Futures-market

A few years ago a remarkable book was published by the options trader Jack Ritchie called God in the Pits - Confessions of a Commodities Trader. The book had much to say about author's spiritual journey and little about the financial markets in Chicago, but he described his motivation for writing the book as follows: "...the common stereotype is that integrity and commodities trading go together like Al Capone and Mother Teresa. While they are seldom accurate, neither are common sterotypes completely erroneous".

Escape to the Futures goes a long way towards dispelling that stereotype, and therefore is a most overdue book. It is the memoirs of Leo Melamed, a former Chairman of the Chicago Mercantile Exchange (known in the commodities world as simply "the Merc") and one of the more important figures in the Chicago financial markets. As well as being better known than Ritchie, Melamed has more to say about his industry. One comes away from the book with an impression of the heroic qualities of the markets as well as an appreciation for the pioneering men who made this new frontier possible. The book's title refers to Melamed's origins. Like that other well known investment figure, George Soros, Melamed is of European Jewish extraction - he was born in Poland. His family managed to escape the Holocaust by fleeing, first to Lithuania, then, barely escaping the Nazi occupation of that country, emigrating to the United States via Japan (pre Pearl Harbour) after a long train ride across the Soviet Union. The twists and turns of this exciting story hints at the origins of Melamed's succ! ess. As Soros has said, describing his experience in the Budapest of 1944: "I learned the art of survival...that has had a certain relevance to my investment career"

Like many careers prior to the arrival of post-industrial society, Melamed's began by accident - he answered an advertisement for a "runner" for what he presumed was a law firm but was in fact a member firm of the Merc. He quickly fell in love with the market: " I was enthralled with the open outcry system of buying and selling contracts, with the speed at which things happened, with the colorful players in this arena of capitalistic hope and sweat." (p.88). This appreciation of what Keynes called the "animal spirits" of capitalism seems to be decidedly lacking these days. In the 1990s, if one want's to be a "player" in the financial markets, the correct route seems to be via a bachelor's degree in business followed by some high-priced graduate study, an MBA or something. Contrast this with the advice the young Jimmy Rogers got in the 1960s: "Go short some beans and you'll learn more in just one trade than you would in two years at 'B-School.' "

Now, reading Escape to the Futures will not give you many trading "tips". Great traders are not going to give away their secrets like that. What it will give you an insight into is how an industry gets built. Melamend himself illustrates the phenomenal growth of the futures business in his preface to the book: "In 1971...14.6 million contracts traded on US futures exchanges. Twenty years later, in 1991, the total transactions of futures and options on US futures exchanges was 325 million contracts." How did it happen? Your average B-School guy would attribute the growth to the US dollar de-valuations of 1971 and 1973, to the commodity price booms of the 1970s, and the financial de-regulations of the 1980s. What he is missing is the role played by men like Melamed who had a vision about what they wanted to achieve with thei! r organisations. Reading his book one is struck by how his working days were more those of a politician rather than a trader.

But I use the word politician to mean "statesman", or "leader". One characteristic of such men is vision. Look, for example, at the Merc's International Monetary Market, the futures market for currencies: "Of one thing I was certain by the mid-1970s: agriculture was never going to be the future. But finance was. If the Chicago Mercentile Exchange had any future, it was on the back of the International Monetary Market. But that was something I couldn't prove in 1975 because the currencies and financial futures still had a long way to go. One had to believe" (p. 242).

One of the downsides of financial statesmanship is that you don't get to concentrate as much on making money yourself. For instance, Melamed would show delegations of visitors to the Merc how a trade was executed, but the trade lose money! It is no surprise to learn, at the end of the book, that Melamed is now concentrating more of his efforts these days on building up his own firm, Sakura Dellsher.

In Melamed we get a picture of a man who allied vision with an ability to persuade people of the virtue of his ideas, who knew how to cultivate relationships with people, and who knew how to effectively use his time and resources to achieve his organisation's goals. I commend this book to everyone interested in capitalism as people and not as abstract concepts as taught in the textbooks. Like another great book written by a trader but not about trading - Bernard Baruch's My Own Story - you will get an idea of how one man made things happen..

This book is divided into two parts. Part I explains the theory of "Smart Momentum." Part II shows step-by-step how to implement it in Microsoft Excel. The nice thing about this book is that Part II parallels Part I on a chapter-by-chapter basis.

The book focuses on (a) indicator creation, (b) indicator selection, and (c) indicator combination. The logical development of a trading system proceeds as follows:

An equity curve shows cumulative dollars extracted from the market versus time. The "Smart Momentum Ratio" (SMR) summarizes an equity curve in a single number. (The author claims the Sharpe ratio, in and of itself, is not good enough.)

One can compare equity curves by comparing their respective SMRs. The better the equity curve, the larger the SMR.

Since an equity curve is the cumulative daily result of a trading indicator: The better the trading indicator, the larger the SMR.

A collection of one or more trading indicators comprises a trading system. Since a single indicator may fail under certain market conditions, it is desirable to build a trading system out of several uncorrelated indicators.

If one varies the parameters of a trading indicator, and its SMR stays relatively constant, then that indicator is said to be "robust." Indicators that contain SMR spikes (referred to as "Matterhorns") are not robust. Curve fitting is avoided by using several data windowing methods, which are briefly mentioned.

By the way, this book does not teach you how to use Microsoft Excel. It only gives you the Excel spreadsheet formulas to enter into spreadsheet cells (I did not test them to see if they were accurate). The techniques shown in this book are fine for tinkering in Excel, but to seriously create and analyze indicators the way the author suggests would take man-years in front of Excel. This may lead a person serious about developing trading systems into computer programming and optimization algorithms. For the latter approach, I recommend "The Encyclopedia of Trading Strategies" by Katz and McCormick.

Because of the above reason, and the reasons that follow, I only gave the book 4 stars (with respect to its intended target audience):
Chapter 9 - Spreadsheet preliminaries) The author uses USDJPY data sampled at 6:00, 12:00, and 18:00 GMT, but does not tell where to acquire such data.
Chapter 11 - Indicator selection) The author tells how to find robust indicators, but does not give the Excel steps needed to generate the 3D charts used in companion chapter 4.
Chapter 12 - Indicator combination) Indicator correlation matrices are presented. The author says they are generated with the Excel "correl" function, but does not reveal what cell references to use.
Chapter 13 - Maintenance) Failing indicators are replaced with new ones on a frequent basis. In my opinion, this is not the signature of a robust trading strategy.

The thesis of the book is that the equity risk premium for stocks, which is the compensation given to equity investors for holding shares of risky common stocks, was below, perhaps much below, what was historically normal. This implied that investors came to view common stocks as being a much less risky investment than stocks had been in the past. Indeed, a quite common view of many investors before the recent fall in the stock market was the view that common stock were an appropriate vehicle for "savings" rather than just for "investment." The implication of this perception by some investors is that equities in general were likely to continue to rise in price over time and thus represented a "safe" or at least low risk vehicle for discretionary income that was not spent.

However, periods of relative low perceived risk usually do not last and are followed by periods of relatively higher perceived risk. The current period we are now in appears to be one in which the uncertainties regarding the stock market have increased and thus investors are now demanding greater compensation, that is, a higher risk premium, for bearing those uncertainties.

The reason the book does not get five stars is that the book misspecifies the constant dividend growth model equation that forms the basis for the author's explanation of the adjustment in the equity risk premium. However, this oversight should not prevent the reader from getting a great explanation of how the prices of common stocks adjust to risks from this fine book.

As for the plot itself, it's reminiscent of a classic computer game: Populous (and it's modern recasting: Populous the Beginning. Hero goes around gathering followers, performing some unethical things to gather more followers, has big battle with villain doing the same thing. Interesting, but soulless.

To make it even worse, DD tires the reader's patience by taking up hundred of pages to get to a confused ending which makes you yearn for the Planet of the Apes (2001).

I just read the whole trilogy. This portion of it takes place almost entirely in Nextdoor, the alternate universe where humans from our world can achieve godhood if the natives believe in them. By the time we get to the events in this book, all the main characters are in place and it's just a matter of marching them to their destinies. Because of that, there isn't as much soul searching and internal challenge and drama as there was in the first two books, except for the characters of Julian and Dosh, one of whom is the sole discordant note among the followers, and the other who has a destiny that's not understood until the end. Both of their stories were very good.

Another aspect of the story that I found interesting was the way the plot develops into a copy of Christ's life, with some things switched about. Examining the differences and the parallels that Duncan chose was intriguing.

Spoilers below...

Regarding the ending which some have complained about, I didn't think it was vague in the least. It was obvious to me what happened (Judas became the Redeemer and vice versa). The true hero and Liberator wasn't the one who survived, but his friend whom he betrayed. I think it will take a re-read for all the implications to sink in. But it does mean the Happy Ending wasn't so happy as it appeared to be.

It was, however, satisfying.

This 600-plus page book is written like a sterile academic textbook for a course devoid of any real world knowledge or experience. Ironically, the author states that the book evolved as a result of a course he teaches.

It is stated that the author was a floor trader with many years experience on a Wall Street futures exchange (been there, done that). If this is in fact true, there is not a single anecdote about his own trading experiences in the entire book, at least what I read of it. What we would be interested in is a chronicle of how the author achieved competency and his experiences on the road to trading success, if in fact he achieved this. Did he have a successful trader as a mentor? How long did he lose money as a trader before achieving success? What were some of his significant breakthroughs as a trader? Did he have a "trading epiphany"? What were the major mistakes he saw traders make who ultimately failed? What is his greatest advice for new traders?

Unfortunately, we will never know the answer to these questions, because this author completely missed the point in writing a book on trading.

In case you just want to have a close to nothing idea of the highly complicated trading or investment market, it's for you. In case you read in order to earn an edge to profit in market where 90% to 95% of the participants are doomed to fail, forget about this.

1992 reduction of trade barriers with twelve nations in the European Economic Community

1988 Australia and New Zealands free trade agreements went into effect

1988 Talks about a U.S Japan free trade accord

For a global economy-one marketplace-to work, we must eventually have completely free trade among the nations, just as we do within the nation-states themselves (John Naisbitt - Megatrend 2000)

The United States biggest import is money. Its largest export by far are bonds, stocks, and other financial instruments. The United States is the largest producer in the global economy, it represents 25 percent of the world production and 5 percent of the population. Any country that attempts to remain economically closed and apart from the global economy will be left hopelessly behind.

Global Economy trends 1) Privatization of Business 2) Bankruptcy 3) Stock Markets 4) decreasing reliance on the blue collar worker 5) increased reliance on telecommunications and technology 6) Decreasing size and importance of unions 7) elimination of the command economies 8) the rising growth rate of the pacific rim - the shift from European production to Asian production and wealth (China, South Korea, Taiwan, Hong Kong, and Singapore). The pacific rim is experiencing the fastest period of economic growth more than five times of the industrial revolution. China and the four tigers have learned to skip over the industrial revolution and enter the informational revolution.

Here are some of the question Naisbitt raises:
Is the Millenium the symbolic struggle between Good verses Evil? Is the Millenium revival a metaphor of choice, where, on one hand man can destroy himself through: nuclear annihilation, bio terror, or the green house effect; and on the other hand, God destroys the wicked because of their willfull disobedience to his laws. What does it mean when we hear "God is Dead" espoused by the Greek Nietzsche philosophy of those who worship science? Are we prepared to embrace and accept both sides of human nature? Do we have to abandon our humanity too embrace science? Is the spiritual revival a quest to better our lives and our neighbors?

In times of religious persecution, economic hard times, social change people seek to escape out of history seek millennial promises of peace and plenty.

Science and technology do not tell us the meaning of life. One starts to rediscover the emotional side of life. There is a deep need for emotional fulfillment through religion. In tough times, people anchor down with either fundamentalism or spiritualistic experiences.

As stronger emotional needs start surface, more advocacy of millennial doctrine will occur with rhetoric centering on themes of apocalyptic destruction and the final return and reign of Christ. The end out come will be "Good" has over "Evil".

Fundamentalism will increase: Shinto, Islam, Protestantism, Buddhism, and Judism.

Joseph Cambell's in his book "Power of Myth" emphasized the importance and power of myth. Myth has power and influence on human behavior. Naisbitt indicates that in time of rapid change both inner-directed, "trust the feeling inside" and out-direction, "authoritive doctrine" will increase. "The Battle for God" further supports the idea of a religious revival with a vast potential to influence media, business, and politics.

Naisbitt observes, one Shinto priest known as the "miracle man of Japan" won 5 million members, in Japan, United States, and Brazil with 80 percent being non-Japanese. Fundamentalist Soutern Baptists have become the largest Protestant denomination. Naisbitt says, "The Catholic Church is reflecting the evangelical influence by tolerating a full-fledged charismatic movement that make some Southern Baptist look tame". In North America new religions outside of the Judeo-Christian framework are growing: Moslem, followers of Islam, Buddhism, and Korean religions.

The fundamentalist have used media to spread their message. Religion is targeting marketing, larger architectures to congregate, music, books and generating billions of dollars in business. The religous leader broadcast taylo made messages and content which are being modeled by feedback from what the people want. Fundamental religion authoritivately spells out the answers. The New Age of Channeling seeks to use meditation, chants, and dream works to increase human intutition.

The New Agers and Fundamentalist commonly dislike each other. "New Agers are tired of the tyranny of fundamental religions trying to take away the right of freedom of religion and the press," says Elizabeth Burrows. Harvey Cox says, "a global phenomenon that has to do with the unraveling of modernity" and marks the end of "a kind of faith where science would master all our problems."

Jake's methods give clear entry and exit signals, significantly reducing the risk from day trading. There are also plenty of examples and charts in the book to make sure that you fully understand what Jake is taking about.

Additionally, Jake is realistic about day rading and about the attitudes and psychology of day trading. He not only provides excellent information with clear examples and charts of various trading methods, but he also lists rules that help traders avoid mistakes, learn from those that do occur, and generally trade much more effectively.

Lastly, Jake is very willing to help readers. He says at the end of his preface to call on him if he can be of any assistance, and he is not just saying this. I had a question because the trading program I use showed some charts differently than the examples in the book, and I e-mailed Jake asking him how I should modify the charts, and he quickly replied to my questions and helped me solve the problem.

A great resource for day traders...should be required reading.

In retrospect, some of the messages from the markets identified in the book are quite prescient. A good example is the rapid deterioration in the A/D line at the height of the Internet bubble. Of course that phenonmenon did not go unnoticed by the market pros. I clearly remember numerous analysts assuring viewers on CNBC that the stock market was not over-valued (and therefore in no danger of collapsing) because so many stocks were in the doldrums!

The book was filled with anecdotes about how major economic and geopolitical events (from Fed rate cuts to border wars between Egypt and Libya) are foreshadowed by unexplained market movements. Had Mr. Insana focused on the rationale behind these movements his argument would've been a lot more convincing. Instead, the book had a tendency to ascribe a sort of magical, oracular power to the market and the "smart money" that makes the market. Of course the real reason is a lot more mundane. Sometimes it's rampant insider trading (as in the oil futures mkt). At other times anyone who has bothered to read a newspaper would have seen it coming from a mile away. A good example is the collapse of the Thai baht. Any regular reader of the Far Eastern Economic Review would not have needed the markets to send a msg - for months the magazine was filled with dire warnings of imminent collapse in its op-ed pages.

Another issue that Mr. Insana did not address is the very important question of how to separate the signal from the noise emanating from the market 24 hours a day. As someone who had (foolishly) dabbled in the futures market, I know first hand that wild swings in the market can be triggered but nothing more dramatic than a 1/2-hr T-storm in downtown Chicago. (I always susepct that if I wait at a 2nd fl. window at the CBOT and sprinkle water on the head of a particular trader as he leaves the building, I can make a killing in soybeans.) In the days of old when the market was almost the exclusive domain of the Smart Money in the know, the msg. of the mkts was probably a lot more reliable than today, when the unwashed masses can steamroll the smart money based on the most ludicrous rumor posted on Pump-n-dump.com. How to separate the grains from the chaff is something we'll have to leave to another CNBC author.

BTW, there really is a web site called pumpanddump.com.

By using the outstanding, original and easy-to-follow advice in these two books my net worth has actually risen into the high six (6) figures!!! Not bad while the market is stagnating or dropping.

My friends, whose portfolios have been plunging in value, are in awe of my newfound financial savvy and skyrocketing bottom line.

And I owe it all to the information I picked up in these two incredible books. Ron and Nancy should patent this advice. It beats anything I've read elsewhere.