! 10 stocks rule the fate of the index direction. Of these 10 stocks we have several market sectors, Media, Banking, Resources and Telecoms. The dominate stocks in the top 10 are NCP, NAB, CBA, BHP and TLS. If you can work out the trends in these stocks you can give yourself an EDGE when it comes to predicting the overall index direction. The problems start when different sectors are trending in opposite directions as they cancel each others influence out of the equation. Sector stocks tend to trend together so it is also an advantage to follow the trends in sectors and their weightings in the overall index. This requires a lot of extra work if you want to maintain control over your analysis. Another thing to know about these top 10 is that 7 of them are traded on overseas markets, outside of the normal ASX business hours as ADR's on the NYSE, where they trade in US$. They create arbitrage opportunities for the big players and it is important to track the ADR's as a guide to the day to day direction they are moving in. I have devised a method which makes it fairly easy to do this. S8tP500 USA The same principles apply to the US top 500 in as much as sectors are important to track to gain an EDGE. DOW JONES INDUSTRIAL AVERAGES - the top 30 US stocks. NASDAQ Futures Although I have not done a lot of work on this one it appears to me that the top 20 would be a good guide to the overall direction of this index. 5 Trading with an Edge. [cJ Bryce Gilmore 200 I CUrrency Futures • Interest Rates Currency Futures These can fall under the category of manipulated markets - they are manipulated in the respect that government agencies of different countries set policy agreements with each other to maintain a "broad band" valuation. The Reserve Banks have the power to enter the markets anytime they like and take on all comers. This is why "events" in currency futures often cause "spike moves". So, if you are asleep and trading some trend following system you could get a few surprises from time to time. The other thing that is helpful in currencies is to watch the % change in trading ranges to see if they are holding in a 5%-10% band as this will alert you to outside intervention by Reserve Banks. When a currency is on a bull trend or bear trend it is usually being substantiated by fundamental analysis, so you need to study fundamentals to increase your chances of success. One of the ways I see currencies as a viable trading vehicle is spreading one currency against another. That's the only way I will trade them these days. Interest Rate Futures These are not my bag but, the volumes are amongst the biggest of all futures contracts. You would be amazed how many traders are employed by banks all around the world to just sit at a desk all day and trade for 5 tics. Basically as far as I can work out they trade the expectation of the next rate cut or increase and trends develop along the way. When the rates get into overbought or oversold territory they seem to react to price retracement levels quite well. They are worth investigating if this type of thing turns you on. Bottom Une: Whatever you do before you do trade any market, at least do a discovery tour to find out what its major influences are. I am sure it will save you some heartbreak in the long run. Hidden meaning here is don't trade without the knowledge of what you are trading. 6 Trading with an Edge. [c 1 Bryce Gilmore 2001 Chapter 2: Who are the Markets? This might sound like bad English but, I think it is a good question to ask yourself before you start to trade. What are the futures markets all about? My opinion is they are an inefficient financial system tool designed by idiots to accommodate the needs and desires of greedy people who can then try and move wealth from one level to another legally. Now having said that I am open to critizism from all sides, nevertheless I can also say that since I feel this way I can work with them on my own terms. When you have been around this industry for as long as I have and you have seen all the changes that have taken place because of bureaucratic bungling, bad exchange rules, shonky brokers, cheats, thieves and charlatans you can become a little jaded now and again. Still, I am willing to take them on at their own game, you better be also if you want to be a professional trader. Before you start trading you had better begin to think about all the pitfalls which can become major obstacles to your success. Brokers: The first obstacle you are going to encounter in this business is your broker. Before you choose a broker you need to go out and interview them the same as you would expect if you were applying for a $150K a year job. Your broker is going to be your biggest asset or your worst nightmare. Only two requirements are important from a broker:- 1. Ability to transact your business in the fashion you expect. 2. Reasonable transaction costs. If they can't provide either properly they are a dead end to your success. You might as well strap a lead weight around your neck and jump off the nearest bridge before you start. Save yourself the grief they will bring you if you don't have reasonable control over them. 7 Trading with an Edge. [c] Bryce Gilmore 2001 After you get past the broker selection issue: What do we find? A market that.... trades up and down in ticks •.. ticks that have a value ••.•• These ticks are real money. You must never lose sight of the value of a "market tick", it is easy to bury your head in the sand, do so only if you are a masochist. Each commission and each extra tick you lose on a transaction adds up to thousands of dollars over time. Slippage: There are times when you place an order "on stop" and the market is moving fast and your broker does not get your order in soon enough, so you get filled at a price that involves what is commonly referred to as slippage. Whenever this happens you have to be prepared to argue with the broker and ask WHY? The exchange records all transactions and they are known as "Time and Sales", you can always check back and see if your slippage was justified. If it wasn't then you must insist your broker make good the loss. This is not as easy as it sounds because the broker works for commission and he will try and brush you off if he can. Back years ago my partner and myself were trading a system for ourselves and numerous other clients of our brokers. The lots were about 26 at one broker and 18 at the other. Often what would happen in the IMM currency markets the opening range would be moving fast. One set of orders were being worked by Wardley's and the othe� were being worked by Rudolf Wolfe, if a fill came through from one broker that was different to the other by more than 4 tick's I would complain. Once the offending broker verified that the other had executed the fill they would make the fill good at the other brokers execution price. Now the only reason they did this was to keep the ongoing business. It didn't happen often enough to make you think "is my broker doing his job or am I getting shafted by someone in here", but it always crossed my mind. Once one of the floor brokers holding orders for us in his deck walked out of the pit with 2 minutes to go on a Friday, the market dropped into the close on silver and closed limit down. 8 Trading with an Edge. [cJ Bryce Gilmore 2001 Wardley's filled the "stop" order 3 cents from limit down on 18 and Rudolf Wolfe left us holding 26 against a limit down close. Now how do you think I felt when I saw the fills and the non-fills the next morning? it was Saturday and I couldn't raise a soul at the brokerage we were dealing through. I hit the bloody roof and rang the principal at home and demanded he get the fill for us. In those days there was a 24 hour spot deferred silver market running out of New York so they were able to hedge the position and give us the fill without to much pain. As it turned out the result turned in their favour but it could have always gone the other way. Another time we had an order to sell 46 lumber on a stop to close and reverse short net 23, and the market ran the stop and the broker had a buy order there instead for some reason. That required him to place the order at a limit and we never placed orders at limit. It happened on a Friday as well and on Monday morning the broker rings me and tells me we have 69 long on a limit down in lumber. I asked him what he was going to do with his 69 longs as we were short 23 on paper and the order was supported by a telex printout. He then asked me what he should do? I said if I were you I would sell 138 and go net short 46 and see if you can get your money back as that was what our system had told us to do. : -» Funny business this, and if you are not in control of your actions you will get shafted sooner or later. The original question was - Who is the market? The market is you, me, the brokers and everyone else who can make a mistake and blame it on someone else. The Trading Pits: Most of the financial markets have moved from open outcry to electronic computer execution. The S&PSOO still trades by open outcry but at the same time the E-Mini trades electronically. If you are following a live data feed for the S&PSOO you will find it is about 30 seconds behind the E-Mini print in fast markets. This is because of the delay processing (hand punching) the executions coming from the floor into the system. The market can slip you a lot of points if you are relying on information before you place an order. 9 Trading with an Edge. [el Bryce Gilmore 2001 The grain markets at the CBOT are subject to the same problem in fast markets. If you don't have an order in the system you could miss getting a fill just watching the screen and then calling the broker with an order. This will change this year when electronic trading begins on mini contracts through the day. Right now the only way to keep up with what is actually happening in the trading pit is to have a direct line to them or a radio voice feed telling you what is going on in there. With all these obstacles in mind you have to evaluate "who is the market" Buyers, Sellers 8r. Traders: These people are the market, no one else. They all have different reasons for placing buy and sell orders, half the time it would be anyone's guess why, except the trader has a high probability reason. Yet we have ways and means to seek out this information to a relevant degree. Our aim is to work out the bias between buyers and sellers to get an EDGE on the future direction of the market. That is how we can make some money, no other way. If you aren't up to it quit now because it is work, trading the markets for a living is a job, you better want to do it and enjoy it, because that is what you are up against. Only people who enjoy the life keep trading, the longer they are in it the smarter they get. If you are not up to their level you are like a fish out of water. The beautiful part of being a trader is that you don't have to trade when you don't want to. You can sit on the fence anytime you like, system technicians (won't call them traders) can't afford to do that because they are dealing with odds and odds are their only way. Probabilities under certain circumstances are the trader's tools. You must learn to identify opportunities with a high probability of success to be a professional trader. All those guys trading fixed system's, be they trend following, planetary, counter trend or what ... are technicians, they are not traders, they are just buyers and sellers. Professional traders are a world apart from everybody, they are discretionary traders, that is the reason why they take 90% of the available pool. They maintain a vision .... a focus, and act on it. 10 Trading with an Edge. [c 1 Bryce Gilmore 200 I Chapter 3: Preparations for Success: Before you set out to become a professional trader you need to decide on a work ethic. The largest single reason I have found why people don't succeed is because they are inherently lazy. They have no focus, they want to do everything the easy way! The majority of losers go into this business unprepared, sure they think they are prepared but then something happens that they have no control over and they buckle under the weight of it. Brokers Losers trade off other peoples opinion's, they think the broker is qualified to advise them. Brokers are salesman working for commission, they know nothing about the markets. Anyone who thinks they do is a fool to say the least. News Services Another fallacy is that news services know where the market will trade today. Let's hit that idea on the head before we go any further. News services only report what they hear from others, they are not qualified to give trading advice, 90% of them are "still wet behind the ears" and their claim to fame lasts about 5 minutes at the most. Nevertheless, to be infonned is to be pre-anned. It is necessary to follow a good news service to keep yourself informed of the fundamentals and the current psychic euphoria or despair that is prevalent in the day to day fluctuations of the market. The news service I have been watching for the past 5 years or so is BLOOMBERG, I take it on cable and it runs in my office non-stop day in day out. I have got to the stage where I can just about tell you what they are going to say about the current market before they do. lust the same they do provide a good infonnation service in as much as they are continually interviewing traders, analysts, CEO's and important people who have a say in the affairs of this world. 11