| Larry William's Trading
by legendary trader Larry
Williams, courtesy of Refco.ca
1.Who are the Commercials?
2. What does Market Sentiment (Public) indicate?
3. What is significant about the relationship between
the Commercials & the Public?
4. What is Open Interest?
5. What do I need to know about Spreads?
6. What is comparative strength?
7. What Cycles do you follow?
8. What is the significance of seasonal tendencies?
9. What is Accumulation/ Distribution?
10. How can I calculate Accumulation/ Distribution?
11. How do I use the "Mock Turtle" to enter
12. What is the Fake Out (Key Reversal) entry technique?
13. How do you arrive at and use %R?
14. How should I use Volatility Break Out when trading?
15. How do I arrive at Zero Balance and what does it
16. How can I predict a False Break Out?
17. Where should I place protective stops?
18. What are the three specific trading patterns you
taught in your Money Tree Course?
The Commercials are the large position traders who are
using the markets to hedge. I refer to them as the "Smart
Money", as they are the professional traders who
have a real use for the commodities they trade and hedge.
I analyze the accumulation or distribution of this group's
market positions to predict which markets are setting
up for a major move. The net position of the Commercials
is reported every Friday by the CFTC and can be found
at their web site www.cftc.gov.
The Net Traders Position shows a change in the attitude
and positioning of the Commercials. If the number is becoming
more positive, then the Commercials are buying or covering
short positions. Conversely, if the number is becoming
more negative, they are selling or covering long positions.
This group, because they are hedgers, tend to enter the
market early, so this indicator should be used in conjunction
with others to find a suitable entry point. Below are
some things to keep in mind when analyzing the Commercials:
1. I use the Commercials as a "set up" mechanism.
They are not a "timing" mechanism.
2. They are usually early in a move because they are
accumulating or distributing their positions.
3. Analyze how the Commercials typically behave in a
given market. Do they typically get heavily long or short?
Do they frequently go to extremes with their positions?
4. The Commercials are typically trend "enders".
Market Sentiment (Public) indicate?
Market (Public) Sentiment is a sampling of the opinions
of the leading market advisors and futures newsletter writers.
This information can be obtained from Market Vane Corp.
and graphed with Genesis software. Public Sentiment is a
very useful short-term indicator used to determine the public's
position. It is also very useful to determine if a market
is "overbought" or "oversold". I have
found that the Public provides an early warning of trend
changes, since they generally enter the market at the end
of a move and they are (unfortunately for them) usually
incorrect in their market opinion.
Below are some things to keep in mind when analyzing
1. When the Public is over 75% bullish, the market is
usually overbought and should move lower.
2. When the Public is over 25% bearish, the market is
usually oversold and should move higher.
significant about the relationship between the Commercials
& the Public?
When the Commercials and Public have opposing positions,
the market "set up" is stronger. If both are
graphed, and the Commercials are extremely bullish (above
75-80), while the Public is extremely bearish (below 25-20),
this is bullish and the market should move higher. Conversely,
if the Commercials are extremely bearish (below 25-20)
and the Public is extremely bullish (above 75-80), this
is interpreted as a market that is set up to move lower.
Below are some things to keep in mind when evaluating
the positioning of the Commercials and the Public:
1. It is critical to look for juxtaposition between the
two group's positions. It is very desirable for both to
be at opposing extremes in their positions.
2. The positioning of the Commercials and Public is bolstered
if they are at 12 month extremes in their positions. It
is desirable to see the Commercials the most bullish they
have been in 12 or more months, while at the same time
the Public is the most bearish they have been in 12 or
more months. This is an ideal Commercial/Public "set
up" for a bullish move in the market.
Open interest is a fundamental indicator that I use in
conjunction with my other "Big Guns". Open interest
is usually a reflection of Commercial activity (as they
represent 80% of the volume in the markets) and is usually
an indication of Commercial short selling as they hedge
their positions. When using Open Interest as an indicator,
it is very important that a market be in a trading range.
Below are some things to keep in mind about Open Interest:
1. If open interest decreases, it is representative of
less commercial activity and that they are decreasing
their short positions.
2. If open interest increases, it is representative of
more commercial activity and that they are increasing
their short positions.
3. Based on the information above, a 30% decrease in
open interest can be a bullish indication and a 30% increase
in open interest can be a bearish indication.
4. Once again, it is imperative that a market be in a
trading range in order to
Use Open Interest as a "Big Gun" indicator.
I need to know about Spreads?
A spread refers to the price difference between a nearby
(spot) contract month vs. the next closest (or more distant
delivery months) in the same commodity. The nearby month
of a contract is usually cheaper than the distant month
(this is due to the "Cost of Carry" - insurance,
storage and interest for distant months and is known as
a "discounted" market).
Occasionally a market may "invert" and the
nearby month will sell for more money than the distant
months. This is known as a "premium" market.
Commercial buying causes this phenomenon because of an
urgent need for the commodity. The "cross" from
a normal or "discounted" market (for the nearby
or spot month) to an inverted or "premium" market
is bullish. Below are some things to keep in mind when
1. It is bullish when a premium occurs, but it is very
important to look at the relationship of the premium to
the market itself. In other words, how is the spread performing
with respect to price? You can time your entry into the
market by looking for divergence between the spread and
2. A declining market may also have an increasing premium
in the spread, which can indicate that a bullish condition
may be developing, even though price is declining.
3. If spread premium falters while a market rallies,
it can be an indication that the market is nearing a top
and is bearish.
Comparative strength evaluates the strength or weakness
of different markets by comparing overall price movements
to new highs or lows. If three contracts are moving in
the same direction, but two have not reached a new high
and the third has, then the third month would comparatively
be the strongest. It is possible for a market to be "comparatively"
weaker or stronger than other markets, even though it's
overall price movement is smaller in magnitude when compared
to other markets.
do you follow?
I am more interested in magnitude (price) scale, rather
than time (duration) scale.
There are two markets "cycles" I follow:
1) Trading ranges cycle from small range days to large
range days. The best time to trade is following a series
of small range days, because a large range day should
be developing. Large range days contain the biggest moves
in the magnitude (price) scale.
2) Closing price vs. daily ranges: Market highs are usually
indicated by a market closing at or near the high of the
day. Market lows are usually indicated by a market closing
at or near the low of the day. The closing price vs. daily
range relationship is interesting to study, because it
generally "feels" very bullish when a market
closes on its highs and it "feels" very bearish
when a market closes in its lows. When in reality, this
is usually an indication that the market is poised to
the significance of seasonal tendencies?
Season Tendencies can be a valid indicator, but they
are not reliable enough to trade on their own. In fact,
I prefer to call them Seasonal "Influences"
and I always couple them with other indicators to determine
if a market is "set up". Seasonals approximate
the time of year markets may reach highs or lows. Some
examples of Seasonals from the Money Tree course are:
Wheat - bottoms in August
Soybeans - drop in July
Silver - tops in January
Corn - down until December
Gentlemen - don't trade oats
Copper - rallies in July
Heating Oil - declines in October
Cotton - rallies in late November
Sugar - rallies from October to late November
British Pound - rallies from October to December
Canadian Dollar - drops from September to November
Remember these are tendencies and not constants. Never
use this tool alone to trade futures.
A/D measures market pressures and specifically looks
for market divergence. It also serves to measure market
strength and sentiment. Look for situations where there
is a considerable divergence between A/D and the price
of the commodity as an indication to future price direction.
For example when price and A/D both move into new highs
it is a good sign the trend will continue. However, when
price makes a new high and A/D levels off it should be
construed as a warning that the tend will soon change.
This also true when price is making new lows and A/D does
I calculate Accumulation/ Distribution?
+ or - Net Change / Day Range = + or -
This formula has an exception for gaps. The exception
is: If yesterdays close is < today's low then yesterdays
close is the true low, in the day range.
Example: Price A/D
-300 / 600 = -50 4700 4950
+200 / 400 = +50 4900 5000
-400 / 1200 = -30 4500 4970
Price made a new low, Accumulation / Distribution did
not, look for this market to turn bullish.
How do I
use the "Mock Turtle" to enter a market?
Buy at the highest high of the last 48 days.
Sell at the lowest low of the last 48 days.
Place a protective sell stop at the high from the last
Place a protective buy stop at the low from the last 24
This has been used by itself as a trading system. The
draw back is that you must be in a basket of markets.
Thirty-five percent of the trades are winners.
If the Commercials and Public are set up use a 12 day
time frame for entry and a 24 day time frame when placing
a stop. Continue to tighten your stop as the trade matures
using a smaller time frame's highs or lows.
the Fake Out (Key Reversal) entry technique?
If yesterday closed lower than the previous day, buy
at yesterday's high.
If yesterday closed higher than the previous day, sell
at yesterday's low.
How do you
arrive at and use %R?
Percent R is the relationship of today's close to the
closes from the past 10 days.
10 day high - today's close = V1
10 day high - 10 day low = V2
V1 / V2 = %R
If the market is trading in an up trend and the index
is low (below 20), that is a buying point.
If the market is trading in a down trend and the index
is high (above 80), that is a selling point.
I use Volatility Break Out when trading?
Expansion of volatility is very bullish. Large range
days usually change the trend. On the day after a break
out you can buy above the market using 100%, 90%, 110%
of yesterdays range.
How do I
arrive at Zero Balance and what does it tell me?
Label each of the last eight highs and lows eight to
one starting with eight being the most recent. Add the
value of point six and five and subtract point eight (6
+ 5 - 8 = Zero Balance). This should be where the market
is going next. If price doesn't follow the Zero Balance
line down, that is a bullish indication. If price doesn't
follow the Zero Balance up, that is a bearish indication.
If the market makes three consecutive up/down moves without
the market following, we should have a big move in the
I predict a False Break Out?
If the day prior to a break out day has an up close,
it is probably a false break out. If the previous day
has a down close and then breaks out, it will probably
I place protective stops?
There are a few ways to place protective stops.
1. Monetary Stop Loss. Let your broker know you want
to risk "$X" on any particular trade.
2. Trailing Stop. As the market makes new lows/highs
use those prices as your stop. Early in the trade, use
highs/lows from the last twelve days and narrow the number
of days as the trade progresses, never getting tighter
than three days.
the three specific trading patterns you taught in your
Money Tree Course ?
1. Option Expiration
Buy the close on the Friday prior to option expiration.
Exit first profitable close.
2. End of Month Bond Trade
Buy on the third to last trading day of the month. Sell
the close on the third day of the new month.
3. Oops Trade
If the market opens below the previous day's close, buy
at yesterday's low. If the market opens above yesterday's
high, sell at yesterday's high.
Article by legendary futures trader
Larry Williams. Courtesy of Refco.ca, Canada's most trusted
commodity futures trading broker.