I began trading the futures markets in the late 1970s. The only data source available for trading was daily charts, usually purchased from a vendor and updated by hand. Technical analysis consisted primarily of a few crude indicators. Cycle analysis, Stochastics and the Elliott Wave were some of the most sophisticated and widely taught techniques for traders.
The challenge confronted by individual traders was attempting to trade against experienced traders and large institutions who had been using daily charts for a long time. How could a neophyte expect to be successful trading against those with many years of experience and substantially greater resources? It was difficult and I was not particularly successful.
In an attempt to get up to speed, I attended the first of its kind Futures Symposium in Chicago in the early 1980s. All of the great trading gurus of the day were there, teaching their trading techniques and selling their newsletters and advisory services. And tucked away in the exhibit area were three new technological advances that came together to change trading forever. The first was the personal computer. The second was real-time satellite delivery of intraday tick data. The third was software to make this tick data into charts and indicators.
It was magic. Watching the brand new CQG machine create a five-minute bar chart before your very eyes! Or watching the Market View PC create indicators, simple moving averages, Stochastics and Larry Williams’ %R and update all this real-time! We were witnessing a new world opening up right before our eyes.
This technological revolution instantly put all traders, both experienced and new, those with substantial resources and those with little, on an equal footing. No one, not even the greatest of market gurus, knew how to trade intraday charts because they were too new. So many of us neophytes started trading five-minute bar charts on the newly created S&P 500 Index futures contract at that upstart Chicago Mercantile Exchange. Put up a couple of moving averages, trade the cross-over and it was like shooting fish in a barrel. We could go long and short several times a day. This was a new world. And by the way, I was paying $100 per round turn. My first full year of day trading produced $50,000 in gross trading profits but it cost me $70,000 for execution. The revolution in competitive brokerage commissions had yet to begin, but pressure on commissions had.
As day trading became more common and difficult, and less profitable (fewer fish in the barrel), driven by an increasing number of S&P day traders, the next logical step was to backtest and mechanize the trading process. Unless you had access to the resources of the large trading houses, the only way to backtest systems in 1988 was to print out the five-minute charts, one day at a time, and practice by hand. Then, add up your simulated daily profits on a spreadsheet (Lotus 1-2-3).
And here again, I found myself at another disadvantage, but this time I was competing with the big firms who had the resources to support large mainframe computers, programmers, and could afford to purchase a large historical intraday data base. My research budget paled in comparison. I planned to spend $150,000 to develop the infrastructure necessary to do historical testing.
Before I spent this money, I discovered the next big technological leap in a Futures magazine advertisement. It was here that I found that for $1,995 I could purchase system development software. And they threw in a PC, several years of historical intraday data, and a promise that I could program the tests myself. This software was called System Writer (now TradeStation), and it again leveled the playing field. I could now, for this very low investment, compete with the big systematic trading houses. I could, with a minimum of training, test thousands of ideas and develop my own trading systems. It would not be an exaggeration to say that most, if not all, of the major systematic commodity trading advisors (CTAs) today started their careers with a CQG machine and System Writer. This was the technology that we grew up with. These were the tools with which we started our businesses.
The appeal of trading as a business has always been the low barriers to entry. Get yourself some analysis software and data and a small stake and you are in business. Post a great track record and the money will come. Success would depend on creativity and intelligence, not financial resources.
But the success of those early pioneers has turned trading into a more professional business and the growth of worldwide futures markets, the phenomenal rise in liquidity and the proliferation and continuous cost effectiveness of analysis software and data delivery have tended to push the emerging trader out of the loop. The business has matured. MBAs are running CTAs. Research expenses to fund the development of these complicated programs are beyond the reach of the average trader. CQG and System Writer have become obsolete in today’s complex environment.
The vision of trading success now not only includes creativity and intelligence, but financial resources beyond the average trader. Technology has changed the trading world again. Have we come full circle?
Charlie Wright is the chairman of Fall River Capital. He sits on the board of TradeStation Group and Prolitec Inc. Charlie received his BA from the University of South Florida and an MBA from the Harvard Business School.
