"I believe if someone important can have faith and expectations in those around them, it will make a difference in their lives." Phantom of the Pits
"Cloud Hopping" is dedicated to the memory of your and our friend John Denver, who died in his experimental airplane on October 12, 1997. John touched our hearts with his songs, and his touch of kindness reached out to all living things. Our memories are stronger than death as we search the clouds and share past laughs. Far out, our Brother in Mankind.
One of the most-used tools in trading is perhaps the chart. Charts not only show high prices, low prices and current prices but also other data that can be used for derivative information generating. Each trader has their own way of using and interpreting their charts. Some make up their own charts; others buy them from a commercial vendor.
When it comes to their use, Phantom remembers when charts were charted on a big graph in the pits themselves for all to see. We continue our insight with Phantom on charting.
Art Simpson (ALS): Phantom, sometimes I wonder how organized traders can be with all of the charts around their offices. I always thought the less information you had to research during trading hours, the better you would be able to react to the current market situations. What do you view with your charting?
Phantom of the Pits (POP): First of all, you mean "Cloud Hopping!" On a Sunday afternoon I would go out to the park and do my charting. Let me reach over and turn this old radio on with this funny-looking knob here. This big radio is an oldtimer, and it takes me back 30 years or so. As I turn it on, you will hear WGN and the Eddie Hubbard show with his theme song, "Poor People of Brooklyn," playing in the background. I think his theme was a spoof on "The Rich People of Paris" but I don't know that for sure.
I doubt that many oldtimers will be reading what we say here but, just the same, the past is certainly worth a view once in a while. A look back is good if, for no other reason, just old time's sake.
On my Sunday afternoon charting, this is what I would see with my charts! I would look to the sky and see all of these kites flying. My chart would show this as volume. All of the kites on the ground, not in the air, and the flying kites would be the open interest. The clouds in the sky would be my price on the charts. I would chart all of these with a connecting line from all of the clouds in the top part of the chart and volume and open interest on the lower parts of my chart.
As I saw the movement of the clouds in my sky market, I would place another chart point either higher or lower, depending on whether an existing cloud moved higher or a new lower cloud formed. Any time I could get a divergence from the clouds' highs and the open interest of kites and volume of kites, I would get a signal to sell sunshine futures.
My father would ask me what I was doing, as he would always pick up the trash from our picnic when the wind would blow it away. I would answer him, "Dad, I am CLOUD HOPPING!"
I got pretty good at cloud hopping and sunshine futures as I could predict when it was going to get cloudy again. I think I was all of 13 at the time. That was my first introduction to charting.
I tell you this little insignificant point of my early charts because I have seen just this week examples of the same things in trading signals from traders. It may not make much sense most of the time to most of the people but if it works, who am I to argue. My cloud hopping worked for me!
There are advantages and disadvantages in charting. When you use charts to look back to get signals, you are setting yourself up to believe you can actually be more right than wrong. It is possible, but you must never forget Rule 1, regardless of how accurate your chart indicator shows over the past. Just because it worked nine out of the last ten times does in no way suggest that it will stay 90% accurate. Protect your positions at all times.
I think the main advantage I see in charts is that you can plainly see what will be dictated to other traders for them to think at certain points. You will remember I said I don't totally agree the market is always right at all times, but that is what we must trade with or against. How many times have you seen public sentiment be a massive majority of opinion one way or the other? What happens? More times than not the thinking was wrong.
In charting I have to say my strongest signals are when support or resistance is broken and thinking is in the majority against what is happening to that support or resistance.
I don't want to go into specific types of charting and indicators as there are so many of them and so many ways to interpret them. I will try and point out what I think is useful to all traders the most. I could explain each type of indicator and charting process, but that serves no purpose. Each trader must decide his or her own criteria for charting.
My charting is based on knowing what the signals of each type indicate to other trades more so than to myself. I am always looking to find what is the edge to me. I don't care about what the charts indicate if they are not my tools, but because others do use them, I must be aware of those indicators. I need to know what other traders are thinking.
I don't position opposite to my signals ever, but that doesn't mean I don't position opposite to my fellow trader's charts and indicators. My criteria takes into account the other signals, though not directly a signal indicator to me.
There are many trading plans based on various charts and indicators, which can be accurate over a period of time. The biggest problem with the dependable plans is that Rule 1 and 2 are not a part of the plan, and the traders never get to trade in the long run. The trade plan may have what they call money management, but that is always a weak point in the plan. Drawdown eventually demoralizes the traders. In the end all is lost.
ALS: Do you have any specific advice on using charts?
POP: Yes, when you see what most charts give you, it is clear that everyone is looking at the same data to establish a method of being the most accurate.
The key to usefulness of charts, as far as I am concerned, is that you take everyone else's chart with a grain of salt and establish your own charting to be reflective of data not usually known to others. All bar charts show the same things. It is a daily chart of high, low, close, open, volume, open interest and other moving averages or indicators. This is one reason I prefer a chart like a point-and-figure chart. It removes the daily bar graph points as the most important for that day.
Let me ask you what would you think of a chart that takes the same parameters as a standard bar chart but your daily high, low, close and open data had a time frame different than daily? You would laugh. I like that laugh! It tells me I have no competition with the idea.
I will give you an idea and an example here. Let us say you make a chart that starts one hour and fifteen minutes prior to the close of a market. We will justify this by saying that the most important trading data for a day is in that last part of the trading day. We will call this the opening for your next day's chart. One hour and fifteen minutes of today's trading is already on tomorrow's chart. We will call this tomorrow's support and resistance. We continue to chart tomorrow until one hour and fifteen minutes prior to the close. This closes out our day's trading chart.
Okay, I think you see what I am getting you to think about. Now keep in mind I am not giving you my way of charting but using this as an example of how to change your behavior when it comes to charting. Most traders will never chart this way for several reasons and that, to me, is good. They can't get the data this way as they may only get it out of a newspaper, delayed or through a broker. Other reasons exist that prevent them from getting a different outlook chart.
I feel you need a jump on tomorrow's trading to get the edge. The edge to me is important but not as important as execution. It is just that, with the edge, you can get better execution. You are ahead of the game because you are in front of the day-traders, funds, scalpers and position traders because you are not using their data to follow them. Instead, you are using your data to look beyond their view. By using Rules 1 and 2, you can establish a plan that is a little more remarkable than anyone would think.
You will have to do back-testing and research and most traders can't even come up with that data yet, even today. I guarantee in the future there will be those who look at what I have done lately and say it is time to make the computers earn their keep. You see, the frontier is just now opening! The sharpest trader with the most intuition will win here. I want you to remember where the idea of "Different Outlook Chart" came into play. It started with me when I was 13. It can start with you today.
Do your research! Do it again! Learn what different outlook charting can do for your trading plan. I have given ideas of what my criteria is in trading certain situations so that an understanding of where I am coming from shows up. Vary your data times. Use 15 minutes, half an hour, half day, first hour and other time frames.
I am giving you a gift here and someday it will hit you. Just don't take too long to see what is behind all three doors. I still want to point out that we will see different outlook charts as the years go by, and they will get better and better. There will be a day when they are followed closely enough that they no longer have the same value.
In trading you need to change the odds to your favor. By using Rules 1 and 2, you are moving in the right direction. By using your own mind, you are doing what that computer programmer did many years ago. You are looking at a different view. An artist will view his subject material from all angles. Shouldn't you?
ALS: Aren't you making it a little dangerous by telling traders to go find your own plan and make your own charting system?
POP: I believe I am only making it a little more difficult in showing that trading is complicated when it comes to getting the edge in trading. I don't expect them to take entry and exit signals they devise without using Rule 1 for protection and Rule 2 for enforcement of their new knowledge.
I believe in the small trader! I know what the potential is because I know every trader started out as a small trader. Not one big trader started just big. You must start. There is no better place to start than at the start line. Only then can you say you went the entire course.
I want to impress upon you the importance of my belief in the small trader. I believe if someone important can have faith and expectations in those around them, it will make a difference in their lives. A good mentor knows that their guidance will grow up one day in those who benefit from their convictions of belief.
This story I am going to tell you was told to me by a very brilliant mind. I like the story better the way I like to tell it but will tell it the way it was told to me.
One year a math teacher in the geometry class had more students that usual. Thirty-eight students were just too many to have the time to give one-on-one guidance as required. Not only were there too many students in this particular class but the teacher also had more bad students than usual.
One particular student had never gotten grades above Ds in all his school years. His name was Robbie, short from Robert. Robbie was the class clown and had been his entire life because that is what the other students expected of him. He had no interest in school and would brag he would quit school at the age of 16 in a few short months.
The teacher had three Robert's in his class: Rob, Robbie and Robert. It was pretty easy for the teacher after two weeks to keep the Robert's clear, as the one who went by Robert was the top student in math.
Five weeks into the school year the first PTA meeting was coming up. The teacher told each of the students to have their parents come to the PTA meeting. That night only about a third of the parents showed up. The teacher knew by how well the students were doing just which parents would most likely show up at the meeting. The teacher took three to five minutes with each set of parents to chat and find out a little about them.
The last parents were a little backwards and shy, but the teacher shook their hands and made them feel at ease. The teacher never got an answer when they were asked their name so the answer was never known. The parents asked the teacher, "How is my Robert doing in class?"
The teacher thought and then answered, "I have never had such a good student in my class who takes so much interest and is a delight to have as an example to my other students. Why, your son is a living example of those who will be leaders in our future. It's just wonderful to know that in our lifetime we will see youngsters like Robert grow up to make us all proud to have known him!"
The parents of Robert stood a little taller and smiled as they left the PTA meeting that night.
Over the next three months going into the end of the first semester the teacher noticed his students doing better than he had expected up to this point. Trying to comprehend how his teaching had improved and what he had done differently, the teacher spent more time trying to improve. At the end of the school year, the teacher was in his own glory as no student had failed -- not even the class clown Robbie. In fact, Robbie had gotten all his assignments done, taken a math scholarship exam and finished with the top score nationwide. He had won a math scholarship as a sophomore. The teacher was really proud to have taught so well.
The last day of class, Robbie waited until everyone had left and then headed to the teacher's desk to talk. Robbie held out his hand and said, "My Mother told me what you said about me! I have never had anyone ever want me in their class before or even cared if I learned. Thank you for giving me insight into my life!"
The teacher began to cry as all the efforts to improve as a teacher reflected back to the PTA meeting at the beginning the year. You see, the teacher thought that, when the parents asked how Robert was doing, it was Robert's parents and not Robbie's parents. The teacher had made the biggest mistake of his life at that PTA meeting by assuming he was talking about the right Robert. Not only was it the biggest mistake but it also was the best mistake of his life.
Can you imagine a grown adult crying? Isn't it refreshing to know we as adults can learn from youngsters and it's ok for us to cry! At one time or another in life we see a flash of light in thought looking back and realize what we have just been given.
ALS: Pretty touching. You say you like to tell it differently?
POP: I like to substitute Robbie's name and instead use "a brilliant trader." You must understand that somewhere as a trader the light must come on for you. There will be a point that the biggest mistake of your trading career will be the best mistake you have ever made.
I personally want that student to come to me and say, "Phantom, no one has ever wanted me in their class before or even cared whether I learned about trading. Thank you for giving me insight into correct trading."
I do care and I have only one thing left that I wish to become: A better teacher!
ALS: How do we go on from here? I think your pep talk has caught me by surprise. I don't know what to ask right now.
POP: I'll go over point-and-figure charting next. Go and enjoy a walk to the top of your hill with your wife.
ALS: Okay, I would like to reflect upon what you have just given as insight -- not just for the book but I also want to reflect for my own personal evaluation right now. Thanks.
The next interview:
ALS: On point-and-figure charting one question I see often is what size to make the boxes?
POP: The fact of P & F charting is that the smaller you make the boxes and retrace criteria, the closer you will see the market characteristics and order flow. To learn the nature of trading and each market, at first I suggest the smaller box sizes. Keep in mind for the retrace that it must have some significance beyond a normal bid-and-offer slippage.
Each market can be a percentage of daily expected moves. I would say that, as an example in soybeans, if the daily range is usually 9 cents, I would use a 1 by 3 box -- each box is 1 cent and each significant retrace has to be at least 3 cents. This pretty well says to take 10% of the daily expected move as the box size and 30% of the daily move as the retrace requirement.
As time goes by, you will want to extend the sizes to larger sizes. You may even keep multiple P & F charts to compare. Today computers can do this for you if you are set up for it. It is important to realize that, at one time or another, each trader will try and improve his trading office.
Is it good to improve your data before your success or after your success? The answer is a catch 22 as you will improve your trading as you improve your understanding of how markets work. Most traders do not want to extend the costs at first due to limited funds. What really can you do with your data if it is based on someone else's criteria and information? You can only be a derivative trader of that restriction.
I am not going into how to specifically use P & F charts, but many good books on the subject will be a good library add for you. Learn the highlights of support lines, resistance lines, three wave recognition and breakouts. You will be able to see what the trade does each day within the market parameters. This is important to see first-hand, and P & F charts are the perfect way to do it.
You are better off if you do your own charting rather than using a computer until you understand and see what important data is available on these type charts. I also suggest that, if you had to use only one chart, it should be a point-and-figure chart.
I don't mean to be weak on giving knowledge on charting, but it is critical that each trader come up with his own thoughts and ideas. For someone to give you their thoughts just limits a trader's horizon of what is possible for them. Do your own homework and decide what your charting shows.
On some of my programs on charting and signal criteria, I narrow it down to inputs of importance. I could have as many as 64 inputs. I can weight each one according to how important they are, or I can have them in one of two states only. Some of my criteria input is qualified by going through several doors first. In other words, if the criteria is met, that input must go through the next set of criteria. It sort of ends up like an eye examination as you expect one total answer in the end.
Charts and criteria are nothing more than the best set of eyeglasses at the end of the examination. You will wear those glasses after your exam. Same in trading, you will use that data after your criteria is set. Why argue with it?
Many traders are always making exceptions. For example, the last time they used their criteria signal they lost money. They won't make the next trade. The big one! If you lost money last time and aren't happy with the signals, you must go back over your program or criteria and reintroduce the correct data that you expect to be required. If at any time data is excluded that you require, your signals are useless. Get the total picture on your plan and not just the pieces. Have a definite signal and not a maybe signal.
There are times when nothing you do seems to work. When things continue to go bad, I can say to you that you have violated another known fact. Diversity helps reduce risk but only in the long term. In the short run we are talking about luck, both good and bad. Believe me, if bad luck comes first, you are finished if you only depend on luck.
Charts are not an answer alone and have no use if your trades can't be executed promptly. Any time you can't do what is required as a trader to get the position on, you will take the scales the wrong way. Remember, you must be in before you can get a correct move.
ALS:What kinds of charts do pit traders use mostly in trading?
POP: I have seen P & F charts, bar charts with half hour, ten minute, down to 1 minute used. I have also seen several of the new popular volume based price charts as well as different color charts with indications of momentum along with price.
ALS: What type do you use when you are in the pits?
POP: I never use anything but mental graphs when in the pit. The mental charts are more point-and-figure charts. They are really easier as I am looking for the third wave to position against the public on the third wave in my desired direction. It works well for add-on positions and keeps my entry cleaner for protection requirements.
I don't go to the pit often anymore unless it is to be an exceptional day indicated by my signals. I will go to the pits when I have an unusually downward bias indicated, as gravity seems faster to me in those markets that reverse to the downside.
Most of my charts are kept on computers, but that doesn't mean the computer gives me my signals during the day. I like to have them before the day begins. It is more mechanical and not ever emotional that way. That is an important point in trading -- remove those human elements as best as possible. Only then can you truly be objective.
Look at it this way. When it is no longer your money, it is easy to do the right thing. But, when it isn't your money, you can also be careless. Just follow the rules and your signals without exception. If they don't work in the long run, you are not using the correct system or you're not using my two rules first and foremost.
ALS: You are still going to have arguments about your two rules as to whether they work for all traders!
POP: We wouldn't have markets if everyone agreed on a plan. We would have nothing but limit day moves everyday. We really need various ideas and concepts. I just want one that will work over time and keep my drawdown smaller than when I first started. I must have a rule that allows me my freedom to know, regardless of what happens today, I will be here tomorrow and the next day and next year and next decade if I wish to be.
Don't ever think that no one ever cared whether you learned anything in trading. I do care and I insist you take full responsibility to learn the correct knowledge. That knowledge must be not only criteria for trading but also the correct method of changing your behavior to that which is required to be successful in the long run. Your trading career should be a long-term expectation on your part. A short time frame is not acceptable in trading. I am not saying that short-term trades are not acceptable but that you must look beyond one day in your trading career.
Some of the best traders started out broke! And then they got more broke. Until success!