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F.A.Q. - Frequently Asked Questions |
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What exactly is a mechanical trading system?
How can a mechanical trading system make money year after year?
Since you have a mechanical system, why are you selling your trades?
Aren't you rich?
How exactly does your service work?
Why do you consider trading stocks to be more risky than trading
commodities?
How much money do I need to trade with Tortoise Trades?
Which broker should I use to trade this system?
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What exactly is a mechanical trading system?
The very existence of a mechanical trading system is doubted by many people. A mechanical system implies that any person knowledgable of that system could make a fortune trading without any prior experience. This goes against the common sense of economic laws. To think that my 13 year old daughter could be a successful trader with a little initial help from her Dad doesn't make sense. Somehow we have all learned that "Money must be earned!".
A mechanical trading system is simply following a set of rules
and entering the market when the rules say to enter, and exiting
when the rules say to exit. There is no human decision involved.
It does not take years of experience to trade successfully. You
simply follow the rules with blind faith.
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How can a mechanical trading system make money year after year?
There are basically two approaches to analyze the market direction.
The first is the analysis of the fundamentals, or “news”. A trader
would look at the supply and demand information and make a decision
based on whether there is more supply (price goes down) or more
demand (price goes up). An inherent problem in the fundamentals
approach is that one side of the equation is usually known before
the other side. For example, you may know what the yield will
be for this year’s soybean crop, but not know what the demand
will be until months later when the crop is harvested.
I have a personal friend who is a broker with Refco Commodities,
a commercial clearing house for hedgers. Hedgers are usually the
farmers who sell the commodity or the end user, like General Mills,
who process the commodity. If anyone would know the fundamentals,
these people would. My friend told me how it really is in the
hedger's trading world. Hedgers very rarely know where prices
are going and are just happy to keep their risk exposure at a
minimum. A study of the government's COT (Commitment of Traders)
report will show you that the Commercial positions, hedgers, are
often just as wrong as the Large Fund positions, speculators.
Technical analysis is the second approach to determining which
direction the market is going. A quote from the legendary Bernard
Baruch is, "Show me the charts, and I'll tell you the news." A
picture says a thousand words. Charts reveal the human condition
of fear and greed to a particular supply and demand situation.
Patterns develop over and over again as traders with a bullish
bias win out over traders with bearish sediments, or vice a versa.
Most people know about the North Star and how they can see the
Big Dipper if they know where to look. If you had never been told
about the constellations you would look up on a starry night and
most likely never see the patterns. So, too, are the patterns
in the markets. Market patterns have been there ever since the
price of anything have been recorded. Patterns go back hundreds
of years and will continue into the future as long as human nature
plays a role in the price of a commodity.
Mechanical trading systems are often based on market patterns.
These patterns happen over and over again because human nature
does not change. Human emotions and reactions to events are universal
and predictable.
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Since you have a mechanical system, why are you selling your trades?
Aren't you rich?
This is a skeptic's common reaction to a trading system that makes
money. It is a lame excuse for not trying out my service.
Because this is a public web site, I will not go into personal
reasons why I am not rich. All I will say is I do not have enough
money... yet. Consider yourself fortunate that I am in this state.
There is a verse in the Bible that says, “Give and it will be
given to you. A good measure, pressed down, shaken together and
running over, will be poured into your lap. For whatever measure
you deal out to others, it will be dealt to you in return."
There comes a time when someone discovers what he has been looking for.
There may have been a long search before that discovery was found. In my
case this is what has happened. Amassing a fortune often has a humble
beginning. You have to start some where. You and I may be at that point
in time. I am in the race!! You can come along if you like. The choice is yours.
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How exactly does your service work?
The first step you should do is learn how to use the information I will
send you. Under “Training” in the title bar you will learn how the system is used trading Futures,
Single Stock Futures (S.S.F.), Futures Option Trading, Orders to Use and (most important) the Money Management
System (M.M.S.). For now, let’s go through how this service will work.
When I get a trade signal from my system I alert you by e-mail that my trade alert page is updated, usually by 8:00 p.m. EST. To see an example of a trade alert on S.S.F. (click here). The trade alert page gives you all the information you need to do the trade. You will know how to enter the market, where to put your stops, when to change the stops and when to exit. You also get the information you need to use the M.M.S.
If you have a trading account where you can place orders on-line, then you will simply take the time that night to enter, or change, any orders. That is all there is. You’re done.
This procedure should take less than 10 minutes a night.
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Why do you consider trading stocks to be more risky than trading
commodities?
In order to understand this question you must first get your thinking down to the bottom line premise. Many people think two or three levels up and fail to understand what trading is all about. I will explain where risk is created in investing by describing three levels of a particular view point.
Let me illustrate the first level with an example. We want to trade stock in ABC Company. You buy $10,000 worth of stock at $6.00 per share. Now you have done a little bit of homework and discovered ABC Co. is a big company and trades on the NYSE. That's good enough. Let’s not get too much into the fundamentals of this stock, that is for the next level up. OK, you buy this stock and would like a 20% profit, but it goes against you. “No problem", you say. "As long as I don’t sell I won’t take a loss. I’ll just put this stock in my long term category”. After a few months go by you stop checking this stock every day. Then one day you read a news release and discover the stock has made a big drop in price. Again you reason you don’t lose if you don’t sell. The news release says ABC Company has filed Chapter 13. Now what happens? The Company will reorganize their assets, start anew, and your stock in the old company is now worthless.
A stock is a piece of paper that is only as good as the company
behind it. It has no intrinsic value. No one will buy this stock from you
now. It is worthless, and you have just lost all your money...short
term or long term, IT IS GONE.
Now let's take $10,000 and buy a December Corn contract. Corn
is trading at $2.00 per bushel. Like the stock trade above, you
do very little homework. It is the month of June and the summer
heat is going up. Prices could go up if the corn crop gets too
dried. If they do, you will take a 20% profit. In July there is
record heat and you are excited! But, for some reason, corn prices
are going down. The weather changes by mid-July and prices are
falling fast. “No problem", you say. "I will stay in and maybe
with a frost scare in the fall prices will rally again”. One fact
you do know is you must sell your contract by December or take delivery.
Since you don’t have a big enough yard to dump 5,000 bushels of
corn, you must liquidate your contract.
It is now late fall, there was a record crop and prices have gone
down. How far? Maybe 20 or 30 cents, BUT NOT TO ZERO! Farmers
will never give corn away. The price cannot drop to zero because
corn has INTRINSIC VALUE. As long as people need to eat and have money, there will always be someone to buy corn. The contract of corn will always be worth something. Even if it expires, you will own 5,000 bushels of corn. Just don't let the corn rot in your back yard. There are many starving people and animals in this world and somebody will buy that corn.
I know of trading systems that work just on this fact. The system will buy a commodity when the price is low. If the price goes lower, it buys again. If the contract gets near the date it expires, it rolls over the position to another crop year and on and on until prices start to rise and the trade makes money. Commodity prices cannot go to ZERO, but stocks can. This is the first fundamental reason that creates risk.
Now from this bottom premise we go to the next level, which is
knowledge. Having knowledge can take almost all of the risk out
of trading. Let me illustrate what knowledge can do.
If I asked you to take a cash advance on your visa card for $1,000, look in the classified paper to buy a piano, and then sell it for $1,800 to make a $800 profit, could you do it, or would you take a loss? If you are like most people, you would not know how to buy the right piano. Nor would you know if the piano was too old? Would you have figured in the cost to move that piano? Would you know how much it cost to fix it up and tune it? Where would you get a buyer? After some time, since you are paying interest on the $1,000 cash advance, if someone offered you $900, you would probably accept it because you are losing money every month on your loan.
I use this example because buying and selling pianos at a profit is very easy for me to do. I am a highly trained piano technician and have done this for many years. It is easy for me to make money. When I buy a piano it is "money in the bank". There is no risk because I have the right knowledge. I know the value of the piano, I know the condition and because of my line of work people come to me looking for pianos to buy.
Know what you are doing and there is very little risk to trading.
The third level after knowledge is where people are at in their thinking. It is this level that makes the CFTC put out warnings about trading futures to protect you from yourself. It is the level of leverage. When most people trade stocks they put up the whole amount of the position. When people trade commodities they trade on margin, sometimes as low as 4%. It is this leveraging that has given commodities a reputation of being very risky.
Many people don’t realize that figuring out the direction of the
market is just as hard in stocks as it is in commodities, (knowledge).
Stocks do not always go up! Losing all the money in your account
happens only because of leveraging. Don’t leverage the market
and you won’t lose all your money, unless you can’t stop trading.
Set a limit. Realize that your losses are only because you lack
knowledge.
Tortoise Trades solves the problem of too little knowledge. YOU have to control the leveraging.
There is a Money Management System that I have developed to use with my system. I can not stress this enough. Use this M.M.S.! It is not because this is the greatest method of money management nor will it give you the greatest return with a trading system. It is because trading any system will not be successful unless you use a money management program.
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How much money do I need to trade with Tortoise Trades?
In the "Training" section there is a Excel spreadsheet you can download. The spreadsheet helps you calculate the number of contracts you can trade with the capital you have to work with.
The main issue we are dealing with here is what is your risk tolerance. Would you stay with a system if you had a 20% drawdown? How about 30%, 50%? In the training section I deal with money management and explain a system that I have developed with the Tortoise Trades. Following this method will help you to determine how much money you will need.
The system generates enough trades and I have explain techniques (like using future options) that will allow you to make trades with very little risk. Do not think that you have to do every trade to validate this system. I know traders who think this way but I do not believe this is true. This is a subtle form of Murphy's Law. You are saying that if I pick and chose which trades to trade I will pick all the losers. The first problem with this thinking is you are not picking which trades to trade and which ones not to trade. The M.M.S. is picking the trades. Even if you pick trades that only look good to you, I believe over time the system will perform to the same percentage of wins and losses as trading all the trades. I believe in the law of averages and eventually all the trades that you do will have the same record of percent wins over losses.
I have solved the problem of the learning curve for you. Most beginning traders go through their initial investment because of mistakes and lack of discipline in trading. Some people need enough money to overcome their personal trading flaws. I don't know what is the right amount for you. The reality of trading is we all have trading flaws and you will either do other trades, "fall asleep" and make mistakes or just plan lose your discipline. This is the real world of trading. Some people use automatic brokers. Automatic brokers are brokers who get the signals from a system and are authorized to initiate trades based only on the system. If you are interested in this or want more information contact me.
Please let me know if you have trouble opening up the “Money Management” spreadsheet. You will need Excel to open the file. E-mail me if there is a problem with the file. trader@tortoisetrades.com
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Which broker should I use to trade this system?
Picking a broker to trade Tortoise Trades is not very crucial.
I wouldn't consider the amount of commissions to be a major factor
in deciding which broker to use. I would recommend that if you use a broker (as opposed to trading online),
that you pay enough commission to get a personal broker who knows who you are when you call, and can personally
help you place your trades.
Discount brokers have tended to frustrate me because desk clerks are usually wage earners and do not have a lot of personal interest in your account. Sometimes I have found them condescending because they often deal with people who are trading for the first time and they will treat you the same way. They can make you feel ignorant because they don't understand everything they need to know when filling orders.
There is a lot to remember for each commodity, like trading hours, point values, price format, first notice day, last trading day, what orders are accepted in which pit, etc. It is a lot to remember and even experienced brokers sometimes have to look up some facts. An order clerk just doesn't have a strong incentive to be helpful, and may not take the time to "hold your hand" during a confusing situation.
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