After earning a BA in finance from the University of Texas at Austin in 1972, James H. Jones’ next scheduled stop was law school. But Jones, who had traded stocks since high school, made one last push to find a job with a stock brokerage. Each turned him down because of his lack of sales experience. But a friend landed a job at Clayton Brokerage Co. in Houston and urged him to apply. Jones packed the car, then found out that Clayton had an office in his home town of Dallas. “I’d stop by there and just see; and there was this office that was just booming,” Jones recalls. He talked his way in and spent the next 12 years with Clayton, a boutique commodity brokerage known for its research.
While Jones is now a technical trader, he didn’t start out that way and says he only really began to understand the markets after he went bust. “I had just started in the business and I was long coffee and got caught in nine consecutive limit down days,” he says. And while it left him unable to trade his own account for almost four years, he says he spent the time studying the markets and discovering technical analysis. “The fundamentals may be right, but in order to make money, you have to use the technicals,” Jones says.
Jones was one of four founders of CompuTrac in 1979, which he describes as the first computer-based technical analysis tool. “We wanted the computer to plot stuff and our indicators and the historical data that we had,” he says. “We took it public and I made a lot of money out of that stock.” Jones and CompuTrac co-founder Walter Bressert continued to develop computer-based technical analysis tools and the HAL Method of cyclical analysis.
While Jones is a technical trader with data and technology experience and surrounded by computers, he is not a screen trader, nor was he a floor trader. “Everything I do is mechanical, so it runs the day before,” searching for as many as 2,000 patterns per night for trading the following day. The system spits out a sheet of possible trades that fit his trading models, each with a price and stop for every pattern. Jones then makes his trade decisions based on a combination of attributes, like profit and loss and probability. He then calls out his trades to his staff, who execute the trades for him.
Jones says the ag markets’ migration to electronic trading has been a challenge, and that his entire database of market information, which is based on pit sessions and not on 23-hour electronic markets, had to be channeled through the pit sessions to maintain the integrity of his database. And his database is huge, containing market information dating back to 1860 for many commodities. “Research is my forte,” he says, “and data is extremely important.”
His three most important programs are the Diversified Portfolio, Seasonal Trading and Inflationary programs, all of which are experience based and built on actual trading models. Diversified is up 26.62% through the end of April, and its compounded annual return (CAR) is 18.55%. It tracks 25 markets and generates signals based on pattern recognition, using price and time, and weighted so that price projections are more important when the market is more advanced and more volatile. But from April to March 2006, it suffered a 45% drawdown. “I built the program for larger sized accounts than I had at the time,” Jones says. Since then he has reduced the leverage for all of his programs by 40%, and Jones says they are more profitable because of it. “We really haven’t changed the patterns. The price patterns have been the same forever. But the way that they take profits has changed. I increased the number of signals that take profits on strength rather than on the trailing stop,” he says. “When everybody else was devastated in March, I had so many things that had taken profits in the overnight markets, we were worried that I didn’t have hardly anything on. We were down [about] 2.5%.”
Jones’ Seasonal program is up 1.02% through April, with a 22.45% CAR. “It is not a trend following program. It’s not countertrend. When it gets an entry signal, it takes two contracts and it works off probability,” adding that he always has a protective stop, but always sells on strength, after hitting 70% or 80% of the objective.
His Inflationary program has never had a down year and has performed well when the market has not. It’s up 17.84% through the end of April, with a CAR of 14.75%. Jones says the system capitalizes on long-term trends and uses longer term stops. “It is going to have ups and downs and it’s the mix that is important for it,” Jones says.
When he’s not trading, Jones says he studies the market, and when asked about outside interests, he pauses for a moment and says, “I do a tremendous amount of exercise to keep healthy and to keep my mind right,” but the market is his passion. “The markets are always changing, but if I know one thing, it’s that price history repeats itself; so you need to have as much history as possible when trading the markets.”
