Tick off the most significant developments in trading as Futures’ marks its 40th anniversary this year, and you come up with a pretty impressive list . . .
- Introduction of financial futures, beginning with currencies in 1972, then interest rates in 1975 and stock indexes in 1982, a progression that moved even the most sophisticated mainstream financial institutions into becoming participants in the futures markets.
- Options as a trading instrument, on stocks in 1975 and then on futures in 1983.
- Exchange-traded funds, launched in 1993 about 20 years after mutual funds.
- Electronic trading, which took off in 1993 with the introduction of Globex and advances in the new Internet.
- Evolution of exchanges and clearing organizations globally over the years that assured the integrity of trades . . . until confidence in the structure was shaken in late 2011 with the MF Global bankruptcy.
You could probably list more key trading developments in the 40-year history of Futures if you surveyed readers and traders. But, arguably, the most significant development of all may have been the introduction of the personal computer and the development of trading software that allowed individual traders to do their own advanced technical analysis and eventually to trade online.
In the first years after Todd Lofton launched Futures in February 1972, traders used graph paper, pencils and rulers to keep daily price charts by hand and slide rulers and hand-held calculators to compute technical indicators such as moving averages – unless a trader happened to have access to a company mainframe computer and a punch card machine.
The first personal computer software applications to trading were rather primitive, limited to performing simple mathematical calculations to add, subtract, multiply and divide numbers and to plot price charts. One such program available in the late 1970s was CompuTrac, started by a handful of traders. These early computer adopters relied mostly on TRS-80, Commodore or various Apple II computers running simple programs in the Basic programming language.
Still, the purchase of personal computers and trading software was limited to a handful of individual traders, as even the most sophisticated commodities/futures traders were unfamiliar with, and somewhat intimidated by, these new technologies and how they could be useful in analyzing market activity.
A trading software industry didn’t really exist in this time period and, at most, was a small cottage industry composed of just a few individual traders who developed software for their own use and were willing to share it with other traders for a fee to help defray the cost of development, getting feedback from other traders about what the next versions of the software should be programmed to do.
Power of PCs
Louis Mendelsohn was one of those traders in 1977, working full-time as a hospital administrator while trading commodities actively on the side, after cutting his teeth on stocks and options trading since 1971.
“Right after I first saw a demonstration of a personal computer, I realized that this new technology would revolutionize technical analysis and the financial markets forever, not to mention every other sphere of human activity,” Mendelsohn says.
He set out to develop the most powerful commodities trading software that could be programmed, given the state of the art in personal computing power at that time. With his new wife’s support and encouragement, in 1979 Mendelsohn started his own trading software company, Market Technologies, determined to gain a competitive edge over other traders through the use of his own software while making it available to other individual traders getting their first exposure to computerized technical analysis.
Shortly after his first son, Lane, was born in 1980 and despite admonitions from his wife’s father, Mendelsohn left his career as a hospital administrator to devote himself full-time to his passion as a commodities trader and trading software developer. This life-changing decision led to his introduction in 1983 of ProfitTaker Futures Trading Software, the first commercially available strategy back-testing and optimization software for the personal computer in the financial industry.
Exposure in Futures
One day around February 1983 Mendelsohn submitted an article to Commodities magazine (later that year renamed Futures) addressing the unique intersection of computing technologies and technical analysis. The magazine had published a number of articles about technical analysis previously but mostly about visible chart patterns and trading techniques and not how individual traders might use a personal computer to develop, test and optimize trading strategies.
It was clear by then that the personal computer had the potential to change the face of financial market analysis and trading. Mendelsohn’s article demonstrated that he knew and understood the subtleties and nuances of commodities trading, which are unique and difficult for many traders to grasp, much less write about and program into computer software.
His first article appeared in the May 1983 issue, followed by two subsequent articles later that year in which he used ProfitTaker as the basis for introducing the concept of strategy back-testing to commodities traders interested in applying personal computers to their trading for the very first time.
Even given the relatively limited computing power of PCs in 1983 compared to what they can do today, Mendelsohn’s first history tester had the ability to link actual contracts and test trading strategies under simulated, yet real-time, conditions; optimize various technical indicators and execution times; handle rollovers of expiring contacts; test for lock-limit conditions; and display trade performance results in various formats and levels of detail.
It was apparent to anyone who saw Mendelsohn’s software or heard him speak at various financial conferences in the 1980s that he was an expert at applying personal computing to the markets and that technical analysis was in the early stage of a technological revolution.
Other commodities traders followed in Mendelsohn’s footsteps (including several of his own customers) and became trading software developers, which opened the way for today’s huge technical analysis and trading software industry. Years after the first release of ProfitTaker, Omega Research, founded in 1982, introduced its back-testing software with System Writer in 1989 followed by TradeStation in 1991.
Taking the next step
By then, Mendelsohn was already well on his way to developing other innovative next-generation trading software that dealt with the affects of various global markets on one another. Around the time of the 1987 stock market crash, he released the first trading software program capable of analyzing the effects of related markets on one another, in what would later become known as intermarket analysis.
Then, in 1991, the same year that John Murphy, a fellow Market Technicians Association member and personal friend of Mendelsohn’s, published his own research on intermarket analysis, Mendelsohn released his third trading software program called VantagePoint Intermarket Analysis Software.
VantagePoint was much more robust than Mendelsohn’s earlier intermarket analysis program, using a form of artificial intelligence known as neural networks to quantify the intermarket relationships between markets. VantagePoint uses the pattern recognition capabilities of neural networks to find the hidden patterns and relationships between related global markets and forecasts the trend direction of each target market with up to 86% predictive accuracy.
Although mathematical algorithms such as Mendelsohn’s were not yet recognized as patentable processes by the U.S. Patent Office until the late 1990s, Mendelsohn did receive worldwide recognition years earlier for his pioneering work in strategy back-testing and intermarket analysis when his biography was chosen to be included in Marquis Who’s Who in Finance and later Who’s Who in America and Who’s Who in the World. His biography was also selected for inclusion in a time capsule in Washington, D.C., to be opened in 100 years.
Market Technologies itself has grown considerably since Mendelsohn’s early years as a software software developer, and now has more than 50 employees supporting its trading software customers in nearly 150 countries. Now in his mid-60s, Mendelsohn is not only a living legend and pioneer in the field of computerized technical analysis but is still actively involved in guiding his company and overseeing his company’s R&D department in creating more robust analytic tools for traders, including a suite of predictive technical indicators that are used by his customers to forecast market trends and prices in advance.