Category: Phantom of the Pits

Phantom of the Pits

Chapter 25 – Phantom’s Chat

Chapter 25 - Phantom's Chat

It’s always difficult to get a group of people together at a time and place and equally difficult to get
Phantom to be available to work on a specific project especially when he is working on so many
already.
We were able to set a time and discuss various aspects of questions on trading of interest to our
traders. It often times seems that much of Phantom’s insight is more general when specific questions
concerning his rules are presented. I asked him about some of his trading as it would pertain to long
term and short term trading both. His answers were that while you may travel 100, 1000 or several
thousand miles it is travel just the same as to whether you take a car, train or airplane.
Answers to your questions may not be as timely as you wish but we will try to elaborate on some of
Phantom’s aspects of trading as they refer to both long and short term trading.
ALS: Pop, give us some of your observations on your reflections of the reception of your trading
rules since you presented them to the traders.
Phantom of the Pits (POP): Many remarks have been made as to the rules being more for short term
traders than long term. I would like to dispel that notion. The big reason for that belief is that traders
are still OVERTRADING their account size. The rules work for both long term and short term if
over trading is not a problem.
I have seen a couple of posts, which are accurate in regard to, how large of a trade should be made.
I think most traders want to be short term traders or day traders. It is a fact that trading futures
requires prompt actions, which leave the trader to feel that all trading should be short term. Markets
swing and reverse back and forth often in moves, which can wipe out an account so fast if over
trading is a problem. Nothing will wipe out a trader faster.
The rules are a must in long term trading just as well as short term trading. If you have a signal to
enter a market and two weeks later the market is not doing what you expected and you are still in
the position you should have used rule one and not rule two. You will not have added to your
position because it didn’t prove you correct. By not overtrading you may have been able to hold the
position for two weeks without going to an extreme of losing on the trade by big time.
Still if you have a two-week position on because you are expecting the trend to continue or develop
you must approach the initial trade by not overtrading to a point of having to lose on minor
fluctuations. If you overtrade you will be forced somewhere to pull the trade off at an unfavorable
situation and with a loss you had not counted on taking.
By using rule one with long term trading you are far better off to under position with smaller
positions. It is rule two, which will make up for the smaller positions in long term trading. In long
term trading your window of the position proving to be correct would perhaps be a little wider and a
longer time frame. While this longer-term time frame and window may give you a greater chance of
losing, you still have a better position by not overtrading the position from the start.
Keep in mind that entry signals are not always good entry points. That alone says not to overtrade
the position. You must also be prepared to pick a range and not a price, which leads us back to not
overtrading the initial entry. This leads to rule two in allowing you the opportunity to get larger
once the position proves to be correct. We are talking a wider window than most traders think about
for rule two to work properly in the long run.
Much frustration develops in trading when the initial position is overtraded. Each trade should not
make a difference in your account. The problem with that statement is that each trade does make a
difference to almost all traders. If the trade makes a difference in your account then you are going to
allow the market to make decisions for you and that is always inconsistent with good trading. Keep
in mind too that the statement is not saying that each trade should not be important in your trading.

I have seen the smallest trade become significant to traders because they didn’t use rule one and
remove the position once it failed to prove a good position. The loss becomes larger and larger.
Believe me that it will make a difference if not protected properly. It is much easier to follow the
required rules if your plan has a plan for removal if not proven to be a good position when your
position is small and not larger upon initial entry.
I have had several email indications from traders telling me what works for them. Good for them as
they have a plan and can use it correctly. It must be a plan which you incorporate into your trading
and it must work for you. I can’t stand to sweat or to swear for that matter and that is what happens
if you don’t keep each initial entry insignificant position wise. Rule one can stretch from minutes to
weeks or months but the important part is to know you must remove the position and not leave it to
the market when not proven correct.
Don’t worry about not having a good size position on a big move because your plan has the other
side of the coin. Rule two always says to increase a proven position and to do it correctly. What is
correct for me may not be correct for you because you may be more removed from the market than
I am.
ALS: Pop, do you want to go into detail more on long term trading with your rules?
POP: Unfortunately I can’t narrow situations down for a specific plan for all situations. The correct
way to use the rules for long term trading is to always keep in mind that small is certainly a key to
success when used with proper rules.
I saw a post and please forgive me for not remembering who posted it that the position taken by that
person is always going to be smaller than most but at the end of the year they would have made
more money than the larger positioned trader. Yes, that statement is a correct one for several
reasons.
Up front is the behavior modification. A smaller position is kind to you in allowing the proper
response from yourself in protecting your account. Of course there are times when being aggressive
is required and that is where my rule two comes into play for myself. As I have said before a trader
on the CBOT with a single letter acronym continues to astonish me in his proper aggressive use of
rule two. Not that he uses my rule two specific but that he aggressively adds properly at the proven
points.
I have observed many posts over the past year and the “SMALL” secret is starting to get out. There
are ways of trading small. You certainly can trade MidAmerica contracts with good results and you
can with options into smaller exposure in markets as long as the markets are liquid. Any futures
contract, which has options, can downsize your position exposure on any exchange.
What I want the smaller trader to do is to be realistic about return expectations when becoming long
term traders. You won’t start with ten grand and make a million by being long term traders. Oh yes
it is possible but you are putting yourself at too much of a disadvantage to think you will do it
without making a full time effort and becoming more of a day or short term trader. Even then it is
remarkable if it can be done.
ALS: So mainly you are saying that long term trading with your rules require you to be small but
aggressive at the proper times?
POP: You aren’t wrong! It seems like a trick but it is not. You’ll have to pull that sack out of a sack
and see there is actually something to it. Small can always become larger but when you start larger
you are actually setting yourself up to have to become smaller somewhere in your career. It is the
sad truth.
I have watched posts from various traders and it’s easy to see that many traders are overtrading. I
think the only complaint I have against the experts, authors and researchers is that while they are
making the effort to help traders admirable, they must present the problem of overtrading more
clearly.

Since I have walked the road of trading and often observe various writers and experts I can say that
I believe they are usually on the right track but times change and they can not always predict that
change. It is not their blame but the small trader must be aware and on top of it. The small trader
can recognize that change better if they are not so large.
I watched a mutual fund trader come out of positions just yesterday as he believes the market is not
topping but that he is too large to get out when it does top. Recognition of the situation is very
important and to me that is a very smart mutual fund to be in with your funds. Now for the small
trader it isn’t always necessary to remove positions before the reversal because of being too large.
That to me is a very big advantage for the small trader provided they have their surprise side trade
plan always in place.
I want to point out another major problem I see with what I have observed over the past year of
observation of the small trader.
What is the one thing, which can most likely change your odds in trading? If someone could
actually give you M.J.’s shoes that now allow you to jump five feet higher, could you better play
basketball?
In trading we can have those shoes. First we must think about being small from initial entry because
the position has not been proven. The only thing we have upon entry is that we have a signal based
on what has happened. We know that the direction is pointing but not that the direction will
continue.
Because we are small we must have the plan to become larger (rule two) or we won’t ever exceed a
50/50 expectation in the long run.
Where do we get the pair of shoes? Secondly our efforts must be different than what we are
presently experiencing in expectations. Every trader who learns of trading is expecting to make
good sums of money. They also count on that outcome.
The expectation of making good sums of money is WRONG in trading. The CORRECT
EXPECTATION is that you will have a large amount of losses. It is a fact! It is up to the trader for
the large amount of losses to be kept small or they will certainly be large.
I am not saying that you can not expect to make large sums of money but that you should never
have that expectation in trading. The only expectation in trading is that you should expect to take a
large amount of losses.
Here comes your pair of shoes that help you jump five feet higher!
Your job as a trader is to have a good plan for entry, adding, exit and use of good rules for your
protection from being removed from the trading arena. You must not concentrate on how much
money you can make or expect to make in your trading. Your plan and objectives of your plan will
give you your proper signals and your rules will give you your proper protection.
(YOUR SHOES) You must concentrate at all times on keeping your losses small and never on what
you expect to make but on what you expect to lose. The five foot gains come when you don’t expect
them and they do come. They come when you are concentrating on keeping your losses small at all
times.
Keeping losses small is a full time job and takes action on your part. You may ask how do you keep
losses small at all times as you have taken positions and in minutes the position went massively
against you before you got the fill back. The answer to keep losses small in relation to the size of
your account is to expect the unexpected disaster and limit exposure from the start of an initial
position when the position has not proven to be correct.
I want to give you the best example of what I mean in keeping losses small. I listened to a trader
accurately state that he had 80% of his trades make money. I watched his trades and judged his

trades. When a trade went against him, he would hold that trade until it became a winner. The 20%
losers were large losses. Yes indeed he was correct in his statement of having 80% winning trades.
His net income was negative because of not understanding that trading has nothing to do with what
percentage of winners you have.
Trading has the most important statement in the end! It is that your income is based on not how
many winners or losers you have but on how small your losses are of those losers. How large your
winners are is second to how large your losses are.
I am a very poor percentage trader in that I lose more trades than I win. I would hate to tell you
exactly the percentage for I am sure you would not even want to read my input anymore. I am not a
good winner but I am the best loser I know. Losing well is what gives me my income.
MJ is good in scoring! It is not always how many shots you take or how high the percentage. It is
the score at the end that actually counts.
ALS: Ok you have a few raised eyebrows. I know your percentage and you are correct, as it would
shock most people. I won’t divulge it. What do you suggest traders do in order to use their new
shoes in trading?
POP: Frame of mind is what we are talking about from the start of a position. Let me say I have 5-
10 grand in an account. Am I to start out to make a fortune or to continue to survive forever in
trading? Of course the trader and I want both. But keep in mind that without long-term survival you
will never reach the goal of making a fortune. So survival is the more important of the two. Let us
devise a way to accomplish that.
We will use soybeans as an example. If I put a 5,000-bushel contract on I can expect to lose 3,000
on a limit move. Notice I said I can expect to lose and did not say I can expect to make. You see I
will not limit my gains as I will be able to hold gains longer than losers. Notice I also said expect to
lose 3,000 as a limit move is 30 cents but I use the limit to limit exposure rule. What I am saying to
myself is that I have an exposure upon entry of limit to limit.
By having a good entry plan I can reduce the expected loss and by having a good exit plan I can
reduce the loss also. I am not going to have a plan to put a position on at limit up or down in either
direction. Or am I? Perhaps at times with the use of rule two I will add at limits if I can but we are
talking about initial entry here.
With a possible worst-case loss expectation of 3,000 and an account of 5-10 grand we are looking at
30-60% possible loss from the start. Even so we want to trade the entry signal in beans.
What should we do? How should we trade? First reduce the exposure before putting the trade on
from the start. You can reduce it by trading smaller. You could trade a one contract of 1,000 on the
MidAm exchange. Another method is to look for an option with say 60 days to go before expiration
and a delta of 20%. In a break out and that is what your entry should be looking for in a trend, you
will have the opportunity to participate without the trade making a difference in your account. If
you are worst case loss in the first day you will lose 600 and not 3,000.
Ok so we have the exposure to less than 600 of a 5-10 grand account. Next let us reduce the
exposure further by knowing when the position has proven itself correct. Let us say you are only
able to look at the close in the newspaper at night and must work away from communications to the
floor during the trade part of the day. Your entry is now more important. If you position in the top
possible third of a market or the bottom third in that direction, you are allowing almost the entire
risk of 600. By having a good trade plan which does not allow you to position the top third of a
possible trade range you will reduce your risk by 1/3rd. In this case your allowed risk is now 400 at
most.
Yes you will miss some moves by not buying the top third or selling the bottom third of a days
possible range but the survival aspect is worth the lost trade. This also keeps you from chasing a

market, as we know markets have highs, lows and ranges each day. Use it to your advantage by not
chasing markets into the hole even if you miss the trade at the cost of long term survival.
The next part of your entry is to limit your loss possibility. There are positions that during a day
should be removed for the sake of protection of being limit locked into a larger possible loss the
next day. You are going to have to accept the fact often events can take a market limit one way or
the other and at times they will reverse from that limit. You must never allow yourself to be locked
limit against your position. The only way of doing that is to have a plan to remove the position
before it happens.
If you are long in beans and the market is in the bottom 5-10 cents of the possible range for the day,
you had better have a plan for removing the position even with the possibility of the market
recovering after you get out. Let us say you went long ten cents higher and now the market is 30
cents lower and only ten cents above limit down. Since your plan says not to sell the bottom third
for entry the only reason for selling is to limit your losses. At what point do you give up the
opportunity of recovery in a position now showing bad? When the market in beans has moved
within ten cents of limit you can pretty well accept the fact that any recovery is going to be a fluke
most of the times. We will consider the bottom ten cents too much risk against us so our plan could
be to exit on a stop when the market is in the top or bottom ten cents against us.
This ten cents on exit with a stop can reduce our risk now by another ten cents. So now we have a
total possible loss of 300. This is 1/10th of the original size contract risk. We are talking maximum
loss of 3-6% of our account size at this time. This we can live with.
By having several trades working and with much smaller size your odds of removal from the game
will diminish but you must have a plan for each position. Looks more like work doesn’t it? Yes it is
work but it pays off in the end.
Keep in mind the above example can be suited to your trading but keep your initial position small
enough so it won’t have a chance of affecting you emotionally or financially in your trading. Your
new shoes are your expectation of taking that loss many times but controlling your size of loss.
How much will you make? Who knows? Better yet who cares? It is when you don’t care how much
you can make that you will better serve the aspect of how much you can lose and how much will
you lose. Only then can you judge whether you can control your account properly.
Nothing precludes the importance of having trades that will give you the positive expectation of
outcome. You won’t take any trades unless you can have a positive expectation of being able to gain
more than you lose.
I am only pointing out to you that a high expectation of winning trades over losing trades will point
you in the direction of larger draw downs and worst of all holding trades for too long when not
good trades.
Limit your thinking on trades to limiting losses at all times. If you trade small enough and decide
you are going to try and lose 300 on every example of the bean trade but follow rules one and two
correctly, do you think you could do it? I mean lose 300 on every trade. Of course you couldn’t lose
300 on every trade unless you have a real bad trade program and entry signal.
Most traders think the other way of trying to make 300 on every trade and then the losses become
larger than any possible gain. Not only the larger losses but the failure to add to correct positions is
overlooked.
I challenge your thinking on trading as a game of limiting your losses! By properly knowing your
worst case loss you can actually do better than you think because your trade plan also has a criteria
of telling you when you have a proven correct position based on market conditions. This means that
often times you are taking even smaller losses than the worst case and sometimes removing
positions which don’t prove to be correct at a gain.

ALS: Phantom I know you wanted to bring up many points and I know you have given a time limit
on this. We will continue to drive down the road and look at the signs along the way from our
traders. It was great to be able to get together on this again. What are your plans forward?
POP: Art, I intend to watch the forums, the web sites, complete my other projects and when time
permits to continue what we started with our traders! No time limit but I do request patience from
the readers and our great traders.
I would like to change the image I gave our wonderful trader friends. I have learned so much from
them and what I hold highly from them is their loyalty. So much good input from all of them. I
don’t want to leave anyone out so I won’t name them. I know that seems like a cop out but it isn’t.
If only traders can imagine how important it is to being a good loser than we shall see many more
Phantom’s appear in the future. I am beginning to see a few already.
ALS: Thanks Pop, you have the rest of the day off.
For those of you worrying about the year 2000 problem, hexadecimal is a base 16 rather than base
10 number system that works in many situations. There are many solutions to the problem and I
hope this gives you a lead on 2000 thinking. 256 is a larger year base than 100 and with just a
conversion program in assembly will correct many software problems. They are talking billions on
this problem. Go get some of it and then trade big time!
” You must concentrate at all times on keeping your losses small and never on what you expect to
make but on what you expect to lose. “—POP
Editor’s Notes on Knowledge & Research
Phantom has asked one of the most admired and great editors of all time to give his hints to you on
knowledge gathering. His suggestions on research can save you one of the most precious
commodities – TIME.
There is nothing like putting someone on the line without their knowledge but Phantom felt it was
worth it just this one time.
TEXT FROM TOP EDITOR IN FINANCIAL MARKETS OVER PAST TWO DECADES GOES
HERE
There is a lot to be learned from one of the best editors of all times. His experience in research
and knowledge gathering is difficult to match in the financial field today“—POP

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Chapter 24 – Your Trade Program

Chapter 24 - Your Trade Program

Phantom indicated that it was time to conclude the talk forum part of Phantom’s Gift and move to
the sidelines in order to complete the first book of his give back project. There were a few
hesitations on the forum but only because of not knowing the further plans that Phantom intends to
complete.
The project has been very successful and well received which pleased Phantom and exceeded his
projections. Several comments were made to the point of wishing for a never ending dialogue
between Phantom and the participants on the forum. Phantom felt it was time for him to stand on
the sidelines in order to see the results of his efforts.
Trading is an extremely difficult business and research is always a demanding part of each trading
day. While Phantom needs to complete a few other projects, none are as important to him as the
efforts he has given on seeing the small trader compete successfully with the big traders.
There are so many turns and new frontiers in trading and only a few have been covered up to this
point. For a trader to know what is required in order to stay in the trading game for a long period of
time is most important and above other aspects. But without the other aspects such as a trading plan
and a system to generate trades, trading can not be completed properly.
There are so many trading plans and systems and while one trader may be able to be successful with
a same system, another trader may have failed to master the same system due to different entry and
exit points. It can be a very fine line.
With Phantom’s rules it is a more even call with the same system. This is what Phantom intended to
see in presenting his trading rules. To more or less level the playing field and improve the standing
somewhat due to the quicker actions required by the rules than actions of the deep pocket traders is
an improvement for the small trader.
The small trader can not survive unless equity is preserved first and foremost in trading. It can be
done but must be done with the skill required. This requires following closely the rules and
knowing oneself. It is difficult to teach this method without a trader’s own experience pointing the
need for the rules which require the trader to run like a coward in order to survive in the long run.
It isn’t too much different from a professional basketball game in that if you missed your shot, you
are running in order to defend at the other end of the court. You know that you will have another
chance if you can continue to keep the opposing team (the market) from running up the score on
you.
It must be instinct and practice is required in order to make it a reaction trained by your practice.
Knowing the rules is just not enough. No one tells a good trader to make a trade, as it must by your
own thought in order to properly follow the correct rules. Same at getting out of positions which
don’t prove to be correct positions.
We proceed with a trading plan after we feel that our behavior and reaction to market conditions is
in our total control. As long as we are prepared for any outcome and adapt our behavior to all
possibilities can we start to follow a good system.
Phantom wanted to give the important step beyond the critical starting rules in order to give traders
a better outlook in their trading. We include some of his writings over the years of his trading on
such things as how to look for an entry and improve the edge upon entry. We shall look at ideas on
system entry and trade signals.
All traders feel there is a system, which is best. The best system is going to fail at one time or
another and that is why we need Phantom’s rules. Bad systems can turn some good trades and be
correct at opportune times. Many of these systems have drawbacks.

Many systems assume that you will have the funds to cover what the back testing indicates is
required to margin your trades. Phantom has studied these assumptions and has his own ideas as to
the difficulty with using back testing as the criteria of system creation.
Often system traders fail to see the entire requirement when emotion takes a seat on the team bench.
This absolutely will defeat the system. What system is best? Phantom has thoughts on which system
you might use to better survive. Which ones are they?
Most of the book has required a couple of readings in order to interpret a lot of what Phantom has
indicated in his insight. It was by no accident that his insight prompts your own questions and
searching. You are with us so far. That was the most important step.
You are doing your own thinking. From here forward it will be a little easier for you. It is
discouraging to have a market take funds away from you and your family. The more soul searching
you do about what the market is waiting to show you the better your outcome will be in using the
rules properly.
Take a break, have a favorite drink or refreshment and get your note pad ready to make your own
notes. You are going to draw your trade plan according to your goals. Phantom will have some
good suggestions about your trade plan.
Your trade plan will give you your entry signals. Phantom’s rules will give you your exits and
drawdown protection. What else is there? If you have the rules for protecting your funds in a losing
game and you have a good plan for putting on good trades which you exit if not proven good trades,
you have it pretty well covered.
It is easier to look greed and fear in the face with the proper frame of mind. You have to be your
own motivation expert in your trading. The motivation must be tilted toward the rewards of keeping
big losses out of your account. Not just today but every day you trade. You must look at a big loss
the same as you would a personal bad habit. It is undesirable to ever have a big loss show on your
statement.
Phantom is going to look at your statements. If he sees big losses in your account, you will have to
answer to him personally. It is his business when you have a big loss because he is going to see it in
your face. Your tie will be too tight, your face red and you will have a miserable day. POP wants
better treatment for you in your trading. He cares and you must care each minute your position is
against you.
Can you make that good fortune in trading? Only if you lose small and never let turn around
markets take you for a ride. It is your question to answer. Phantom has no one to answer to and
nothing to prove to anyone. You must prove to yourself. Let your performance speak for you. It
should not take you more than six weeks to know for sure.
You can expect to be on your way not because you made some money but because you don’t let
much money get away from you. We have known some big winners and winning was easy for them.
Only thing they forgot or never knew was that though it isn’t difficult to make money it is difficult
to keep it. There is only one way to keep it.
Ok if it isn’t difficult to make money, why don’t you understand before you make money that you
must keep all money at whatever cost you can create with the word small. The biggest loser I ever
saw was a trader who had a few outstanding months of trading in a trending market. You may have
heard of the Hunt silver slide. It can happen to anyone who does not respect the reward of a
SMALL LOSS! YOU MUST see the reward of a small loss. Don’t let it be your forgotten advice.
Let’s look at some of Phantom’s writings and his updated notes as to his ideas on your trading plan.
ALS: Phantom, I’ll transcribe these into our book and have you verify the points, which I don’t fully
understand. Though I have known you my entire trading career I still don’t know everything about

you. When you put thoughts on paper it seems different for me than when we talked answers back
and forth.
I am more like the readers now, as I must read what you wrote instead of what I wrote from your
spoken insight. Do you think this will make it easier for the readers by doing it this way?
Phantom of the Pits: You bet, Art! I am exact in my thought when it comes to making a trading plan
for our traders. You go ahead and put it in the book.
ALS: Okay, here we go!
POP’s (writings): In every trading plan there must be an element, which gives you the edge. It is
that edge which can change the outcome of your trading career. In the pits it is the edge the locals
get for putting on the trade which is their advantage that allows them to trade for a longer term than
if they had not gotten the edge.
My rules are not the plan but the rules are a must in order to have a plan to work. To me the rules
are the most important part of giving me the confidence I need to know that I can and will survive
in my trading. Survival is the most important point of any plan. If I know I can survive then my
plan can be much easier to design.
While my plan may seem advanced to others, there are only three ways for a market to go. I know
you are going to ask what is the third but none the less believe me! There is a situation coming up in
a few days and every trader off the trade floor is not thinking the trade. My writing points out a
third way the market can move
I didn’t want to put this on the talk forum because I didn’t want to confuse new traders with my
thoughts on this point. I am not going to ask you to interpret what I am trying to say. I am going to
tell you what I mean here.
A good trading plan must have the third way a market can move included in the plan. Is the third
way a market can move is the surprise side move. No not exactly!
The third way a market can move is the edge we want in our trade plan. A market that goes with the
trend and then breaks support or resistance, which also flags traders to get out or cause them to get
stopped out, will turn into your friend. The most powerful signals in a plan are the ones where the
market has moved both ways in a trend and are showing reversal to the big build up of trend
followers.
I know of a couple of funds that have been proven winners due to this one input of their plan. Sure
there were other criteria too.
Oh you say but you are the great trend follower of all time. What is wrong with throwing in the
towel early in a trend? I’ll tell you what is wrong! Not throwing in the towel early is what is wrong.
Big losses are the reward when you have convictions in a trend beyond support or resistance. You
got it, the market trips and you must take it. You need not only to take the profit but also to head the
other way. You need to make criteria for this situation in your trade program.
In your trade plan we now have two situations which can give you the edge. The first is the surprise
side and the second is the third way a market can move. The surprise side is an event, which takes
place during the day, and unfortunately seldom allows the public to benefit from on entries. Mainly
because they are already the other way when it takes place.
The public seldom reverses their position because they seldom get out at the right place in the first
place. You must use this knowledge to your advantage and not be caught up in the same situation.
I don’t care how bullish or bearish a position you have established appears to be, there is a place in
every day when it is going to be right to be out of that position. The odds are that you won’t hit that
place most days. You’ll find that it seldom happens when expected in trends. That is why you must

have that exit planned during every day. You must be prepared within your trade plan to use the exit
if needed.
How do we put this into our plan? If you are using Point and Figure charts, you can often see the
45-degree line of support and resistance. A good trend will give you several attempts at the support
and resistance lines. After several attempts a reversal day will break through the line. At that point
you will have stops and the stops can generate more orders coming into the pits. As the price moves
through it will generate more orders to exit.
You don’t want to stay around long after the first move through the line. Even if it does reverse back
again, you usually will have a good clue that you did the right thing by offsetting as consolidation
starts to take place if the line holds.
Some of your biggest trends and moves come from the breaking of support and resistance of a
strong established trend. Put these criteria in your trade program. Even if you were to only trade this
edge, you would be making the best moves of your program.
Let me qualify this for you a little more. This is the third way a market can move. The market must
have moved in the direction of the trend and then broken support or resistance. It is not the same as
the surprise side moves.
The surprise side move is different in that it can be caused by a reversal of a market after going the
way of a report and then failing. The surprise side also can be when opinion is one way and the
market has no more traders to re-enforce the opinion with positions so the market fades the other
way.
You must have a surprise side plan in your trade program at all times also. The surprise side over
the years of research for me has always been the opposite way the market opened in all markets
except one. It is up to you to search that one market out. It tells you something about taking a
diversified trade plan by spreading your trades over several contracts. If you trade five different
futures and you see that only one can be the one, which I expect to be a surprise side in the direction
of the open, you have the odds in your favor in your thinking.
I don’t want to mislead you on the surprise side. What I mean is that if the market opens higher and
closes higher for the day but lower than the open, it is what I call the surprise side. It is the same on
a lower open and it closes higher than the open then it is the surprise side. Go do your research on
the open and closes but not in respect to higher or lower on the close but in reference to the open
only.
The big money is made on the surprise side. Why do you think that is? It is because the
professionals are not only getting out before most but also going the other way when the rest of the
trade starts getting out on stops.
You should make yourself a data chart and research this knowledge to confirm it before you put it
in your trade program knowledge.
First the market opens and last the market closes in reference to the open. This is your data research
required for this input. What do you find over the last six months? What do you find in a trend and
when not in a trend? Chart it or data scale the information and use that in your program.
You see opening prices are good indicators of where the market will close in relation to the open in
certain market conditions. It seems to have certain creditability due to the way the market
information is reported in newspapers to off floor traders. Some traders only get the open, high, low
and close most of the time.
Opening prices are bad news most of the time. There are times when opens and gaps are with high
creditability in predicting the close direction. Learn them from your technical research and use them
in your trade program.

During a surprise open there is little you can do if you are already the wrong way but to protect your
position. If you are right by mistake of the surprise open, consider yourself lucky but listen to your
plan just the same. If your program said to offset after a higher open and you get a surprise higher
open, do it and then re-enter your trade when you have the criteria met of your program met.
Many times an extreme open will give you support at the opening range as the gap indicates to the
professional trader an invitation to continue to move in the same direction as new orders to follow
continue to come into the market in waves. You must consider this phenomenon in your trading
plan and input it carefully in your program.
It is just as important to not make a mistake about good gaps on the open. Watch them and research
what happens with them. There will be a two-sided market in those situations but only because
there are always many traders willing to take a profit. Use that as we have said in the past to your
advantage. These profit takers are your friends in these situations.
Gaps are certainly a study needed since they are your opening indicators and can change most
trading plans immediately. Use the information you gather on gaps to implement good trading plans
with the gaps being a possibility for each day.
Getting back to the third way a market can move is not as many think in picking tops and bottoms.
It is not picking tops and bottoms. Third way moves are your acknowledgments of what the market
is telling you about the existing trend. It is finding lack of continuance and is going to reverse
somewhere along the trend. It is usually after the support or resistance of the trend has been flirted
with and broken. Be aware of your support and resistance points in your plan each day.
Always take into consideration the possibility that the third way moves in trends are of the most
powerful moves in markets. If you have missed the existing trend for some reason you can always
be ready for the third way move out of existing trends. Don’t ever force the trade until the resistance
or support has been violated depending on which way the trend established is moving. Have your
points in your daily trading plan.
Most systems will not give you criteria other than expected entry points and exit points. Thus must
be further establishment of your trading plan. It is good to have a system, which you can have
confidence in, but you must complete the total trade plan in addition to it.
Seldom is a trade system a complete trade plan but there are some which are. On selection of a
system to trade I feel it is best to have an additional trading plan along with the system. Mainly I
feel this way because there are times when your system can generate a period of losing trades. You
must be able to filter as well as protect with my rules when this happens.
Look for a system, which allows you the opportunity to complete a trading plan along with the
system. You should be able to find the needed criteria to allow the dual situation in your trading.
Many systems writers say that you must follow them exactly at all times. What happens when an
unpredictable event total changes a market from technical to chaos? How can you continue to
follow a system on that event? This is why I like a trading program in addition to the system. And
above all else the rules of survival take priority over all.
So we are saying that the best system is one which allows you the best lateral movement in your
determination of trading throughout the day. We are also saying that rules of survival are much
more important than the system. But without the system you will have no positions established.
Many call money management the same as we call the survival rules. Don’t rule out either
explanation of survival. You can only succeed if you trade in the long run. This is not the same as
saying long term trades. Long run trading allows you the opportunity to be around for good moves
in both the present and the future. If you trade just for today you had better just buy a lottery ticket.
When you select a system there are drawbacks to each one. Look for a system that back tests data
currently. What I mean by this is that it must be current in the last six months or so. What good is

the system if it takes the past 50 years into consideration but not the current six months, which
reflect our current market conditions best. I like to see a system back tested in two stages, one for
lots of data and one for the past six month data.
If you design your own system compare both sets of data from the long term and six-month data. If
they conflict you must refine the system somewhat to a better signal generator. If you can’t refine it
better then use both sets of signals and throw them out when they conflict. This can be a good filter
for you in your trade signals. Who is to say that times don’t change in cycles just as do market
swings? Use it to your advantage.
More times than not when you have conflicting signals you will be better to disregard them. Your
powerful moves come when all your signals tend to agree. Don’t make the mistake of having too
many indicators as the more you have the wider the road must be and the more difficult it will be
for you and you may over stay the market because you entered too late.
Too many indicators will cause you to enter too late many times. This also leads to staying in
beyond the proper time. Most systems will not give you a good intra-day reversal signal, as they
tend to be more day to day signals. You need your trade program to flag you on third way moves in
trends at reversals.
Don’t be a hero and don’t use a system, which requires you to be a hero by holding on the extra day.
If you do you will find yourself missing the reversal signals and catching the bounce instead. This
will change your outcome and sometimes invalidate your ability for the particular system you chose.
This is another good reason you should have a trade plan along with the system chosen.
I have covered the most important aspects of what you should include in your trade plan but this is
now way complete. There are unique inputs from each market you want in your system like
seasonal tendency, volume, open interest and other factors which are unique to each future contract
you trade.
Your plan can be generic with minor specifics of each future. Keep in mind that you still need a
fairly simple program. The system is what will be complicated. It may include several moving
averages or other indicators. Try to not use too many lagging indicators. You are talking about
future and not past. Stay closer to leading and forecasting in your system choice. The reason I say
this is because quick and extreme moves take place in trading.
What kind of signals do you want to trade? Mostly you should use a trade plan to keep you from
chasing markets. Your system may require you to buy strength and sell weakness or buy the open. I
don’t like this type of trading anymore. You must have a filter but keep execution as part of the
trade plan. You can have two possibilities set as long as one of them guarantees that you do indeed
follow your signals. It will only change and moderate your entry places.
A system can not know what the market is doing after entry. Your trade plan can. That is your edge.
It is not second-guessing but intelligent gathering upon entry. Systems may be giving you a signal
again and again. Does this mean to add at every signal? Your trade plan must address that. I have
liked the three add on points. Use your own ideas.
I hope this helps you with your trade plan. The ideas are unlimited but you must narrow them down
and keep your plan relative simple.
–Phantom of the Pits–
Let’s look at some of Phantom’s writings and his updated notes as to his ideas on your trading
plan “—ALS


Chapter 23 – My Order Was Filled – Where?

Chapter 23 - My Order Was Filled - Where?

Phantom has always been anxious to address what the traders questioned in trading. It was with
great hesitation that the subjects of order placement and fill prices were finally addressed. He felt
more research on his part was necessary. There are so many different situations for traders when
they put in orders for their trading.
Some of the questions appeared over the months on the Trader’s forum. Many traders would get
what they felt were bad fills for one reason or another. Phantom knew it was mostly
misunderstanding of how a market works in volatile situations. This lack of understanding due to
little known knowledge on the subject disturbed him in these situations.
It seems there is a vast opinion by most traders that the brokers are to blame on most of their bad
fills. This misunderstanding is a great handicap to traders unless they are aware of what causes bad
fills in volatile markets. We shall present some of those situations with the explanation in order to
improve order placement by traders.
Little research is done individually by most traders and Phantom felt this is a big mistake. Phantom
has always done his own trace of order placement, execution and reporting of orders to and from
brokers in order to know the integrity of his placement. It gives him the ability to know what the
edge can or can not be upon an order placement.
Logging and tracing placed orders early in a trader’s career affords the opportunity of knowing just
how exact an order must be placed. An order placement for market orders, price orders, and stop
orders will have different urgency and slippage at various times due to current volatility at
execution. Understanding changes in volatility is critical in knowing when and how to place each
type of order.
I asked Phantom to give some insight on order placement before we got into particular experiences
and results of traders. His insight is based on experience and knowledge of his many orders in his
career. Phantom is the only trader I know to have been stopped out limit up and limit down in the
same day. It was early in his career and he takes full blame for not knowing early in his career the
situations, which can cause such slippage and fills.
Some of the important points on order placement and price fills are seldom talked about or
considered. Phantom felt many misconceptions were important to address as well.
ART SIMPSON (ALS): Can you tell us some of the most important insight you have observed in
your trading career on order placement and market prices.
PHANTOM OF THE PITS (POP): Let’s just start with a normal day and look at an opening, daily
range and closing. Regardless of what your order is to be, you will find that there are times during a
day that liquidity will be better than at other times. That is really the reason for different ranges
each day.
I remember in the early 70’s watching a trader bid the high of the day consistently at each new high.
I asked that trader why he would buy the high of the day. His answer was that there would be many
highs during a day but at the end of a day only one true high of the day.
If you think about that answer you’ll realize that it is true. Each time you buy a high, it is possible
that there will sooner or later be another new high for the day. To use his method of buying new
highs you would have to be a floor trader in order to use my rules but it has merits.
A reason I say it has merit is because the thin part of markets is at highs and lows. You’ll see this if
you look back on volume at the end of the day. When the markets are thin, they can be pushed
further until liquidity once again enters the markets. Even though markets are thin at the high and
low of a day, during the day there will be many new highs or lows which are not the high or low
showing at the end of the day. We can never know for sure which high or low during the day is the
true high or low for that day.

I got a kick out of some posts on a forum as one was headlined something to the effect that the
locals were gunning for the stops. There are some misconceptions in that thought. Locals don’t gun
for stops it is just how they trade. If you knew the market was thin at highs and lows and were
positioned the wrong way, What would you do if you were a floor trader? It is the traders who are
wrong which push the stops before the stops are hit. In other words you don’t want to have to buy
many ticks higher if you are wrong and approaching the high of the day. That is what the public
tends to do by putting their stops above the high for the day.
I certainly don’t think the forum participants were wrong in their thinking but only having fun with
the way the markets tend to act on their positions at times. They have really hit the nail on the head
and it just takes some understanding as to why it seems to be that the locals are gunning for the
stops. Locals are good at taking the smallest loss possible and going with the flow. It is an
advantage over the public traders.
To understand why markets act as a system which tends to prove the most people wrong in any one
day is a good start in correcting bad entries when trading. Traders are correct in thinking that the
stops will get them out and then the market will just turn around and go the way they had thought
previous to being stopped out. The fact that it happens is reason enough to devise your trading plan
accordingly. This idea is especially useful upon planning entries.
I never really liked stops but trading off floor creates a problem for the public because they
certainly need protection from being hurt from extreme moves. Stops do not protect well in choppy
markets. Trading plans can be improved by knowing how stops work and what far too often
happens.
If I get my signals of what I want to do, often I can see a new high for the day in the last hour of the
day. If I have my signals telling me to sell, it often times will say to sell the new high in the last
hour with the requirement of proving that position correct being that the market must spend little
time at or above that new high. This is not saying to take a loss on a stop but saying that the new
high is a move created by day traders, locals getting out or bad buying creating the stop run toward
the end of the trade day. For the position to be proven correct, the market must prove that the reason
for the new high is just as I previously described.
Markets slip through stops on the bottom toward the end of the trading day also because of the day
traders, locals and bad selling that push the stops which build up below the markets. This is natural
in trading and is not recognized often enough by traders, especially new traders.
Another big disadvantage of stops as I see them is the feeling by traders that they are protected from
adverse moves. When the market is liquid stops work fairly well. To often when an important report
comes out like the monthly unemployment report, markets such as bonds and currencies will do the
long jump. There is no liquidity for sometimes as much as several support or resistance points. This
means huge losses in a matter of minutes until the stop order can be executed.
Keep in mind a stop order is a market order whenever the price is hit. Most traders blame the broker
for not getting the stop order filled at the stop price. How can they if the market has no bid at your
sell stop price? How is the broker to fill your order on a stop when every order he has is the same
stop order price and there are no traders or orders willing to take the other side? Everyone sees the
same chart. Stops are grouped in the same place.
After a big report, the stops are free game for anyone who wants to squeeze as much profit as they
can. If I am correct, I know that it will often take three waves of effort before I have to worry about
the market reversing and taking my profit back. Why shouldn’t I bid the lowest price possible after a
report my way? If the market didn’t fall substantial on a big report I would be adding to my position
until I see the bad selling. The bad selling is the stop selling after a report. Same on bad buying as
the bad buying will be the stops buying at the market.

By understanding the drawbacks of stops you can come up with a better suited trading plan to
protect yourself. Rule one does just that. Your criteria must include getting out if you don’t want a
flip of the coin at times. Big reports are those times.
Another aspect of getting your order filled way out here is when you go at the market on the open.
Order fills look bad to some traders just by the way some of the quotes get reported. Some quote
machines show the open price the price, which was the night trading open price. The next day the
open may not be anywhere close to the night trading open.
Many trade systems signal a position to take after the previous days close is used as data in the
program and position on the open. This alone can skew the opening price by good margins of price
difference. If you are buying and you are on one side of the pit, you may get a good fill but a large
order may bid above your order in another part of the pit. The broker’s job is to buy the offer when
it is a market order on the open. They don’t have time to look for the cheapest price when there are
numbers to do. They take what is offered.
If you wanted to buy a computer and you did, you bought at the offer price. Why didn’t you wait six
months until the price was half as much? It is because you wanted it now! It is the same in trading.
Your market order on the open is saying that you want it bought now. Not after it went down or
went limit up or tomorrow after a sell off.
Just because the opening call was four cents lower and you put a market order in on the opening are
you going to get the low of the day. You might get the high of the day but most likely never the low.
You may even be filled five to ten cents higher on the day if news changes quickly enough. Or in
Orange Juice, you might have no sellers at all on the open for several minutes.
Orders are entered poorly more due to lack of understanding of how the market works at certain
times in getting orders filled. It is seldom because of a mistake on the order placement by the broker
or executing broker that you got filled way over there.
Another misconception of being filled in left field on an order is that the thought is that the broker is
trading for himself. I watch this myself and can attest that what I see has never been beyond
providing liquidity by a broker in poorly liquid times. Brokers are position traders. They can not
attend to being day traders or scalpers. It is their primary job to fill your order first. The brokers I
have seen do just that! They fill your order first.
One more aspect of being filled at what looks like a huge slippage is the delay in quote prices and
the delay in getting your brokerage runner to get the order into the pit in timely manner. They are
allowed a certain amount of time in getting your orders into the pit as it takes time to go to the desk,
take the order to the pit and hand it to the broker who is filling other orders already. Repeat the
process again as the runner looks for your order in order to report your fill price back to you.
Sometimes you don’t know that you were filled because the runner can’t find the filled order before
he has to run another order to the pit. Let me give some insight on this situation. If you must know
if your were filled, CANCEL the order! This way the runner must require the broker to pull the
order from the deck. If it was indeed filled it won’t be there and the runner will have to look for it.
Sometimes new runners don’t know to look over in that pile for the filled order. Every runner starts
a new career and is not good at it until experience becomes the teacher.
There are times when runners are seeing so much volume that the floor managers will tell them to
do the most important aspect of their customer business. That is getting the orders into the pits and
worrying about the fills later.
Often confidence in the way orders are routed and filled by customers and a new trader is never
above a one on a ten scale. You owe it to yourself to see the flow of orders and understand the strict
method, which must and is followed by the commission houses and the brokers. Believe me
integrity is as good as it has ever been.

I remember when beans had gone above 4.44 for the first time in history and I fed orders to the
floor to sell out my longs as they hit 4.44. My fill was at 4.32. I did my research and checked all
time and sales and price quotes that day. I know when I get a bad fill why today and everyday. It
has never been because of the broker not being alert. It has always been because I was not in the pit
and did not know what was going on for anywhere from two to ten minutes before my order was
filled.
Art, I know we want feedback on this so we can address the input from the Futures Talk forum. I
never really had my heart into this chapter as it seems so cut and dry for me but I know it is
important to the traders. They must understand their fate when blame is quicker than answers in
difficult market times.
ALS: Ok traders, Phantoms, paper traders, brokers, newcomers and us old folks alike, let us have it!
Your questions and observations please!
Note: We had some good feedback from R.H. and it seems fitting to put it in this writing. Below are
R.H’s comments.
Phantom… thanks for another insightful chapter. Unless you’ve been there or had much experience,
you tend to follow the notion that the little guy always gets the short end of the stick. This chapter
explains the process of the markets for better understanding.
No specific comments other than paraphrasing my understanding of your words.
On tracing orders, is there other info or stats that one can request other than time and sales and price?
On “gunning for stops” it’s my paradigm and others that running the stops creates a quick bounce
and once hit and expanded, the locals offset and is done as a tactic in itself. Your explanation
seemed to be that it was not necessarily a concentrated effort to run the stops but rather floor traders
positioned wrong and as they offset near the thin areas, the market pushes thru the stops.
On markets proving most people wrong and hitting their stop and heading in the way they had
thought. Rule 1 was made for this action. If you position and the market goes against you, rule 1
offsets the position allowing for re-entry (in the last hour, in this instance) rather than positioning
once with a stop just beyond the daily extreme. So rule 1 allows us to use these areas to re-enter
again or enter (i.e.. day & 1/2) rather than lose the position and see it go our way shortly afterward.
On stops and a big report. Any other ways to see the bad buying or selling other than the looking at
the same chart everyone else looks at?
Thanks again for providing us clarity of the true workings of a market . . . RH
ALS: Phantom a couple of questions from Randy we should answer. His question on tracing orders,
is there other info or stats that one can request other than time and sales and price?
POP: The best way to trace an order is to know the phone clerk by name who takes your order and
to identify the runner who takes your order into the pit. For me this is pretty easy to know because I
am pretty well known for requesting all the information I need to keep the integrity of my orders
going into the pit.
I like to have the information because I like to prove to myself that the myths of what happened to
an order are just that – myths. Most of the time other traders who put orders into the pit are not
aware of what has happened because of fast markets or newly reported information. They only
know that they got a bad fill.
Well bad fills all have a good reason. Every time I check to see the reason for my bad fill, I have
verified the circumstance that it has indeed been at my own hand that I got a bad fill. I didn’t know
at the time when I placed my order that I didn’t have the timely news or what the liquidity was at the
time. How can we always know the situation at all times? We can’t!

You see it is easy to use a crutch in blaming some reason other than a fact, which we don’t know at
the time. It is wasted energy to think or fill was other than with the highest integrity. Even though I
could fill all of my own orders, I know I can do a better job giving the order to the professional
broker. Now most traders don’t know that.
On tracing orders most of the time, you can get time and sales but the true event is that your order if
a market order can be filled anywhere within a time limit of say two minutes. Now have you ever
seen a market move in two minutes? Of coarse you have!
A market can move quite a lot in two minutes. How do you win the game? If you put enough orders
in you will find that it tends to even out. If you put few orders in you will find that you tend to get
the short end of the stick as Randy suggested. The short end of the stick is that you will put your
orders in just as the market is changing direction and starting to go against you.
You know what the market is going to do and it has already done it by the time your order reaches
the floor and you got the slippage from the market reaction. The quotes you receive are not the
same as the bid and offer in the pit when you put the order in. There is always a lag. I can stand in
the pit and watch the tape and be behind as much as minutes at times. I bid and offer according to
what is going on around me in the pit. The public can not do that. At times you are better off with
resting orders but execution is always the most important part of order placement if you don’t trade
large amounts.
Ok, time and sales is it and the rest of your research is on your shoulders to check your broker,
runner an phone clerk. A good commission house will do this for you but not always when the
market is open. Do it when the market is closed and keep your own records. I consider it as if I am
hiring the people who work my orders both into the pit and in the pit.
ALS: What do you think of Randy’s ideas on his interpretation of running the stops ideas?
POP: I don’t mean to remark lightly but Randy has a good handle on the correct interpretation of
what I meant. I can’t really add anything to his correct ideas.
ALS: Another question for you on stops and a big report. Any other ways to see the bad buying or
selling other than the looking at the same chart everyone else looks at?
POP: I see the reason for Randy’s question on the bad buying and selling. In the pits it is pretty easy
to see what is going on. Off the floor it is a sense that we have to be alerted to in our thinking. We
must know the possibilities of why things happen the way they do in markets. People will trade like
herds at times and when the herds are finished in their positioning the market takes a breath and the
move start to fade.
It is the lack of follow through that tells us when we have seen bad order placement. When we are
away from the floor we must be aware of lack of follow through. It happens at the highs and lows
because of momentum trading which causes the moves to be quick and sometimes cause artificial
moves.
My suggestion is to be alerted as to how quick a move happens and then to watch for the follow
through in a proper amount of time. Each market is going to take a little different reaction to such
conditions.
Randy has my idea on rule one and the way I trade correct. It is the criteria of follow through with
the combined knowledge of what day traders have done up to the last hour which I use to help
generate a trade during the last hour or two. It is more powerful for me to get the bounce in
positioning.
In fact I have a chapter or two or even a book on the systems I use in trading. Of coarse I would not
give all of the inputs but enough to help most traders establish a game plan that would match mine.
ALS: Do you want to address any other situations on order fills?

POP: No, I don’t as I think it is research that each trader must make on their own and I can not give
them the results of their ideas of bad fills. They must slay that situation themselves in order to have
the confidence of putting it behind them.
ALS: You’ve been generous in helping me write Phantom’s Gift. I know the traders do appreciate it
and wonder what are the plans from here?
POP: You know I have been rewarded and as I watch posts of forums I see the affect this project
has had.
Art, I think it is time to see how Robbie does in his trading. We must step back and be the observers
again.
ALS: Does this mean this project is completed?
POP: Art, you know that the project is not completed. I see the CD on your desk and I see
Phantom’s Gift in red on the cover. I also know we have the best for last. Now who wouldn’t suspect
that? We want our traders to make it big. So far they have had lots of insight to interpret on their
own. You know the respect and expectation I have in the small trader. It shall happen that they are
the winners. For how long I don’t know but they will be the unexpected winners.
The next step is to point out where the pot of gold is. I recommend a good book on technical trading
to add to your library. It is called “The Handbook of Technical Analysis” and written by Darrell
Jobman. Unless you have seen Darrell Jobman’s new internet video I would suggest you take a look
at it too.
ALS: I see you can get the tape with Darrell’s book free. I haven’t seen it what do you think of it?
POP: First class just like Darrell!
ALS: Do we go ahead with Phantom’s Gift on CD with the rest of the story chapters? If so what will
it cost?
POP: Only if our traders want it! Production and distribution will have a cost. It’s up to our traders
as to what they think it is worth to them. That will be the cost. It has to meet cost of production and
distribution. It is all up to our traders!
ALS: What’s is next?
POP: I am a good observer. I know our traders. Some know me already! It shall get better for the
small trader. To keep my mask on makes me pretty obvious but the small trader has the best
advantage this way. Let’s keep it that way. Offers are offers but I want to see my little Phantom’s
grow up.
ALS: So Be It!
To keep my mask on makes me pretty obvious but the small trader has the best advantage this way.
Let’s keep it that way. “—POP


Chapter 22 – Trading and Three Accidents

Chapter 22 - Trading and Three Accidents

The phone rang in the middle of the night. Not knowing if it was important I got up to answer it just
as everyone else would. The voice at the other end was a familiar one.
“I believe that John Denver’s biography is going to be the most important biography of this year. If
not the most important surely one of the important.”
“Art, I was just doing some thinking on John Denver’s accident. He touched millions of lives as
well as yours and mine. I can relate to that accident. ” Phantom told me.
“You called me in the middle of the night to tell me this?” I asked.
Phantom explained, “I know how our traders can relate to John’s accident too. Of course there are
those people who he never touched or who didn’t even know who he was.”
“This is so important to me. Maybe it is more important to me than anyone. It is important because I
always have had timing as my friend in my trading career.”
“Traders will have to face in their trading career what John had to face in his last flight. I just don’t
ever want our traders to ever have to face that last flight in trading. I have to make them understand
one very important point in their trading. Somewhere along their path they will face an unexpected
event that can take them out of trading if they don’t prepare for that eventuality in their trading.”
Phantom continued to convince me but I already knew Phantom was expert at timing.
When you get a phone call at 2 a.m. in the morning you can almost know it must be from a friend.
Why else would someone call at that hour and awaken you from deep sleep? As I answered the
phone I could see this call from Phantom was not just to me but also to Phantom’s trader friends.
“Art, I must ask you to address three aircraft accidents!” It’s John’s, the latest one in the article your
brother sent you and the one I was in. I never could make anything out of the aircraft accident but it
has to do with life and in trading too. It is important that we warn our traders of needing to be
prepared for all possibilities. I have searched for some kind of answer from John’s accident and my
accident in the past. Not until I read the last accident of the Doctor who’s aircraft landed itself after
carbon monoxide poisoning in the cockpit did I realized the similarities to trading and how it is
important.”
Phantom continued, ” It does have to do with trading Art! When you wrote about God’s rules you
never really understood fully why it was such a difficult time for me. I went through the same
process in my aircraft accident as with John’s. We survived and we had altitude to recover and to
make a decision. John didn’t have that altitude and couldn’t make a decision. He had to take what
was given. The Doctor wasn’t even in the decision process because of his condition.”
“Three accidents and they all had different results. The Doctor had no choice and when he lost
consciousness because of the carbon monoxide in his aircraft, he still survived because he ran out of
gas. John’s had what appears to be fuel and a fuel value problem and he lost his life. Our engine
failed and we had time to work the fuel tank valve and get the aircraft on the ground where we
wanted because we had altitude. We were able to make a choice of where to land. John didn’t have a
choice. The Doctor’s aircraft landed by itself and he survived. These three accidents are all the same
accident with different circumstances.”
“Can’t you see what I am getting at Art? Trading has the same conditions”
I remembered seeing Phantom’s post on “Futures” talk forum to Randy about the fuel valve over a
month ago and had thought little about it until now. I began to see Phantom’s thought on the three
aircraft accidents. There are times when the market hasn’t given you enough altitude to be able to
recover. At other times you have enough altitude on your position to make a good landing choice
when the market goes wrong. And there are times when you have no control on where you are

going to land or how because it is out of your hands. Yes, it makes sense that Phantom would call at
two in the morning.
Phantom never pulled rank on anyone and never considered himself better than anyone. He has
always been a gentleman and perfect example of what you would expect of a hero. Why should I
hesitate to let him impress his thoughts on his friends? He wishes to save as much grief of trading to
his trader friends as he can. I can not question the unconventional thinking about the accidents and
trading as my thinking is pretty unconventional at times too.
We shall convey the insight for you on the three aircraft accidents and allow you to question if you
feel it appropriate.
Phantom rarely ever said anything about an aircraft accident in his life but it always bothered him.
In John’s accident he was presented with an aircraft accident not easily accepted. Now out of the
blue sky an accident where there is no logical reason the pilot, a Doctor, could have survived but
did. Phantom surely has gathered reasoning for all of this. He has been right in his useful insight on
events over his trading career. Why not now too?
Events in life have a lot to do with trading. Could it be too that trading has a lot to do with survival
in life? “Ok Phantom,” I said. ” We can start the chapter while it is most importantly on your mind
at this early hour. Where would you want to start?”
Phantom indicated he would just tape his thoughts and let me take them and make out of them what
seemed to be the message like we had on his insight in this project. I agreed and went back to bed.
You can know that Phantom didn’t sleep that night and kept the midnight oil burning. I guess there
is a time and place for all thought. We must let it flow and not restrict thought at those times. That
point is another Phantom has taught me.
Phantom felt the three airplane accidents reflected clearly similar uncontrollable events in trading
just as in the accidents. We’ll see just how they compare.
The three accidents Phantom was talking about were John Denver’s, a pilot who is a Doctor and
Phantoms accident. The Doctor’s aircraft landed in Missouri on it’s own when running out of fuel
while the Doctor was unconscious. The aircraft accident Phantom was involved in was at greater
than 5000 feet altitude when the aircraft engine quit.
In John Denver’s accident there were two pieces of information, which Phantom was disturbed
about in the accident. Before the flight took place, John had borrowed a pair of vice grip pliers in
order to turn the fuel selector valve. The fuel selector valve was not in the correct place below his
right hand on the floor of the aircraft but over and above the left shoulder behind him. This required
him to take his right hand from the flight stick in order to turn the valve, which was difficult to
maneuver.
The most disturbing aspect of John’s accident was that his problems occurred with less than 500 feet
of altitude. Thought time in the emergency situation didn’t exist, as actions had to be second nature.
Since John had few hours in the aircraft, second nature reaction with such little time wouldn’t have
allowed recovery in time.
The Doctor’s accident, which Phantom referred, happened as the pilot was overcome by carbon
monoxide, which entered the aircraft because of a faulty exhaust system.
The aircraft was on autopilot when the Doctor lost consciousness from the CO (carbon monoxide.)
He was flying to Topeka, Kansas from the west and instead of a 150 mile trip made over a 300 mile
trip to the Moberly, Missouri area as the plane ran out of gas. Surprisingly it landed with the
autopilot engaged and the pilot unconscious.
The Doctor walked away with only a broken arm. Had the fuel on board been enough to fly another
half-hour the CO level in his blood would have been 50 parts per million rather than the 35-ppm.

He would never have lived. Had the terrain been different the aircraft could have crashed instead of
landing on its own.
The third aircraft incident occurred to Phantom and he never wanted to talk of it before. At about
5500 feet altitude the aircraft engine stopped. Phantom’s explanation of the accident was that it
required an immediate decision and that was where to land. The altitude gave comfort in allowing
good amount of time for a good decision of where to land.
In two of the three accidents everyone survived. . The two aircraft made landings without loss of
life. . While the two aircraft had control in landing, one pilot wasn’t conscious but still survived. In
the other airplane accident, the safest aircraft, John’s lost his life. The loss of life was in the aircraft,
which had the lowest altitude and least amount of time for reaction and corrective action.
All three were unexpected and all had different outcomes because of circumstances beyond control
of what the pilot could do. It was these situations and different outcomes that Phantom wanted to
discuss as it relates to trading.
Phantom never had any value of learning from the accident that he was in as he always wondered
what reason or purpose it pointed him to in his life. He always felt other people’s thinking of a
person who is in an accident is that somehow they are to blame. As I see the way John was treated
in the news media when he lost his life, I understand Phantom’s view. Others do often look for
blame rather than answers.
Phantom has always looked for an answer in his airplane accident. He has found some answers to
uncontrollable events in life and in trading. To relate the three aircraft accidents to uncontrollable
events in trading, Phantom gave me his explanation.
In our lives and in our trading lives we come upon a situation sooner or later where we have little or
no control. We must at all times plan for that time. When a pilot learns to fly they are always
practicing emergency landings. In trading we must practice those same landings.
Depending on the exact situation, we shall at times end up with entirely different results even
though the situation may repeat itself again and again. We of course want the best result but there
are times we don’t control the result.
In your first situation as you take a trade, there is a time when it is just as if you took off from an
airport and don’t have a comfortable altitude. This is the time when the trade has not really been
proved to be a correct position yet. At this time an unexpected event can have it’s worst result in
your trading. You have to take what you can get for a landing spot due to the lack of altitude.
The second situation is when a trade becomes a proven correct position. It is similar to being at a
higher altitude in an aircraft. If an unexpected event takes place you have a more comfortable
choice and can make a better decision due to the extra lead, which is also similar to picking out a
better landing, spot. In this situation you are in control of keeping the trade from being a total
disaster. You land in a clearing.
The third situation for a trader, which parallels the three aircraft accidents, is that you are on you
way with comfortable altitude and are on autopilot. There are no problems with your position. All
of a sudden your trade is taken out of your control. Several events can cause this. Consider some of
them such as your phone line goes dead. You get delayed on your transportation and can’t get
communications to your broker. Your quote machine goes dead. A big report comes out and the
market locks limit before you can even get an order into the pits. All of these are the same as losing
consciousness due to CO in the cockpit as you fly to your destination. Nothing you can do will
change the result as the result is going to deal you what it will.
The trades with the best altitude or lead allow you the best opportunity to recover from a bad or
unexpected event. A lot of traders expect their trades to show this lead and do nothing when they
don’t show the lead that they need. They allow the market to take them out and prove that they are

wrong. To be taken out by the market when proven wrong opens up much more disaster than many
traders ever imagine.
At all times you must understand that the surprise and unexpected event will create a worse
situation than you are prepared to face. You must practice your emergency landings. You can
recover from good positions. You will not recover from bad positions in unexpected situations.
Just as the Doctor’s airplane landed itself you will have times when you luck out. After all a broken
arm is much better than a lost life. Traders are the in the only profession I know where they are
happy when the market gives them back half of their loss. When you get back half of your loss you
have just seen your airplane land itself on autopilot as it ran out of gas.
Phantom indicated that the most critical time of a trade is immediately when you have just entered
the position. This is the time you must be most sensitive to news and events. How many traders are
most comfortable upon entry because they know they are protected by stops? How many surprises
are there in trading? How about the time the unemployment report was a surprise and your stop
gave you the biggest slippage you ever thought was possible? Listen to Phantom! It happens.
Don’t let an unproven position set you up for a downfall.
Phantom asked why is it so difficult for traders to understand that bad trades get worse? They get
worse until the unexpected takes place. The unexpected is always your downfall in a bad position
getting worse. Get a lead on your trades or throw them out.
Phantom wanted you to understand part of his distress in John’s accident and death. He wants the
best for you. Can you relate to the three accidents and your trading? Make out of it what you can.
Phantom intended it as a way to ask his trader friends to be prepared for any possible event in your
trading career.
I believe that John Denver’s biography is going to be the most important biography of this year. If
not the most important surely one of the important.”—POP


Chapter – 21 Tie Ribbons on Your Trading

Chapter – 21 Tie Ribbons on Your Trading

Just when you know you have everything covered to start your trading career or to continue the one
you started, you find that you have a few more questions that you would like to have answered. We
will get Phantom’s view on a few of those important questions yet unanswered.
Questions like a few of the following are perhaps in your minds? When you spill a soft drink on
your mouse pad, why does it always soak in but good trading methods take forever to soak into our
brains? What kind of system should I use to trade? Should I buy a good system or come up with one
of my own? How do I trade to not chase the market all the time? Why do I always end up with the
bad positions but seldom get the good positions and the big moves?
Other than your questions, we should ask Phantom some of his questions that he first had and has
now in trading. Answers are usually from different views. It helps to get other views on our
questions. A good decision is one that can be made from having good choices.
Isn’t trading a lot like picking out a Christmas tree? Do we just take the first one we see? Or is that
only in the first house we buy? How about when we buy a different car, what approach or plan do
we have? Do we buy the same car everyone else wants to buy? Or do we make the trade that no one
wants?
There isn’t really an end to questions we have in our trading careers. We’ll try to touch upon some
of the most important ones without writing a book about each one. These are Phantom’s views and
are not in keeping with everyone else’s ideas at times.
Art – Phantom, since this was your idea after reading the Sunday paper, what questions do you think
are important points that should be answered in trading?
Phantom of the Pits (POP) – A point I would like to make is that sometimes the most brilliant minds
can not trade correctly. They don’t always have all the answers. When they don’t have the answers
we are disappointed. Many times the correct answers by someone else does not mean they are the
correct answers for us. It shows that to be taught by someone else or by being self-taught, there is
an important aspect of gathering the correct information. And then the remainder part of learning is
the behavior modification after learning correct information. This conclusion has been stated prior.
The point I want to make is that when we don’t know the correct answer, so what? Admit it and use
the channel required to find the answer. We can’t know all the answers and we can’t be expert at all
things. The smartest person doesn’t know all the answers.
ALS – I’ve known some people who know it all!
POP – They don’t trade long do they? Having all the answers is still an incomplete process in
trading. Often in trading we know the logical answer but don’t know the intuition answer. There are
situations in trading when we don’t want to take the logical answer but the intuition answer. To
know which answer to take is the most difficult decision for most traders.
I believe at least ninety percent of the traders lose money and that close to eighty percent of traders
are logical in their trading and not intuitive. What do you now see about trading? Wouldn’t you now
look more at the intuition side of trading and do more research on intuition?
Do you remember that many times I say “second nature?” What I mean is intuition when I say that.
Intuition can come from known logical reasoning but with the emotional part removed. It is a
feeling we have. Sometimes we can’t explain the feeling with reasoning or a logical plan.
Does this make trading seem more scary or open more thought in you mind? Many traders don’t
want to miss a move so they buy regardless of the intuition they may have. Other traders see a
market move and refuse to jump on because intuition says they are buying a top. Who is right?

Is the intuitive trader a better trader than the logical one? How do you know? How would you prove
it? Those are questions, which I had when I began to trade. I found the correct answer for me but it
may not be the answer for others.
I guess you will want my point of view on the logical or intuitive trader answer. I don’t expect all of
you to agree with what I have found to be my case. There is one word, which I have dropped on you
at times in these writings, and that word is a very important one in the answer to the logical or
intuitive trader question.
I’ll give you the word and let you use it to give some thought to the question. We’ll answer that
question as I see it along the way in this part. The word E X E C U T I O N is our key to the answer.
I saw an advertisement pointing out that you would never have to worry about buying tops and
selling bottoms again. There are times when you can make an exception about any statement and
you need a filter system in your trading program to help clue you in on these times.
There are of course times when you should buy tops and sell bottoms. I do it all the time when I
expect a market to reverse. Why? Because I use a method I call the best of a bad position theory.
My theory being a learned one that my best trades are usually after correcting a bad position and
getting correct in a market. This happens to me more at tops and bottoms than any other place.
Some of the biggest moves take off from a reversal and if you miss the entry it causes you to be
hesitant to position as the move gets stronger because you missed the entry. A worse case is when
you had a plan and didn’t get filled. Why does it happen you got filled when it went against you but
a good position never got hit? There are good reasons for that to happen.
I’ve always said to pick a range and not a price. The exact price can not be done with consistency. A
range is easier to pick and position when you have your signals. Most people think that the position
of getting out is the most important. You know what, it is important but the most important position
is actually the entry. How many times have you put an order in at a price and got the price but not
the fill? Many more than you think! It happens to most traders.
By knowing that most traders have put orders in the market and never gotten filled, what does that
tell you? Inexperienced or uninformed traders are great market supporters and market resistance
builders. Now just why should I say that? The locals lean on the orders, as it is only natural. It
works like this! You want to buy 10 December corn at 268 because that is where the support is.
Sure enough that is support. Tomorrow on the way to 275 you ask yourself why is it you only get
filled if it continues to go down.
Do you have any clues? E X E C U T I O N! You must guarantee that you are filled with every
signal you get. Any signal you get when you don’t position is going to be your money position. The
market never waits for you. If you trade millions of bushels a day then you should worry about the
extra ¼ cent. Even so, execution is still the most important step in your positioning. Your plan is the
most important part of your trade but execution is what validates your plan by giving you a position.
When you learn to use rule one properly, you will never worry about or hesitate to take your signal
and position with the utmost execution. You will see that you must take all Signals and make sure
the market lets you in. How do you think the best way to enter a position is? The answer is based on
how close you are to the market, how accurate and timely your quotes, and how quick your orders
are to the floor are.
You must guarantee you get all your positions on at all times! I can’t stress that enough! The
unfortunate thing about that statement is that it is completely true. The unfortunate part of
positioning is that most trade programs or systems use price action and positions are usually taken
on strength or weakness. This causes buying tops and selling bottoms at the thinnest part of the
trading day at times.

How are you going to make sure you have all your signaled positions in place? I could give you a
way or you could come up with a plan of your own. Which would be the best plan? It has to be your
plan. It is only my job to tell you what you must do!
You must position according to the market characteristics. Sometimes you will have to buy the high
and sell the low. How do you know when to buy the high and sell the low?
You must have two plans in place at all times. I would guess that most traders have one plan and
when they miss their position, that is it for the day. You must be smarter than those who only
support the market with their orders and never get filled. They can never make any money but you
can. You see the market order support are the orders waiting to get filled but never will be filled
until they are wrong. Same thing on the top side! Why would you want to position this way too?
One of your entry plans will always be a market order. The other order will be an intelligent order
based on the nature of market you are trading. We know that each day that there is a high and low
and a range throughout the day. You seldom buy the low and sell the high so don’t even consider it.
Your second plan for entering positions will be based on the fact that better liquidity tends to
migrate toward the middle of a day’s range.
You don’t want to chase the market if you can prevent yourself from doing so. This is the reason for
your two plans. Your market order plan is your plan to execute upon failure of your first plan. Same
as get me a soda but if no soda (sometimes they are out) get me a glass of the water (lots of water
around.) This is all pretty elementary to most traders.
What is not elementary is always having two entry plans. Some of your systems will ask you to
enter a position on a stop. Ok it is a market order. Throw out your other plan if the system is that
accurate to expect you to enter on a stop. Other systems may ask you to enter on the close. Ok,
execution is important and you have no choice but one plan at that point.
I usually know within the last hour of the market what I am going to do. This allows me more time
than to just enter on the close. The reason most entries are poor is because the systems are based on
how you get your market prices and information. It can’t be a system which gets data that you don’t
have the possibility of obtaining. That is your big disadvantage.
As an example, if there are 1000-day traders in a market you can almost be certain that they have
positioned by the last hour of the day. If the market is up, what do you think their position is most
likely to be? Same if the market is down. What is there most probable position to be? Long or short?
Ok, you get my thoughts here as the point is that when they offset, there will be some kind of wave
action. You want to use wave action to your advantage when positioning.
You don’t want to chase the market but you don’t want to miss it either. So your two plans cover all
the bases with your input of market characteristics. If each day the market tends to give you a range
of say 15 points, then you surely must be cautious when the market is already up 15 ticks. But only
be cautious for a short period of time. Don’t miss the move and use your “at the market” plan after a
period of time. Sort of like a stop and I must say the best use of stops I know.
How does it work? Today at one hour into the market day you get a buy signal. Your two entry
plans are now valid to be used. The first one says to buy at the market but you want to use that one
last. Ok so you hold that one because what you are doing is holding your own stop order to buy.
The second plan is to buy as intelligently as your input allows for the particular market you are
trading.
You know the signal to buy is going to be based on strength and stops are hit going up when it kicks
in. More times than not, you will get several waves of buying and this can be to your advantage.
Sometimes you do just plateau but that is ok too. Use your second plan for entry and price based on
your criteria but do one thing more! Add MIT to that order and add two ticks! It will be the best
money you ever threw away. You must guarantee you are in your position but with intelligence.
That is exactly what you are going to do.

After a short period of time, if your position is still not filled, you will use your first plan to go at
the market to get filled. So be it! You still acknowledge that you guarantee you are filled and in the
market at all signals.
Keep in mind if you don’t get positioned, you are acting like you only want positions when you are
guaranteed wrong immediately. This is one time the market can give you an emotional let down if
you didn’t get positioned. It will always be the time the market takes off without you. Stop! Stop
yourself into your entry signal at last resort but absolutely do it if necessary.
Take a survey! How many of you have missed your entry? Don’t let it happen again!
Now we have your position established after you have a signal. Good and well so far but what
happens now that the position just isn’t acting correctly? You have the old ought- oh get out signal.
So what is so important about the bad position now that it isn’t correct?
What is important about a bad position, one I considered not proven correct, is that it gives you the
greatest opportunity to get a correct position. This happens often at tops and bottoms. It must come
from a trade program you develop which allows you to reverse your position at certain times but not
all times. Most of the time a good position other than the bad position is being out of that position.
Other times the best position is to reverse the prior position. Your trade program should address this.
How do you know when to reverse? We watch effective ranges in bull markets. We expect a bull
market to continue to build range during most up days as long as bull markets are strong. When
markets are getting into topping action you often times see what is known as a large effective range.
Effective range is nothing more than a broker’s dream. The market will go to a level, reverse, go to
a level, reverse and so on until you have a very large amount of price swings within a small range.
Buying gets met with selling and selling gets met with buying which swings the market back and
forth many times in compact ranges.
In bear markets your effective range may just go dead and not swing at all for lack of interest. A
normal bear market will eventually have bottom pickers cause up swings even though you are in a
bear market. When all interest is losing in trading, you can look for a possible reverse of a bear
market.
I find that the positions, which I reverse, are usually the ones I have the intuition of not wanting to
place in the first place. It works so good for me because I know my answer to what I disagree with
in my positioning. This allows me to take all signals even when I disagree with them because I
know what my true thoughts will allow me reverse if the first position isn’t proven correct.
I saw some posts on the most difficult positions to place are usually correct. That is true in most
traders’ situations. That is why you must take all your signals and be prepared when you disagree
with the signal to have a strong counter plan due to your intuition. Intuition is your friend as it is
your caution flag, but not to the extent it takes you out of your plan.
Logical plans are usually what a system is developed around. Intuition is often left out. To me the
intuition side of trading is the surprise side of trading. You must always have your intuition plan
along with your expected logical system.
You are starting to get my answer on the logical and intuition trade question. I did not prefer one to
the other. They both have their place. What the true answer is to me is in the trading system or
program, which I develop for my trading. Perhaps this is an answer to you also. I must have both
covered in my trading plan. There are times the intuition plan comes out ahead and these are usually
at tops and bottoms. Be swift! The intuition part of my program is swift. It prevents large drawdown.
It’s not exact but you see you must let intuition be your surprise side plan. How many times have
you said, “I just knew it?” That is Right! You did know it. Learn to use that intuition and when to
use it. I can not tell you because I am not you. I can only tell you how important it is. I know you
have all felt it was important and have learned that it is important.

You know now how to put the good positions on and not just get stuck with the bad positions.
EXECUTION when you get your signals is a must!
ALS – I thought you would go more into detail on how to enter with the two plans than you have.
Would it help if you did?
POP – The point of execution has been made and I think reflection of a person’s trading is more
important at this time. The positions must be entered in order to have a fairly good chance of having
the good positions on as well as the positions, which are never correct.
ALS – What kind of trading system should a trader start with in trading for the early part of their
careers?
POP – First it must be one that they totally understand. They can not take a system, which they are
not familiar with and expect to trade it correctly. There will be too many conflicts if the signals and
how they are obtained is not fully understood. This can be a problem at times from some systems,
which may not properly disclose the criteria of the trades on entry and exits of the trades.
The trader should error toward simplicity at all times unless they have a better understanding of a
more complex system. With my rules, the system is going to be easier to judge and simple systems
can be just as effective as long as execution is never in doubt. The system they chose will be a trade
off most of the time. I always want the system with the least drawdown and the maximum gain in
the shortest period of time.
ALS – You don’t want much do you?
POP – I don’t mean to be cavalier about it but it’s easier with my rules to look toward that goal. You
will have to make sure that you can use the rules successfully with the particular system you chose.
The other terms of a good system are the liquidity filters but with rule three, thanks to our traders, it
won’t be as critical as without the rule. To confirm the move of course the system should have some
kind of volatility figured in and open interest.
On suggestions as to whether to purchase a commercial system or design your own, I would say that
your first purchase of importance is price data whether it is included in your system or outside of it.
You need price data and chart data. Without those two elements, you have a very large handicap to
over come.
ALS – I’ve seen systems where they say just ten minutes each day. What about systems where you
only need a short amount of time each day?
POP – I don’t rule them out! I am saying that you need the data to verify the validity of any system.
Without it you can not be a good judge of any system.
ALS – What about a long term trade suggestions by various individuals or vendors?
POP – I don’t know if you can remember my remark about not being able to carry a reputation. My
reason for that feeling is that I know what has happened in the past is no guarantee of the future. I
also know that I change my mind more often than the experts. It is extremely difficult for expert
traders to convey with confidence to their customers that they know what they are doing if they
change their minds often. I like the luxury of changing my mind. They don’t have that luxury.
I remember one day when I got at least six reversal signals in one day. How do you think a trader
you are trying to help would understand your changing direction every time they saw you in a day?
That is another reason I say it is not an impossible road but a lonely one. It is out of necessity. You
must have the courage to do at all times what is correct. A good advisor is perhaps good at advice.
There is conflict between giving advice and also trading. I do not accept conflict. Some can but not
me. Most new traders are better off without conflict of advice.

I could tell you what I am doing every trade and you would not trade the same way. You could
never be at my point in time when I execute my trades. We must always have the latitude of
changing our positions based on our systems. My rules allow this thought for doing the correct
trading.
Good advisors are often times trading funds instead of giving individual advice. Advisors have a
harder job than I do. Think about how you explain to over eighty percent of traders that they have
lost and been wrong in their trading.
I am not saying anything against advisors for I know the cards are stacked against them. You take
the best advisor and there will always be those who are upset for one reason or another. It’s the
adult-child thing in trading. I admire those who stick to the field and move beyond the difficulties of
being leaders in their field.
The same also holds true of systems vendors. They are only as good as their data used for back
testing and often times it is past data being used for future prices. Any one event can change the
entire picture. I guess that is why stops are so important in most systems.
I think to not over trade is more important than a good stop system but most traders don’t have the
discipline to trade small enough that stops won’t much matter. Everyone is in this game to get rich.
Why, it’s the farthest thin from my mind. Can you imagine trying to get rich by trading? There is
only one way to trade and get rich.
ALS – What way is that?
POP – 1. Trade your program signal, protect it with rule one and add with rule two when the
program says to add and take profits or offset with rule one or rule three when required. And then
do it all over again and again and again until you have the confidence you need. At that point you
can think about getting bigger. You must have complete confidence in your trading.
E X E C U T I O N! You must guarantee that you are filled with every signal you get. “—ALS

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Chapter 20 – The Third Rule

Chapter 20 - The Third Rule

Art – Phantom, you have indicated that you used rule one and rule two in your trading career to
allow you to change your thinking and your behavior. Why do you now state a third rule?
Phantom – The third rule has not been a written rule for me but has been a second nature type of
rule over the years. You know that I strongly disagree that the market always is correct. From
experience I have concluded that to be the case. I use this assumption on my part to protect profits
and eliminate new positions in illiquid markets.
I’d like to point out that the third rule is not my rule and the credit goes to the traders that have
convinced me that there certainly is a third rule to be used after rules one and two. I was very
reluctant at first but I see that they are correct in this request. Let us look at everyone’s rule here and
not my rule.
Almost every trader that read my rule one and two felt there is a third rule. They really are sharp
and more observant than am I. Even though I have used a third rule more as a rule of thumb, it is
indeed a third rule. Our traders thought it should be a rule on when to take profits. It extends beyond
that point because our true focal point is to keep loss possibilities as small as possible and retain as
much profit as we can. That implies taking profits at the correct time and properly outside of rules
one and two.
Although rule one does address taking the quick loss when the position has not been proven to be
correct, we do need rule three to tell us something about our trading plan which is very valuable in
trading. That rule tells us when we must question the liquidity in the market and the place that
indicator has in our trading plan. I feel it is better to have that in a rule outside of the original
trading plan in order to give us our criteria in illiquid market times for not losing much money.
I also feel that the time to take profits is clear within market conditions when we have our extreme
volume days. This is usually a turn around indicator in most cases. But let us get out on those
indicators. Why? Because we can re-enter any market as soon as we get another signal from our
trading plan. Even if we were to miss part of the move at the expense of being early, we still will be
better off in the long run. It is the long run we plan to trade in our careers.
ALS – Do we need to qualify the third rule?
POP – No, we do not. We will state it now!
THE THIRD RULE
WE SHALL GO AGAINST THE MAJORITY AND ASSUME THAT THE MARKET IS
NOT ALWAYS CORRECT (those times being when liquidity is poor.) AT THOSE TIMES
WE SHALL QUESTION ALL SIGNALS AND WAIT FUTURE SIGNALS IN THOSE
CASES FOR POSITIONING.
WE SHALL USE THE CONVERSE OF POOR LIQUIDITY AND REMOVE OUR
EXISTING POSITIONS WHEN EXTREME LIQUIDITY TAKES PLACE IN TWO STEPS
AND WITHIN 3 DAYS OF EXTREME HIGH VOLUME. HALF OF OUR POSITION
SHALL BE REMOVED IMMEDIATELY THE FOLLOWING DAY AFTER AN
EXTREME HIGH VOLUME DAY. THE OTHER HALF OF OUR EXISTING POSITIONS
SHALL BE REMOVED WITHIN TWO ADDITIONAL DAYS. WE SHALL WAIT
FURTHER SIGNALS IN THOSE CASES FOR FUTURE POSITIONING.
The first part of the third rule addresses the situation of thin or illiquid markets. It states that we
shall question our trade program signals and wait for further clarification of signals in those thin
markets. At illiquid times the market is not a valid indicator for taking positions. Since most signals
are generated by price, you can see the importance of the third rule allowing you to have an
exception of questioning your signals. There will be some trade programs which address this
situation very well. Not many programs use volume and open interest such as moving average
indicators in generating signals.

I am not questioning various systems but only saying with the third rule that we must put an illiquid
relief valve somewhere in the plan in order to preserve equity at those times.
The second part of the third rule gives us criteria for taking profits or removing any previously
established position. We do know when to take profits. Although we take all the profits and may
miss some of the move, we shall await further signals at extreme high volume days. Additional
signals develop quickly after high volume days and we want the benefit of that by not being
positioned incorrectly prior to additional signals.
Don’t forget that a good plan will continue to give you signals based on market conditions. We are
using extreme liquidity to our advantage by knowing that huge volume is the prelude of further
correction possibility. Many times huge volume days are the very reversal days in bull markets. At
any one time there could be an event, which causes extreme volume. It usually takes several days to
play out when this happens. We also use that to our advantage in the third rule.
When we say we shall take the last half of our position off within two additional days, it is
important to note that there will be times when we will do it very quickly and not extend to two
additional days. The two additional days gives us the outside limit allowed for our rule.
The third rule is a good rule and it stresses the acknowledgment of trading in the long run and not
the short run.
ALS – Many experts are going to argue with your rule three, as it will surely interfere with their
professional trade programs. Most systems say to trust them over a valid time in order to allow
them to work properly in the long term.
POP – My trading experience has told me to have enough integrity to bail out when I see that
everyone starts putting on their parachutes. Why stick around to see who leaves their seat belts on?
Trading is a run-run game. There are times you have to run before they run. That way there is less
chance the market will out run you.
Do you think the experts ever buy insurance for their homes, cars and health? Surely the experts
have a plan to protect positions at critical times. The third rule just places another double check in a
good trading plan.
Traders must never be complacent when the market is at extreme volume whether high or low
volume. These times are to be flagged and I don’t know a better way to flag them than to remove
existing positions. How much can you lose after removing a position after a market volume extreme?
Why not make your plan give you another signal before you re-enter the market?
ALS – Do most traders have the same kind of thinking on this liquidity situation?
POP – We are either at the first floor (bottom) or approaching the eighteenth floor (top) of the
elevator. Few traders watch the floor indicator. They wait to get off. I say just don’t wait long!
Liquidity is giving us our floor information so we know where to get off the elevator.
I’ve seen what waiting can do to people. It was back when the Hunt Brothers had too many bean
positions in place. They were told that they would have to get out. I had just put a position on and
within seconds the market was practically all sellers. I lost money that day within ten seconds and I
got out. The volume was extreme and the market went limit down very quickly. Sure this was a
short time frame and few knew to get out until it was too late but many situations do flag you that
you are looking at a special price level.
We have all heard when in doubt – get out! I think a poet made that statement and it took hold. It
makes sense to this day and always will. You don’t ever lose when you are out. There are times to
be out.

ALS – It looks like the third rule is more of a rule to keep from losing money and to keep from
losing profits previously made in the market. How often do you foresee a situation in which market
conditions present these criteria of either high or low liquidity? Or should I call it volume?
POP – Yes, you could associate liquidity with volume in most cases. We are talking normal and
abnormal market conditions of liquidity and we measure liquidity by using average daily volume as
our reference. But don’t forget we are only talking of extreme conditions of liquidity, which is
abnormal.
Traders will see the validity of watching for extreme volume days. Their use of the third rule will
become second nature. They will see the thin markets better and know what not to do in those
situations. The third rule is a good rule!
We would normally expect the conditions to be a possibility at trend reversal times and at certain
events, which cause lack of interest in trading a particular market. At times in front of critical
reports you could see the situation develop.
ALS – In front of reports what do you usually do with your positions.
POP – From experience I have learned if you make a mistake you pay heavily with being wrong
after the report. You have to have a big lead and then it takes it back sometimes. I must consider
always cutting back in front of a report unless I am given a big edge. There are times you can not
control your position the next day so why not cut back. Most traders should remove their positions
in order to allow longer views of their trading careers.
I just recently had a new trader ask me about a sugar position and my guidance was to look at what
the market had done the prior four days as we at that time had three higher lows in a row. The
opinion was that sugar would go down. Today it made a contract high. Rule one and rule two with
the help of the third rule allows all traders a long term outlook in trading.
First behavior modification must be adapted to the rules in order to have any expectation of trading
long term in a trader’s career. Many shall have to face the aspect which is human nature to oppose
any change. Change is required and you are the only one who can do it. Your trading career
depends on it. Don’t take it lightly.
If you must, rehearse your behavior daily until you have it down correctly. Behavior modification
requires positive reinforcement and trading often is not positive. Find the positive in taking small
losses rather than getting wiped out. Find the positive in the simple rules we have given you to use.
Decide what you want to do with the guidance you have been given!
Unless you go down the defeat road, you will never have to endure the hardship of knowing you
didn’t make a good attempt to change your behavior in trading.
I would like to leave you with one last thought. Trading is not as we had all thought. The sooner
you learn that what you imagined about trading is far from reality and that you must change your
thoughts on that reality, the better trader you shall become. Good Trading to all of you! I shall
watch you trade and shall always be your shadow.
Our Phantom’s Gift
Once upon a time, in the land of Pit trading,
They came across a kind of book,
Around about the glorious days of bulls and bears,
Bound up with masking tape on all the tears,
Maybe they did see but who would look?

The word spread near and far,
Was writings by perhaps some Rook.
Don’t ever open it or it will spread,
The misunderstanding of this knowledge instead,
And please don’t ever let anyone see you look.
The traders understood. Traders happen to be smart
And they were smart to play their part to not look,
They didn’t even flip a page,
For they knew it was from an old Sage.
They never tried to peek at that old book.
Brokers didn’t either, day traders, position traders neither,
Cause they were smart and didn’t ever need to look.
In those glorious days of bulls and bears
It could have been any day just as now,
And not the ones to blame somehow
For looking inside that dusty book.
Yes, someone did. Pulled off the masking tape,
And turned the page to look
At that old dusty book all out of shape.
A kind of bright light or word,
Or was it a sound everyone heard,
Spread around the floor as everyone did look.
And word poured right out and all about,
Into every place even a cranny and nook.
Everyone began to scream and shout.
It was thought to be so unfair
That no one really would even care
How it would spread to everyone who would look.

It spread to new traders. And I’ll tell you this right now.
Not even one could tell you how.
It just got bigger every day that they would look.
It left them thinking, laughing and crying,
Thousands of them quick and trying.
Cause of what they could see was in the book.
Now there’s a way to get a copy,
It can be read by any old floppy.
Everyone wants to have a look
But you can’t stop it from spreading
As it passes faster and farther each day.
But anymore no one seems to want to stop the book.
As plainly as you could hear it would be everywhere and all around,
For years and years as long as it took.
Because of all the knowledge since the days of bulls and bears,
Was the grandest wisdom ever found
Because of that time they opened the book.
I’m absolutely sure it takes all to look
To see that we get the last page in the book.
Who is the beneficiary for surely not the Rook,
Perhaps the old gentleman down by the brook,
Who said it was Phantom who wrote the book!
All Futures magazine Talk Forum traders, readers and observers. (Inspired by John Denver (1943-
1997), Lascelles Abercrombie (1881-1938), & Harold Simpson (1950- 2055)
” Find the positive in taking small losses rather than getting wiped out. Find the positive in the
simple rules we have given you to use. Decide what you want to do with the guidance you have been
given! “—POP

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Chapter 19 – Is the Market Always Correct?

Chapter 19 - Is the Market Always Correct?

Everyone knows that the market is always considered correct and there isn’t reason to even dispute
this belief. Most of our beliefs have been previously written or have been stated for years or decades
by experts.
Phantom made a hint on his feeling as to how he felt about the market being correct. He made the
statement that he didn’t always agree with that statement. We felt it would be an important insight
into trading plans by looking at his view on the subject.
ALS – Phantom, do you feel that the market is always correct?
POP – NO! NO! NO! Definitely Not! Can you tell me who proved that to be a correct statement?
Or can anyone tell me who proved it? This statement is the biggest reason traders are buying highs
and selling lows.
ALS – They’re going to put you away with that kind of statement. They’re going to lock you up.
You are going to lose all of your creditability unless you can make a good case for your disbelief
Phantom. You are taking on a lot of people.
POP – I guess I appear to be bad with that statement. The experts seldom know or acknowledge that
trading is a losing game. A trader expects it to be a winning game. It is the same with the statement
that the market is always correct. Who, ever thinks that it is possible that the market could be wrong
at times? Why do as many as 92% seem to lose in the markets?
I see the market as a continuing image of liquidity. A liquid market reacts differently to news
situations and technical indicators than non-liquid markets. After all what is the purpose of floor
traders in the pits of different markets? It is to provide liquidity. Liquid markets are the leaders in
determining price. Non-liquid markets tend to be sloppy in price determination. We have the reason
for different markets and the creation of new markets. It is to provide liquidity and ACCURATE
price discovery.
If a news item is bullish or bearish in a non-liquid market, the bid and asked spread is usually wider
than in a liquid market. Now are we to believe that a wide spread on bid and asked price is telling us
that the market is correct? I think not! Sure you can try and make the same demand and supply
argument in the market being correct but lack of liquidity is an artificial market condition of
demand and supply a lot of times. Not having an offer to sell is not the same as not having any
product available. Sure it can have an effect on changing price but it is an artificial condition.
These artificial market conditions must be utilized in a good trading plan in order to survive. Our
plan is to trade as long as you want. To not get caught in artificial market conditions requires
criteria. Every trader has been told that the market is always correct. The market is always in a
process of moving away from what it currently says about a price. Does that say it is correct? It only
says to me “A market is more than a day!”
ALS – Yes that is the first lesson you taught me in trading. I didn’t even know who you were when I
learned that from you. It didn’t take me long to respect you and watch you in your trading. I’ve
studied you ever since and I feel I know you almost as well as you know yourself. I know there are
those who study you now. I see by the respect shown toward you since you began this project that
loyalty comes from the reflection of traders changing views about trading.
POP – A simple statement about markets being more than a day can change a person’s thoughts and
lead to a different outcome. It says the market is changing every day and what price it shows now is
surely not correct all the time and definitely not correct for long.
You often see larger market moves in thin markets. Those who direct a fund know new prices
generate new orders. So why wouldn’t they place desired position in the market on thin days in the
direction of their indicators? This does happen. Now are you telling me that the market is correct at
the close in thin markets at all times? I am telling you to look at both sides of the coin in thin
markets. Why? The thin market move is not often going to hold without some kind of base building
or reversal when liquidity comes into a market. The fund positioning in a thin market is going to see

a slight advantage on thin days but it is at their expense in the long run. After they have positioned
the market will tend to retrace.
When funds take profits in a thin market, it hurts their average price fill because the market will
move farther than in very liquid markets. So it is a double-sided edge where there is a good side and
a bad side. Ok so it evens out pretty closely. Markets in trends do react differently in thin markets. It
is important to have the knowledge of the difference of thin and liquid markets. This never occurs to
a trader most of the time because they are using price to generate their positions.
Markets are more than a day! This alone tells you to not believe the markets are always correct!
This is a good reason to use Rule Two. Not all of your position will be established until or unless
the market proves you correct.
ALS – Isn’t this conflict to make the market prove you correct while not always believing the
market is always correct? Doesn’t this present an implied conflict in your trading plan?
POP – Isn’t this the same conflict that most traders use to get out of a position by getting stopped
out? Even if the market was thin on the day they got stopped out. This is what traders think of when
they say the pit is gunning for their stops. The fact is that when the markets are thin, a trader’s
chance is greater of being stopped out of a good position.
Why shouldn’t we turn this situation to our favor by using another rule in trading? Yes, there has
been a third rule in my trading but it has not been a written rule. Not everyone will want this rule. In
the search for a third rule by our trader’s input, and their looking for a third rule they have come
close but not exact on rule three. They wanted a rule to tell them where to take profits. This is their
desired rule three but they all have agreed that they just could not justify a criteria for rule three
telling them when to take a profit.
You see my rule three takes into consideration both sides of the market instead of just taking profits.
It also takes into account of when to take positions off totally. Sometimes it will be to take profits
and other times it will be to offset any position when the markets criteria says to do so.
Rule Three uses the criteria of the market not always being correct.
ALS – Do you want to state rule three here?
POP – No, I don’t! I want the trader’s input now that they know they have been on the right track of
rule three but not quite getting to the important point in the criteria. I want them to think about it
and give us input. We will state RULE THREE shortly. To just state rule three without a lot of
thought on their part will make the rule a little less useful to them. We need more information for
them in order that they understand my view on the market being correct.
I have indicated on the talk forum the importance of several aspects on off setting positions. There
have been those who have asked. I’ve passed it on lightly. Some who have read my posts to the
forum are picking up on it. You’ll be surprised at how punctual and accurate their input shall
become after knowing that they have been correct about a rule three all the time.
We have traders for years and decades saying that they see the market reflects all the market
conditions by just looking at the last price. They continue to trade based on that fact. They make
their trade programs based on that thought about the market being always correct. Why shouldn’t I
use that to my advantage with a rule three? Why shouldn’t traders take advantage of that knowledge
by modified behavior in their reaction to the current price?
I want to state again “It just never occurred to most traders that the market could be wrong! They
think it is only their trading which is wrong all of the time. They continue to lose when they know
they are correct. Just how can there be so much conflict in their trading plan. I’m saying the market
is not always correct and that liquidity and timing are two elements, which keep a market from
always being correct.

In making this assumptions, wouldn’t this help in positioning and exits? It is not complicated but
another rule to keep the advantage of a situation from being unfavorable at all times. My rule looks
at the liquidity situation of a market and uses that knowledge for rule three. Let us further explain
our position on this thought!
To review the statement as stated “Is the market always correct?” Let’s start on even ground. Let’s
say we do not know either way that the statement is or isn’t accurate. Do we say the statement must
be always correct or always incorrect to be a legitimate statement?
Why must we say always correct without exception? I start with the assumption that there are times
when the market is not correct and I will show you that side. It is important because I want to point
out that you can trade correctly and lose money. Why do you lose money when you are correct? It is
because the market is a true reflection of liquidity at any one time when a market is trading and not
always based on a fundamental or a technical reason?
I know many experts are going to say that liquidity is really a technical or fundamental aspect of
trading and that helps prove the market is always correct. What about timing in a market? Is a
market’s timing always correct. Why does the market prove the most people wrong and make more
losers than winners. Think about this very carefully. Is the market not as we had all been taught or
thought? Let us research that further.
By assuming that the market is not always correct, I am going to show you that you can devise a
better trading plan by just knowing you must question the correctness of the market being correct.
Most traders use either fundamental or technical reasons for trading. I like to use what I call tactical
reasons, which include aspects outside of purely technical or fundamental aspects. Let us use
examples of how markets can react in situations to better show our point.
Say for example that a report came out on Orange Juice that it was the smallest crop in history and
the night before the report we had the worst freeze in history in the Florida crop area. Based on
fundamentals the market should go higher normally. Based on technical indicators, let us say the
market shows a bullish trend being established. The public before the open knows no other
information. At the day’s open, the market opens limit down with locked in sellers and offers, which
build, and not one trade is made.
Now the market is open and no trading is taking place and OJ is limit offer two hours into trading.
The experts and the reports in the news make the following statement “Well we see that the market
is correct in proving that OJ was overpriced.”
How can you say that the market is correct when there are no buyers willing to buy? Any shorts in
the markets are not willing to buy back! This does not show the market to be right in my book! It
only shows me that there is no liquidity in the market at this time.
Say the market closes limit offer. Now are we to believe that from close to tomorrow’s open that the
market is always correct? And that this situation is correct during the time the market is closed and
there is no market? How can the market be correct when there is no trading?
Ok, now we watch the next day’s open in OJ and it opens limit bid with no trading the entire day.
No additional news is available except the news reports stating, “The market proved to be correct
today in that OJ was under priced.”
The only thing the news reports for the last two days did was to declare the current price correct.
Let us say for example that the stock market moved to a point of being halted for a half-hour. Is the
stock market right because of the halted trading?
While it is true we only have the current price to use to gauge our equity and balance our accounts,
other criteria must be used to understand if the market is correct. I am not sure you are beginning to
see my point here so we need to use another example.

ALS – When we say “market,” are we talking about the price of a contract currently or does
“market” mean what is or has happened over time in a market action of a contract?
POP – That is a very good observation and the question needs to be answered. You hear reports that
the market moved up today. Is the market correct in moving up? Say it opened lower and closed
higher than the low but lower than yesterday, is this moving up a correct statement? Or what if the
market opened on its high and closed on the low but a point higher than yesterday. Is the statement
that the market moved higher correct? Is the market always correct?
What are the reporters referring to when they say the market? Their definition is now I believe. That
is what they mean about the market – now. Correct can be different depending on their reference
point. Timing can be different depending on when the observation is made.
I hope you are seeing my point. Let me use an example of how a pit in a thin market might react to
various situations, in order to explain better our thoughts, on the market not always being correct.
Keep in mind the markets price is a function of liquidity.
We will use a small pit in Bread Futures (no such future contract). There are ten traders in the Bread
Pit and two are brokers, five are day traders and three are position traders. Yesterday March Bread
closed at 66 cents a loaf. Limit on Bread futures is ten cents.
The two brokers have orders on the open and all are executed at 66 & 67 cents. The position traders
in the pit have all kept their existing positions and not traded. The day traders have positions on the
other side of what the broker’s orders were.
Since little activity was taking place, the position traders in the pit decide to leave and trade
something else. The day traders don’t see any big volume so they offset their positions with each
other and the broker’s orders when they come into the pit. When the day traders in the pit have
offset their positions, they leave and go to lunch for an extended time. Effectively for this day no
change in open interest exists at this point. The only two left in the pit are the two brokers. All of a
sudden someone bought Wheat and it went limit up within ten minutes.
Now the pit brokers in the Bread pit get large orders to buy Bread futures. The brokers bid and bid
and bid and now Bread is bid limit up at 74 cents. The locals are eating lunch and the position
traders happen to be short. They all return to the pits as quickly as they can. No one wants to sell so
the market closes limit bid.
Is the market always correct and correct now in Bread Futures? I still only see that the market is not
liquid. I don’t see this as being a market, which is correct. Ok the experts say that yes, demand and
supply have proved the market is correct because demand outstrips supply.
No one wants to sell but this may not be correct just because the wheat market went up. Traders
think this way though and that is why I always look to sell the weakest market in a strong up move.
It is because of the similar thinking toward the Bread market when wheat goes limit up that Bread
should also. Often times there are correlation’s until the positions are or can be filled. At that point
the true market takes over when there are now no buyers. There are times that the markets are not
correct. It happens and those are often times great opportunity.
You would never think of this side of trading if you only see that the market is always correct. The
experts are going to tell you that this view is more of an interpretation view. I am going to tell you
that the opportunity of the surprise side is often because of the market not being correct.
There are times I do not consider the market correct. I feel it is useful in questioning the correctness
of the market in certain situations. If there are situations where I must question the market for
correctness then there is always a possibility the market is incorrect and I must be prepared for it.
Some days when we are seeing a topping action and the market makes several moves up and then
back down, we are not seeing anything but good liquidity. So can you say the market is correct?

With good liquidity I consider the market correct. With poor liquidity, I do not consider the market
always correct but possibly distorted.
Anytime I consider the market distorted, It is my judgement as to whether I consider the market
correct and I do not want to leave it to the market.
ALS – Isn’t that just another technical indicator you are using rather than debating the correctness of
the market?
POP – If a market moves limit one way or the other and no trade takes place and you have both a
gap and lack of liquidity, you can call the gap a technical indicator but the lack of liquidity is a
different flag in addition to a technical indicator. It is impossible to trade without liquidity and those
times are flagged as not fit for trading and a not correct market. You could have several days in a
row of limit moves without the ability to establish a position. Which day do you want to pick as the
one where the market is correct? Would you pick all of them, none of them or any one of them?
Art, let’s go back to the traders for our input on whether the market is always correct. They now
know there is a Rule Three. Let them discover it as best as they can. We shall state Rule Three soon.
ALS – Ok, we now wait for input! Is the market always correct?
Note: The following was written after input from several traders.
There are great traders and many great ideas. You usually can tell the great ideas from experience
and in our search for answers we know the input from Alfredo A. is always very worthy indeed.
The following is the latest post by Alfredo A. We felt it important enough to put in this section.
– – – – Date: 1.Dec.1997 (Mon) – 10:30 Author: Alfredo A. email:
Phantom/Art/et al:
Was travelling the past two weeks. Am excited by your concepts and developments of an eventual
Rule Three relying heavily on volume/open interest/liquidity. I think you are definitely on the right
tracks. I personally don’t like and shy away from illiquid markets. We have all seen OJ go limit up
for three days and then down for four sessions with no liquidity. You can get really hurt because
you won’t even have a chance to implement Rules 1 and 2. (This is OJ, never mind pork bellies). I
like to watch OBV and be wary of major divergences. But a market (OJ) which sometimes trades
only 300 lots of the first future month per session is subject to violent price fluctuations, not to
mention eventual attempts at manipulation, resulting in impairment of liquidity.
As for the markets being “correct,” I dare say that they are never correct, and that is where you have
a chance of making some money. The only “correct” market I can imagine is the SPOT market,
where someone actually stops and the other side actually tenders the merchandise. If on the date of
expiration of a gold contract, the last contract tendered is, say at US$300.00 per ounce, then that
perhaps is as “correct” a price as you can get. But as for futures, the very fact that prices fluctuate
constantly along one session shows that there are differences between traders, and for a market to
be “correct” there would have to be, by definition, unanimity. I think futures markets, at least in
their nuances, are essentially “incorrect”. (Ergo, the importance of being proven correct). But I also
guess that this “incorrectness” adds to the fun of the game.
But, yes, I myself consider OI and Volume very important, both as indicators of liquidity, as well as
giving us inklings about where prices might be going. It’s a shame the exchanges can’t get OI faster
to us as they do with volume, but I suppose that would be an operational impossibility.
Best regards and good trading.
Alfredo A. – – – –
Phantom felt that Alfredo has lots of great ideas and when we are fortunate enough to be presented
with them, others should read them.

We need another chess piece on the board and many of you have ideas and feel that open interest
and volume are very important. As Alfredo believes they are important indicators of liquidity and
give good feedback about where prices could be heading.
I believe we can trade our pawn in for another more useful to improve our trading. Phantom took
note of Geoff Hughe’s thoughts as they show correct interpretation of the importance of volume and
liquidity. Here is his view:
– – – – POP, What I THINK you are telling us is that Rule 3 pertains to volume. Volume=Liquidity.
If a market rises on low volume the market is incorrect and a short order would the best way to
enter a trade. If the market rises on large volume the market is correct and a long trade would be the
best route. This pattern would be reversed on market that goes down. Open Interest would be
another factor in Rule Three. If interest decreases in an up market shorts are covering their losses .I
think that’s right, – not quite sure – – – –
Phantom liked seeing Geoff’s excellent interpretation of questioning a market with price and
volume.
David Palmer had great insight. His post is as follows:
– – – – Phantom, ALS, and all, Thanks for stirring the creative juices on this forum. I’m certainly a
better trader for the effort. On the volume/liquidity thought – I remember reading a while back that
Phantom had mentioned that he looked to take profits within 3 or 4 days of high volume days, so
this must be part of Rule 3. After reading the last posts I attempted to build an indicator that would
show me current volume relative to recent history. What I came up with was current volume
divided by 45 day highest volume minus 45 day lowest volume times 100 to yield a percentage of
range. I then averaged the percent Vol over 5 days to smooth it and better see a trend. Then, using
Phantoms 1/3 theory I put alerts at 67% and 33%. Tell me if I get out on a limb here. This could
almost be used as a confidence indicator for the price discovery process. Anything in the upper third
of the range could be considered “correct” price discovery and anything in the lower third would
definitely be suspect. Nothing special about the exact numbers used. This seems to make sense. Any
thoughts on this anyone? – – – –
What do you think of DP’s ideas? Phantom was impressed and indicated with good testing even if
the criteria had to be modified slightly that it would be a very useful indicator. We will call it the
Palmer indicator after David Palmer. Think this one over and put your thoughts on paper.
Randy Hogan always gives his thoughts plenty of time for accuracy and are always well thought out.
Take a look at his thoughts on rule three.
– – – – Rule 3 thoughts… How often are markets thin? Can you tell a thin market as it’s trading or
does rule 3 criteria get us away from the effects of making a trade in one? The comments I’ve read
about offsetting are after a position is taken and the market moves in favor (near high of day on a
long for instance). If the market doesn’t follow thru immediately the next day (10 min. in some
markets, 30 min. in others, etc.) the position is “offset”. Is this rule 3 protection?
Can a thin market or an incorrect one last more than 1 day? Rule 3 criteria changes daily so the
market must continue to prove, eliminating the possibility that the position was taken and added to
in an “incorrect” market.
That was a stab in the dark (with maybe a little light on in the background)!
Thanks – – – –
Phantom’s thoughts on Randy’s ideas were that rule three should do as he asked in getting away
from making a trade in illiquid markets. Think markets certainly can last more than a day. Alfredo
had a good example in OJ.

Ulrich always questions both sides of a situation and has good insight. Phantom wanted to post part
of his thoughts as being bold enough to agree that the market is not always correct is a very big and
unpopular stand. Here are a couple of Ulrich’s ideas: – – – –
I stated that the market is always correct before. I meant it in the way that your equity runs will
always reveal the truth. If you lost, YOU lost. Not the market, the broker etc.. It was you putting on
the trade, no one else.
The market itself is wrong most of the time. This is what gives opportunity to trade. If the market
was to be right today, why should I trade it? I wouldn’t expect a move – would I? – – – –
Ulrich usually hits the nail on the head because he never gives up his search. That is a characteristic,
which leads to great trades.
Phantom appreciated all the input and didn’t want to leave anyone out of the input process as he felt
it is very useful. How often do you come face to face when the market is closed to search out ideas
which have been around for a long time. Many of those ideas of the past are in need of discovery of
the correctness of them.
I asked Phantom if he would want to expand on the input he received. His comment was that yes
indeed he would. We shall come up with what will be known not as rule three (his rule) but “THE
THIRD RULE,” which is their rule.
Thanks for your input and thoughts on improving a knowledge and behavior search beyond
Phantom’s rule one and two.
There are times I do not consider the market correct. I feel it is useful in questioning the
correctness of the market in certain situations. If there are situations where I must question the
market for correctness then there is always a possibility the market is incorrect and I must be
prepared for it. “—POP


Chapter 18 – Rule Three – You Say?

Chapter 18 - Rule Three - You Say?

I’ve noticed a lot of arrows drawn on pieces of papers, a few triangles and other strange dittos. I
thought they might be new flow charts for another one of Phantom’s computer programs. It’s not
unusual to have scribbles that turn into worthless pieces of paper after the markets are closed.
Shortly after the markets are closed most of these odd scribbles get closed out to the circular file.
These particular scribbles didn’t get thrown away and that made me more interested in them. Since
they didn’t make any sense to me, I decided to ask Phantom just what they were. He was a bit
uneasy about them and didn’t want to detail any of them.
I decided to try and figure this out myself. Here is what I saw. In his first set of scribbles, there were
arrows and two triangles. The first set contained four arrows. The first arrow pointed to the top of
the page and the second pointed to the right of the first arrow. The last two arrows pointed from the
other two arrows down toward the bottom of the paper and the last pointed to the left side of the
paper. In other words what we had here was your old ordinary – to turn left make three right turns.
The next set of arrows was but two arrows. One pointed to the top of the page and the last arrow
pointed to the left of the first arrow. In other words we now had the old turn left directly symbol.
To the left of both sets of arrows was a triangle indicating one of two choices. It still looked like a
flow chart for a program to me at this point.
But wait, there it is! I see it at the bottom of the page. In very small letters are the words “rule
three.” Great I thought, Phantom is going to give us rule three just like everyone had asked.
Traders on the talk forum had asked Phantom to give them rule three and tell them when they
should take their profits. Their feelings were that the circle must be completed. The traders were
beginning to understand rule one in getting into a position and whether to keep the position
established. They were also beginning to understand rule two better in what the purpose and
advantage of adding to correct positions would do for them.
Could it be that Phantom has had a rule three all the time? Did he just not want to share this rule? I
wasn’t sure about rule three in his trading career as I thought I reasonably knew how he traded. How
had he kept it from me? Why wouldn’t he share his rule three with us? So many questions ran
through my mind.
I turned the papers over and I was a little disappointed in what I saw. Nothing other than a big
question mark was on the other side. There was nothing written on the pages except the scribbles
and rule three at the bottom.
ALS – Phantom, about rule three, what can you tell me in order that I pass your insight on to our
traders as we had agreed upon when we started this project?
Phantom of the Pits – I am afraid I have let them down Art! I don’t have a rule three as such. What
the traders are asking of me is more automatic for me than a rule. When to take profits is not an
easy and clear-cut rule.
You see my rules have been set up in order to address the nature of trading as a losing game and to
keep losses small. This is the most important aspect of trading and to add to correct positions in
order to bigger when correct. To have a rule on taking profits is to have a rule, which is second
nature most of the time.
I can understand the point of view that taking profits must be done correctly also. Though it might
be second nature for me, I am learning that important insight on that aspect is just as important to
our traders.

We will come up with a rule three. Did you notice I said “we?” It’s all the traders, you and me who
will be satisfied with rule three at it’s conclusion. It is not clear yet at this time but we shall do what
we discover as correct.
If you take a beaker of dirt and water, what do you get when you stir it up?
ALS – The clear water becomes muddy. Is the rule going to be revolutionary?
POP – Ok, well that is what taking profits become when it is time to take them. Revolutionary as
you say and I suppose revolutionary rule three will be the most liked rule of all! There are so many
variables that we can’t just have a simple rule to take profits. Most profit situations should be within
the trade program but I am sure we can come up with the rule that doesn’t interfere with a good
trading program. We will work on it.
My rule one takes care of removing the position when not proven correct. And rule two takes care
of getting larger when proven correct by adding positions. Back again we go to rule one to protect
rule two after adding positions. Rule one usually addresses removing a position when it no longer
continues to prove correct even though we have added positions also.
Taking profits is never as cut and dry as removing positions that are never correct for me. It’s kind
of funny though as most traders find it pretty cut and dry in taking profits. It is taking losses that
seem muddy to most traders
The traders on the forum have a legitimate request for rule three. I take profits within my programs
and never gave it much thought that it would be as important a rule as they have pointed out to us.
I can’t give my programs and it is going to be rather difficult to put rule three separate from the
programs I use to establish and remove positions. I don’t want to let them down either. Taking
profits is critical to increasing equity in their account. They are right in wanting the rest of the
insights into taking profits.
Outside of a trade program, taking profit criteria is going to be a little modified. Because we have to
modify when to take profits this way, we will have to have qualifiers as we did in understanding of
rule one and two.
First it must be stated that any time you take profits, you must be satisfied that this is the correct
move. If you look back at anytime, you will see that you could have made more money. Not that
you would have taken the position off at a better price but just the nature of hindsight.
By using rule two to add to positions, our newly found rule three will be much better and agreeable
for our traders to use. We need to establish criteria on the rule before we can actually set the rule
into words.
Are we going to define taking profits at the point we remove a position and end up with profits? Or
are we going to consider a rule to take profits for use only after a success of having added to our
total position? Do we consider rule three for taking profits after one add, two adds or additional
adds if required? At what point do we consider our trade totally established?
You can see some of the difficulties in coming up with rule three to take profits unless we set the
criteria for the rule from the start. Removing positions can at times be considered taking profits, yet
other times removing positions is keep loss small. Taking profits must be considered differently
than removing positions. We consider removing positions as our keeping losses small even though
at times removing profits leave us with a profit by the nature of the rules working for us.
Art, This is going to be a rule where we must have input from the traders in order to come up with
the wording of Rule Three. This is their rule so we must go back and get their input. It is important
that traders understand that Rule Three is with my input also but it is not a rule I have set into
cement over the years. It will include the nature of my profit taking to the extent of what criteria
traders want in the rule. Thought must be given on rule three by all who want the rule to use.

It is not possible to end up with a rule, which will cover everyone’s input but we can come up with a
rule, which they will be satisfied with using. We might need to do a lot of computer testing since we
are giving a rule, which they are asking to have. I am not completely comfortable in a rule three, if
it is different than my way of trading. Because of that feeling, I shall incorporate my own criteria
within the rule also.
I must know what the traders want in the rule. Consider all the variables, do your homework and set
your criteria so we can work on your rule!
ALS – What about the arrows on your paper on rule three?
POP – You see two sets don’t you? We may have three sets after their feedback. Feedback is what
we want now before I go into detail on any of my thoughts here.
I can guide some on what we need. Consider both rules one and two and do a flow chart of the
possibilities of each rule in each step and then point to what rule three is to consider as possibilities
for taking profits. Let us know your thoughts by steps if you can. This will help us work the rule
criteria better.
ALS – Ok, We will wait for feedback on what criteria our traders need.
Note: Further research and input came from “Futures'” talk forum of excellent traders in order to
end up with a creditable rule three.
ALS – We are beginning to get some ideas from traders on rule three now. Actually there are some
pretty good suggestions. In fact some of them end up with your arrows.
POP – I’ll discuss some of my theory at this point to give some hints and then we will address the
input from the traders.
Consider trading nothing but a maze. By maze what I mean is a series of rooms to progress through
from the entry until you get through all the rooms until you come out the other side. You can go
straight ahead or must turn to the left or right. But the object is to get through all the maze and
progress from each room until you have ended up through all the rooms and are at the outer side of
the maze once again.
In our maze, you must design a system, which guarantees that you will indeed get to the finish of
the maze. You can not know exactly which way to turn each time but you know that you must make
a turn. Trading is the same idea. You don’t know which way for sure to turn each time to get to the
goal. Your plan can be guess and miss, trial and error or systematic.
We want a balance of correct procedure each time and a speed, which does not create unnecessary
moves. Now the next point is going to make you laugh and question my integrity but it is an
important learning process from observation.
In my younger years at a great University I learned the maze answer by watching a mouse going
through a maze. The mouse was released to move around the maze and we were to learn what the
mouse would do. To my surprise, a low intelligent mouse had a system to get to the other end and it
didn’t really take long.
What the mouse did was always turn to the right whenever possible until it had progress through the
entire maze and was out the other end. While this wasn’t always the fastest way to get through the
maze, it certainly accomplished the object of the study by ending at the other end.
At that time I devised what is a simple method to get to the exit of the maze by just placing my right
hand on the right wall and continuing to progress until I could only turn to the right. At that point I
would turn to the right. As I continued forward, I would go forward, turn left or turn right
(whenever I could) but I would never retrace or reverse my steps. The idea was to guarantee that I

could get through to the exit of the maze with the least number of steps using a system to prevent
repeating my steps.
Isn’t that what trading presents to us also? A maze where we never really know which way to turn
but must have some kind of system to keep us from retracing our steps and extending the amount of
time required to get to our goals.
In trading, you can never really know at each important point what the correct move is until you
look backwards. Therefore, you must have a method, which is systematic with what your goal is.
The goal in trading is to get to the point of the least amount of loss in the journey. In a maze you
can not have the exact path but you can totally eliminate the unnecessary steps by using a welldevised
system. In trading, you can not make the exact moves each time you trade but you can
devise a system, which prevents you from unnecessary steps. The unnecessary steps are usually
costly losses in trading.
My rule one and two give me part of my system in trading by allowing me to eliminate the
unnecessary steps after defining what my goal includes. Let us progress forward with a forward
arrow upon entry of a position. My next move is either rule one or rules two. I either turn to the
right or turn to the left. When I turn to the left, I am removing my position because it was not
proven correct or does not continue to prove correct at that point of the trade. If I can turn to the
right, I will do it (my right hand on the wall) because this is my rule two adding to a correct position
and the current position has been or continues to prove correct. I want to turn to the right whenever
I can in order to get to my goal systematically without unnecessary steps. You see this is in my
maze system as well in my trading system.
Pretty simple and elementary since it was learned from a lowly intelligent rodent. This in no way
lowers the value of the knowledge. I sure don’t want anyone calling my system the rodent system so
please have mercy on me!
Now you can see some of my dilemma in getting to rule three. If I must either go straight ahead
(continue status quo) or turn left (get out of my position) or turn right (add to my position), I have
no room for turning around 180 degrees and taking profits outside of my rules one and two. That
would interfere with my two rules and cause unnecessary steps in reaching my goal properly.
Two points I want to make here. First I do not mean to imply that I must either use rule one or rule
two when I make a decision. If the decision is to use rule one, I know I am either correct or must
remove my position based on rule one. Just because rule one is used and I now have a proven
correct position does not mean I must use rule two until the proper criteria is established. That
criterion will not necessarily be to add just because the position was proven correct. We may not
add until the next buy or sell signal.
In trying to associate rules one and two with the maze, don’t forget that we turn right only when we
are able to do so (add to a position). We turn left (remove our position) when we come to a head on
wall and can not continue without turning left (removing our position.) A head on wall in trading is
when the position has not proven to be correct. This is not the same as having been proven wrong.
While trying to correlate the maze and our trading rules, don’t over analyze the comparison. I am
only presenting it as a background thought in design of your flow charts for trading should you
want the simple arrow diagram for your own use.
I am concerned that feedback indicates my insights are a little difficult to understand. Can you
imagine if we had ten or twenty rules? I know I repeat myself often but it is necessary in order to
continue to re-enforce the importance of the rules we have established. I guess I could make a
career out of better explaining my thoughts. I think it is better if the traders do more of their own
thinking rather than try and imitate my thoughts in coming up with their own plan. Anything can be
improved and I feel that each trader has the opportunity to improve their plans by knowing my
insights. While mine are not perfect, they work for me. Trader’s plans must work for them to be of
any use.

I feel like I am leaving something out of my thoughts here but I am not really holding anything back
intentionally. I want to address some of our feedback so far!
ALS: The first one we look at is from M.T. In summary his feed back indicates that rule three
seems intuitive, in a sense that rule three is just an extension of rules one and two. His thoughts are
that taking profit could be at a point of adverse movement back to say the last point of adding to the
existing position.
POP: I’ve always liked his thoughts and writings. Since add on positions are done in smaller parts
than the initial position, his thinking can actually be successful if it was considered time to take
profits at the adverse movement. But for profit taking sake all positions would have to be removed
in order to have a profit. Otherwise it would just be using rule one to assume the last add on
position was not proven correct but rule one would not be used properly. Mainly because using the
adverse movement to remove the position was the criteria for removing the position.
I want the last add on removed if the positions criteria does not prove correct rather than because of
an adverse move after entry. Of course if there is an adverse move, it certainly wasn’t proven correct
either so it is still right to remove the position. Don’t get me wrong as sometimes the adverse move
takes place immediately and you must remove the position because of it. But you are removing
because the position didn’t prove correct.
ALS – Yes, M.T. does say that he questioned as to his thinking was correct in using a price
movement to determine what to do instead of controlling the trade. He also indicated that he feels
he does better if he just has a stream of consciousness type thinking. He also indicated that at the
last add, perhaps you would drop all of your established position and that is more or less what you
said Phantom.
POP – M.T. is to the point of being more comfortable with his trading and being more subconscious
in his actions. Believe me that is how it eventually plays out when you have your plan into effect
and the confidence in what you are doing builds. He is certainly showing a good handle on his
future in trading.
ALS _ M.T. pointed out that indication of change in trend might be the removal point of positions.
POP – In a trading program that is what causes us to remove our entire positions sometimes.
Certainly when we get an early indication of topping, we remove our positions also. In fact last
week we did get our topping indicator in beans. Now that is good a reason to remove your positions.
Also we sometimes get a very quick reverse position indicator after a topping reversal. We did get
that last week.
I see you threw up some questioning to that effect last week on the forum in the proper form so as
to not preclude other traders thinking. Our indicators can be wrong at any time and it is important
that we don’t inflict our suggestions as advice on trading. Never give the crutch to a trader as long
as they can walk on their own two legs. They strengthen their legs by walking on them and not
using a crutch. Meaning they must make their own best judgement based on their experience and
knowledge.
Let’s move on to the next feedback, as M.T. is pretty helpful in helping us drive down the road on
our journey.
ALS – David Thomas had a follow up to M.T. indicating that perhaps rule 3 could be quite simple.
Rule 3 is simply following rules one and two. D.T. said that by using both rules and in the last part
of your positioning you will use rule one again and never return to rule two for your position is
removed by rule one.
POP – Yes, that is basically how I end with most of my positions. But there are times when I get a
reverse or topping or bottoming signal where I remove my positions without rule one. That is where
the traders are correct in thinking there should be a rule three. The more I think about it, the more I

see this as a qualifier rule to remove positions and take a profit at the time. But it could also be a
qualifier to remove a position without a profit also at those times.
It is beginning to look like an interesting story here. The making of rule three or the failure of a rule
is this point, I see now!
ALS – Steve Waring has some interesting flow-charting. He did a good job with the format on the
forum, as the difficulty to convey with actual arrows is rather difficult. Steve said he can’t see any
clear answers to profit taking . . . just a lot of trade off.
He uses two examples of mechanical profit taking systems. One system has a target price and one
has a retracement of price. As you would expect, each at one time or another has an advantage over
the other. They both seem to go against rules one and two.
He picked up on your cheapen the price of what you have trick. As you always indicated trading to
be like the ocean when the tide is either coming in or going out. He had good thoughts on how to
use rules 1 & 2. When your program indicates a possible plateau or reversal short term to offset part
of your position looking to re-enter at a better price and cheapen the price of your position. Steve
also indicated his thoughts on positions as being a series of trades. Questions on cheapening your
position price arose from some of the holes.
If you re-position in this manner and miss the lower price, do you do it at a higher price? What do
you do if the market continues to go against you and it gets to be a cheaper and cheaper place to reenter
(leaving your remaining position losing?) How many attempts do you make to re-enter?
POP – All good questions and the answer to each is along the same lines here. When using rule one
to tell you to remove an added position, it is possible that you may have held the position for a
period of time and you have a good profit.
Your trade program may look at the fact that the market is starting to plateau and you are not seeing
your position to continue to prove correct. By this indicator and using rule one, you would remove
the position due to the failure to continue to prove correct even though you have a good profit but
have just stalled in the move. In this case you would look to re-enter at a mover favorable price on a
reaction and have to prove that re-entry with rule one again.
Of course if the market continues to go against the proven correct position, you would within your
trading program expect to be flagged of that situation and use rule one accordingly. You would not
make any new attempts unless your trading program indicated to position further. As far as how
many attempts to reposition is up to your trade criteria and program.
Rules one and two are not the criteria to position but only the rules to follow within your indicators
from your program in order to have a mechanical system for doing what is required on both sides of
the coin.
In asking questions on different aspects of your rules, I think Steve is actually trying to cover all the
bases on proper behavior in all situations of the rules. By asking the questions, he is actually
devising a probable and possible scenario, which is required in addressing validity of the rules use.
As I have said in the past, it is questions of methods and systems, which allow a trader to correctly
simplify trading when the market is open by obtaining the answer to the best probability of a
method or system.
Does Steve see his points in his research as different than I see them? I don’t think so at all as I
question every aspect before using my two rules in order to solve any possible conflict in their
incorporation of my trading criteria. I think Steve is going to be able to incorporate his trading
program without conflict after satisfying his program criteria to what he expects of it.
ALS – We could debate the use of your rules more!

POP – I don’t call it debate. I call it improving trading styles for our traders. They ask the right
questions and they trade the right way after incorporating their knowledge. It gets even better after
they incorporate their experience too.
ALS – Steve indicates his feeling on catching a move as being willing to risk open position profits
for the reward of the trend re-asserting itself at plateaus. We still consider a profit-taking rule as a
variable.
POP – My trade programs allow me to take profits after three adds upon a third wave of movement.
The third wave usually is the strongest and that is where I get out of the elevator on the 14th floor
rather than ride to the 18th floor if it seems to move rather fast. I know it is going to stop eventually.
The only question in trader’s minds, I think is do we get out at the 14th floor on the way up or the
way down.
The correct answer to that lies in our trading program. Using the criteria we have programmed in let
us say that on balance volume is telling us above all other indicators that on our way up we are
seeing large volume on any reversal day and more so than on up days even though our OBV is
increasing. This is conflict and perhaps our program will say get out on the 14th floor on the way up
and not on the way down. Other times we will have a program which says to stay in as long as the
positions continues the move.
ALS – Ronald Adams had another good idea on rule three. He felt that you should never give back
to the market if you can help it. In other words keep what you have. He also felt there was really no
need for rule three.
POP – It has always been easier to make money than to keep it in trading. Ronald has some good
points. Giving back is the big problem after having profits. This really leaves us with conflict as to
whether there would be a good advantage in having a rule three. I know a very famous system of
trading over decades never had a rule three until it was proven to them that they must have a way to
keep their profits at least around 50% of what they had made in their positions. It changed their
profits.
ALS – Rob Klatt climbed on board the bus on the rule three thoughts. He is with the other traders
on his thoughts too.
POP – We can let him drive for a while then.
Maybe we need a rule three completely outside of rules one and two in order to keep more of our
profits using probabilities based on research. I am 50/50 on this rule now.
As you see we are still in conflict as to what is the need or purpose of criteria for rule three! Go
back to the traders and let us listen some more.
ALS – Ok let us do that! I think this is excellent improvement material on effective profit taking. I
know you have many more ideas and with that grin on your face, I too know that you have the
ending answer within your sight. It has been in your computers program all along.
Where is Alfredo when we need Alfredo? We are at a stalemate. New game?
” It’s all the traders, you and me who will be satisfied with rule three at it’s conclusion. “—POP


Chapter 17 – Phantom’s Christmas Gift

Chapter 17 - Phantom's Christmas Gift

Phantom’s Journey
Phantom remembers those people he meets along his journey in trading and those he has met since
he started his insight give back. His remarks were that he felt he could serve you much better than
he has. Phantom felt that he is the beneficiary of what you have given to him.
The best compliment I can remember Phantom ever getting was when he was at an important
meeting. The wine steward had just poured a glass of red wine for the host and to be polite Phantom
also accepted the gesture. As the wine steward poured Phantom’s glass to the brim, the last few
drops spilled onto Phantom’s white shirt and suit.
The wine steward turned to Phantom and said in a loud voice “Sir, a lesser man I could have served
perfectly!”
Phantom turned to the wine steward and said to him, “It is I who must serve mankind better! I am
grateful for your reminder.”
Phantom wants to serve you better and is grateful to you for the thought you provoke within his
reach. Some of the great traders are often overlooked. Great traders are not just those who have
been fortunate enough to make it big in trading but also those who have made great trades in their
lives.
It was Phantom’s request after seeing a simple kindness of others toward a Dad and his Son in their
loss of a long time family friend. The family dog had just passed on. To see the pouring of kindness
of others toward the man and his son touched Phantom’s heart.
It is not just this random act of kindness which touches his heart but powerfulness of wonderful
thoughts which can be extended by others. Traders in their time and atmosphere of intense trading
are still human in a cold and harsh environment.
Phantom wanted us to write his journey in an effort to balance the scales of trading and living as
partners within the soul along the way. Trading at times can reach out and grab your soul with cruel
implications but your living can repair your touch of kindness within your soul. Phantom wants you
to see his insight of you.
It is true that much of the human element has nothing to do with trading and that most see no need
to study human behavior. Or do they? In researching the lost dog incident it is clear that around
ninety percent of traders involved tolerate such thought along their trading route and actually those
opposed also contribute.
Phantom starts his insight to your journey. There is something to be learned. Or is there? He starts
with his Christmas Gift.
Arthur L. Simpson
Phantom’s Christmas Gift By Phantom of the Pits (POP)
Along my journey of trading there have been great traders I shall always remember. To my surprise
it is not the big success stories I remember but the great trades (events) those traders have made in
their lives. Often it is a helping hand in exchange for their precious time and other times it is
dedication in their lives toward mankind. The brotherhood shown by those great traders is what my
journey has shown most to me.
I want to share some of my insight on you, the great traders in our world. The strongest thing in the
world is love. It is stronger than death. What guides us to gather strength even when touched by
death? This is just one of my questions in an effort to balance my trading career with the living side
of the scales. What I have found out about you continues to give me answers. I want to share that
with you.

The wife of a trader conveyed to me one of the great trades made by a person whom I consider a
great trader. In our journey, we shall identify that person only if that person wishes us to do so. In
this case the person has not decided to do so at this time.
It was Christmas Eve in 1979 when two men who had just finished their work shifts on a United
States Naval Ship tanker. The ship was anchored in Ulsan, Korea and unloading fuel a distance
from shore. Since the two men didn’t get to be home with their loved ones on Christmas Eve they
had plans for the evening. It was 8 p.m. and the two men took a boat launch to get to shore.
Both men were carrying large bags ashore. One of the men questioned as to whether they should be
taking anything ashore for fear of being thought to smuggling ashore. The other man pointed out
that this was surely the time to take that risk as it was indeed Christmas Eve and understanding
might be easier if an explanation was required of them.
After getting off the boat launch the two men walked about two-mile and the sacks were really
getting heavy at this time. It was a cold winter night in a country foreign but they had a plan and
carried on with their heavy sacks.
The two men arrived at a building and entered, as it was unlocked. A lady came and met the two
men from the ship and asked them to have a seat. A short time later a group of children came into
the room and spoke in Korean. It seemed to be with great excitement that the children were pleased
to see the two men. They had seldom seen others and especially these two men.
One man’s name was Preston and the other man was my trader friend. The youngsters were
laughing at their broken Korean language. Since the youngsters could not speak English it was the
only chance for communications.
My trader friend according to his wife had caught the eye of two children. One was a boy about ten
years old and the other was a young girl about six years old.
The only word the children were trying to convey to the men was the word Wahn or Waan or One.
The men thought that perhaps they were trying to show they could count in English. The young girl
would stare at the two men and the older boy would not stop talking, as he was very excited to meet
Americans on Christmas Eve.
What was in the sack the housemother asked? The two men said you shall see in time. Let us get the
children something to drink. At that point they were given something to drink.
Preston pulled out a sack within a sack and the children’s eyes got wide as they thought it was a
trick of sorts. The little girl was questioning with her eyes as the two men pulled out pieces of fried
chicken which was left over that night from the ship’s Christmas dinner. The men started eating a
piece of chicken in front of the children. Their eyes were sad, as they seldom were able to eat as
much as they wanted.
The children had never see or eaten fried chicken in their entire lives. Chicken pieces were being
passed around to the youngsters as they learned the tasty smell of the new found food. The full
sacks of food were more than enough for it didn’t take long for the children to get full.
The oldest boy motioned to the housemother and asked several questions. It was Christmas Eve and
getting late for the children but they were allowed to stay up late this special night.
The two men had to be back at the ship soon because it was to leave at 3 a.m. in the morning as the
tide was going out and it was the only time the ship could leave safely.
About midnight the two men left on the launch for the ship. As the two men arrived back to the ship,
the crew made ready to depart as their unloading of fuel had been completed.
My trader friend had tears in his eyes as the ship left and he thought of the starving children and his
small participation on Christmas Eve. He had just been presented with a gift for trading his time in

this event of which he would see many years later. It was one of the best TRADES he would ever
make.
Fifteen years later in October 1994 my trader friend was once again on a ship and his wife had just
been in a life-threatening event. Being on a ship and away from family presents impossible resolve
in helping anyone.
My trader friend searched the ship for a Bible and for some reason none existed on this ship. The
ship made weekly trips from Puerto Rico to New York and was in New York on a Saturday. After
the ship had been properly secured to the dock, a man walked on the ship with permission to do so
and approached my trader friend.
The man held out his hand and said, ” my name is Mr. Wohn. Here is the Bible you wanted!” Why
my trader friend was astonished as he had not mentioned this to anyone. How could this be? A
stranger walks aboard a ship and hands out a Bible after my friend had been looking for one earlier
in the week.
Having just finished lunch, my friend asked Mr. Wohn if he would stay for lunch. Mr. Wohn asked
what is your meal on the ship? Today it is fried chicken, my friend informed him.
Mr. Wohn indicated it was his favorite food but he had already eaten lunch. At that time Mr. Wohn
started to explain just how fired chicken became his favorite food.
“I am in America from Korea,” Mr. Wohn said. “I promised God I would give mankind what they
are in need of in their lives.” My friend asked him how he had decided to dedicate himself in
helping others.
“I was ten years old and my sister was six and the only family I had. We were both orphans and live
in an orphanage in Ulsan, Korea. I first met God in my life on Christmas Eve in 1979. It was a cold
Christmas Eve and it was a sad time on our lives for we never had enough food to eat and we would
always be hungry when we went to bed.”
“At about 9 or 10 that night, our housemother awakened us and told us to come with her. We went
to our lunch room and sat at one of the tables. It was cold so my sister and I sat nearest to the stove
to get warm.”
“Two men were in the room and I thought we would see a magic trick as one of the men pulled a
sack out of bag. The men started to eat a piece of food and it looked strange to us. They gave us
some and motioned for us to eat the same way as them. One man put it up to his mouth and took a
bite of the food. So my sister and I did the same. It smelled good and really was wonderful. It was
fried chicken. It was the first time we ever ate fried chicken.”
“Well I remembered the kindness of the two men to this day and that is how I decided I would help
others.”
“On that Christmas Eve, our housemother let us stay up late as this was different from the other
nights. I was the oldest in the group of children and I wanted to know who brought the food for us. I
asked our housemother and she said that God and Jesus had brought us the food. My sister looked at
the two men and wouldn’t take her eyes off of them when she heard the housemother’s explanation
of where the food had come. She had heard of them and wanted to know more. My sister asked how
they had gotten to their orphanage and she was told that they had come on a big ship in the water.”
“The two men left before we went to bed and all the children talked about the wonderful food and
happiness of that night. Our housemother told us it would soon be Jesus’ birthday the next day.”
“I was excited the next morning and my sister was more excited as she wanted to go down to the
ocean and see the big ship that God and Jesus had come on to give them food.”

“I will never forget the disappointment in my sister’s eyes when there was no ship. Can you imagine
that? We had just seen God and Jesus in our eyes but there was no ship there at all. How had they
gotten to us?” I began to lose faith that it was God and Jesus who had brought us food. My sister
said yes it was them and she knew it was and wouldn’t change here mind. She was so dear to me
and all I had in life. So I let myself have the same faith and I promised God I would spread the same
kindness to man.”
“My little sister talked of meeting God and Jesus when she died and of living with them. She would
ask me if I would come with here. I would cry at nights because I knew I would soon lose her.” Mr.
Wohn told my trader friend of his sister’s death at her age of eight.
Mr. Wohn indicated that perhaps he had seen God and Jesus that Christmas Eve in 1979. As he
walked down the gangway, my trader friend called to him but didn’t know what to say. He could
only think of that Christmas Eve away from home and loved ones when he had walked a cold nights
walk with heavy sacks of food from the ship to an orphanage in a Korean town.
My trader friend yelled to Mr. Wohn, “Mr. Wohn, God uses people to accomplish his wishes at
times.”
Mr. Wohn yelled back, “Yeah, I know! Would you thank your friend for that Christmas Eve in 79
for me?”
Talking to my trader friends wife, I have found a deep gift. She says it is one of the most powerful
gifts her husband cherishes. To trade a part of his life and to see it come back everyday when he
looks at that Bible is the greatest Christmas gift he will ever need.
It was a great trade my friend made in 79 and to see it come back amplified fifteen years later is
what I consider a great trade of a great trader. There are great traders among you and I see this of
you too!
I hope you can see the true meaning of being a great trader. This one Christmas story of a ships’
Chief Cook and an Officer is just the beginning of your great future in your trading career. There
shall be more along the journey and I wish to share them with you.
It’s all about YOU!
Phantom
“It is I who must serve mankind better! Phantom “
Phantom’s Journey
Phantom remembers those people he meets along his journey in trading and those he has met since
he started his insight give back. His remarks were that he felt he could serve you much better than
he has. Phantom felt that he is the beneficiary of what you have given to him.
The best compliment I can remember Phantom ever getting was when he was at an important
meeting. The wine steward had just poured a glass of red wine for the host and to be polite Phantom
also accepted the gesture. As the wine steward poured Phantom’s glass to the brim, the last few
drops spilled onto Phantom’s white shirt and suit.
The wine steward turned to Phantom and said in a loud voice “Sir, a lesser man I could have served
perfectly!”
Phantom turned to the wine steward and said to him, “It is I who must serve mankind better! I am
grateful for your reminder.”
Phantom wants to serve you better and is grateful to you for the thought you provoke within his
reach. Some of the great traders are often overlooked. Great traders are not just those who have

been fortunate enough to make it big in trading but also those who have made great trades in their
lives.
It was Phantom’s request after seeing a simple kindness of others toward a Dad and his Son in their
loss of a long time family friend. The family dog had just passed on. To see the pouring of kindness
of others toward the man and his son touched Phantom’s heart.
It is not just this random act of kindness which touches his heart but powerfulness of wonderful
thoughts which can be extended by others. Traders in their time and atmosphere of intense trading
are still human in a cold and harsh environment.
Phantom wanted us to write his journey in an effort to balance the scales of trading and living as
partners within the soul along the way. Trading at times can reach out and grab your soul with cruel
implications but your living can repair your touch of kindness within your soul. Phantom wants you
to see his insight of you.
It is true that much of the human element has nothing to do with trading and that most see no need
to study human behavior. Or do they? In researching the lost dog incident it is clear that around
ninety percent of traders involved tolerate such thought along their trading route and actually those
opposed also contribute.
Phantom starts his insight to your journey. There is something to be learned. Or is there? He starts
with his Christmas Gift.
Arthur L. Simpson
Phantom’s Christmas Gift By Phantom of the Pits (POP)
Along my journey of trading there have been great traders I shall always remember. To my surprise
it is not the big success stories I remember but the great trades (events) those traders have made in
their lives. Often it is a helping hand in exchange for their precious time and other times it is
dedication in their lives toward mankind. The brotherhood shown by those great traders is what my
journey has shown most to me.
I want to share some of my insight on you, the great traders in our world. The strongest thing in the
world is love. It is stronger than death. What guides us to gather strength even when touched by
death? This is just one of my questions in an effort to balance my trading career with the living side
of the scales. What I have found out about you continues to give me answers. I want to share that
with you.
The wife of a trader conveyed to me one of the great trades made by a person whom I consider a
great trader. In our journey, we shall identify that person only if that person wishes us to do so. In
this case the person has not decided to do so at this time.
It was Christmas Eve in 1979 when two men who had just finished their work shifts on a United
States Naval Ship tanker. The ship was anchored in Ulsan, Korea and unloading fuel a distance
from shore. Since the two men didn’t get to be home with their loved ones on Christmas Eve they
had plans for the evening. It was 8 p.m. and the two men took a boat launch to get to shore.
Both men were carrying large bags ashore. One of the men questioned as to whether they should be
taking anything ashore for fear of being thought to smuggling ashore. The other man pointed out
that this was surely the time to take that risk as it was indeed Christmas Eve and understanding
might be easier if an explanation was required of them.
After getting off the boat launch the two men walked about two-mile and the sacks were really
getting heavy at this time. It was a cold winter night in a country foreign but they had a plan and
carried on with their heavy sacks.

The two men arrived at a building and entered, as it was unlocked. A lady came and met the two
men from the ship and asked them to have a seat. A short time later a group of children came into
the room and spoke in Korean. It seemed to be with great excitement that the children were pleased
to see the two men. They had seldom seen others and especially these two men.
One man’s name was Preston and the other man was my trader friend. The youngsters were
laughing at their broken Korean language. Since the youngsters could not speak English it was the
only chance for communications.
My trader friend according to his wife had caught the eye of two children. One was a boy about ten
years old and the other was a young girl about six years old.
The only word the children were trying to convey to the men was the word Wahn or Waan or One.
The men thought that perhaps they were trying to show they could count in English. The young girl
would stare at the two men and the older boy would not stop talking, as he was very excited to meet
Americans on Christmas Eve.
What was in the sack the housemother asked? The two men said you shall see in time. Let us get the
children something to drink. At that point they were given something to drink.
Preston pulled out a sack within a sack and the children’s eyes got wide as they thought it was a
trick of sorts. The little girl was questioning with her eyes as the two men pulled out pieces of fried
chicken which was left over that night from the ship’s Christmas dinner. The men started eating a
piece of chicken in front of the children. Their eyes were sad, as they seldom were able to eat as
much as they wanted.
The children had never see or eaten fried chicken in their entire lives. Chicken pieces were being
passed around to the youngsters as they learned the tasty smell of the new found food. The full
sacks of food were more than enough for it didn’t take long for the children to get full.
The oldest boy motioned to the housemother and asked several questions. It was Christmas Eve and
getting late for the children but they were allowed to stay up late this special night.
The two men had to be back at the ship soon because it was to leave at 3 a.m. in the morning as the
tide was going out and it was the only time the ship could leave safely.
About midnight the two men left on the launch for the ship. As the two men arrived back to the ship,
the crew made ready to depart as their unloading of fuel had been completed.
My trader friend had tears in his eyes as the ship left and he thought of the starving children and his
small participation on Christmas Eve. He had just been presented with a gift for trading his time in
this event of which he would see many years later. It was one of the best TRADES he would ever
make.
Fifteen years later in October 1994 my trader friend was once again on a ship and his wife had just
been in a life-threatening event. Being on a ship and away from family presents impossible resolve
in helping anyone.
My trader friend searched the ship for a Bible and for some reason none existed on this ship. The
ship made weekly trips from Puerto Rico to New York and was in New York on a Saturday. After
the ship had been properly secured to the dock, a man walked on the ship with permission to do so
and approached my trader friend.
The man held out his hand and said, ” my name is Mr. Wohn. Here is the Bible you wanted!” Why
my trader friend was astonished as he had not mentioned this to anyone. How could this be? A
stranger walks aboard a ship and hands out a Bible after my friend had been looking for one earlier
in the week.

Having just finished lunch, my friend asked Mr. Wohn if he would stay for lunch. Mr. Wohn asked
what is your meal on the ship? Today it is fried chicken, my friend informed him.
Mr. Wohn indicated it was his favorite food but he had already eaten lunch. At that time Mr. Wohn
started to explain just how fired chicken became his favorite food.
“I am in America from Korea,” Mr. Wohn said. “I promised God I would give mankind what they
are in need of in their lives.” My friend asked him how he had decided to dedicate himself in
helping others.
“I was ten years old and my sister was six and the only family I had. We were both orphans and live
in an orphanage in Ulsan, Korea. I first met God in my life on Christmas Eve in 1979. It was a cold
Christmas Eve and it was a sad time on our lives for we never had enough food to eat and we would
always be hungry when we went to bed.”
“At about 9 or 10 that night, our housemother awakened us and told us to come with her. We went
to our lunch room and sat at one of the tables. It was cold so my sister and I sat nearest to the stove
to get warm.”
“Two men were in the room and I thought we would see a magic trick as one of the men pulled a
sack out of bag. The men started to eat a piece of food and it looked strange to us. They gave us
some and motioned for us to eat the same way as them. One man put it up to his mouth and took a
bite of the food. So my sister and I did the same. It smelled good and really was wonderful. It was
fried chicken. It was the first time we ever ate fried chicken.”
“Well I remembered the kindness of the two men to this day and that is how I decided I would help
others.”
“On that Christmas Eve, our housemother let us stay up late as this was different from the other
nights. I was the oldest in the group of children and I wanted to know who brought the food for us. I
asked our housemother and she said that God and Jesus had brought us the food. My sister looked at
the two men and wouldn’t take her eyes off of them when she heard the housemother’s explanation
of where the food had come. She had heard of them and wanted to know more. My sister asked how
they had gotten to their orphanage and she was told that they had come on a big ship in the water.”
“The two men left before we went to bed and all the children talked about the wonderful food and
happiness of that night. Our housemother told us it would soon be Jesus’ birthday the next day.”
“I was excited the next morning and my sister was more excited as she wanted to go down to the
ocean and see the big ship that God and Jesus had come on to give them food.”
“I will never forget the disappointment in my sister’s eyes when there was no ship. Can you imagine
that? We had just seen God and Jesus in our eyes but there was no ship there at all. How had they
gotten to us?” I began to lose faith that it was God and Jesus who had brought us food. My sister
said yes it was them and she knew it was and wouldn’t change here mind. She was so dear to me
and all I had in life. So I let myself have the same faith and I promised God I would spread the same
kindness to man.”
“My little sister talked of meeting God and Jesus when she died and of living with them. She would
ask me if I would come with here. I would cry at nights because I knew I would soon lose her.” Mr.
Wohn told my trader friend of his sister’s death at her age of eight.
Mr. Wohn indicated that perhaps he had seen God and Jesus that Christmas Eve in 1979. As he
walked down the gangway, my trader friend called to him but didn’t know what to say. He could
only think of that Christmas Eve away from home and loved ones when he had walked a cold nights
walk with heavy sacks of food from the ship to an orphanage in a Korean town.
My trader friend yelled to Mr. Wohn, “Mr. Wohn, God uses people to accomplish his wishes at
times.”

Mr. Wohn yelled back, “Yeah, I know! Would you thank your friend for that Christmas Eve in 79
for me?”
Talking to my trader friends wife, I have found a deep gift. She says it is one of the most powerful
gifts her husband cherishes. To trade a part of his life and to see it come back everyday when he
looks at that Bible is the greatest Christmas gift he will ever need.
It was a great trade my friend made in 79 and to see it come back amplified fifteen years later is
what I consider a great trade of a great trader. There are great traders among you and I see this of
you too!
I hope you can see the true meaning of being a great trader. This one Christmas story of a ships’
Chief Cook and an Officer is just the beginning of your great future in your trading career. There
shall be more along the journey and I wish to share them with you.
It’s all about YOU!
Phantom
“It is I who must serve mankind better! Phantom “


Chapter 16 – Your Comeback After a Big Drawdown

Chapter 16 - Your Comeback After a Big Drawdown

ALS – Is it true that you have saved the best until last in your insights?
POP – You will see as clearly as anyone can see that what I am going to tell you is the most exact
and best information you will ever get in your entire trading career. You can call it the best. If it
isn’t the best part of any book you ever read I will send back every thought to the cleaners.
There are great authors, great advisors, and great traders in the world of trading. There are great
editors, great reporters, and great teachers of trading. They all have a reputation. They carry that
reputation well. I could never carry a reputation for it would be such a burden I could never survive.
Great people have been able to deal with it like my friend John Denver, Don Gibson, Oprah and my
Brother. They have learned how to carry such heavy baggage in their lives.
Who I am is always going to be more important to myself than anyone else in the field of trading. It
must be that way in order not to interfere with my duties of success. It isn’t a selfish thing, it is just
that we must be in control first. You see trading must be the most important thing in your life in
order for it to be possible for you to become the trader you know you are capable of being. You will
take the blame and try to take the claim. But listen to me! You must never be so lost in your trading
to think that your success is because of you.
Art, you have dropped some hints along the way and with the events that have taken place. I can tell
you that my faith in the small trader is no whim. As I read your brother’s memorial to John, I realize
Harold said it as perfectly as anyone could say the true reason of what this is about. “Was I
somehow meant to be here? Was this moment just coincidentally mine for my imagination to make
it as I will or was I supposed to be a part of all this?”
I can figure theorems pretty well from the facts I am given and I can assure you that you and I have
learned a great deal from this project. We have learned more than we started out to give. We have
learned more than we could imagine in a lifetime. Do you know the mail and understanding I have
received over just the past two weeks? I know you have seen the response too. I have it calculated
that we could put no less than a 1024 page book together of those we can thank, for not our, but
their insights. It is overwhelming to think that we are alone. But being alone is what trading is about.
It is very lonely in the world of trading.
I can tell you that our experience has opened our eyes and unlocked our hearts because of what has
happened to us, by being a part of the Futures forum. What a step forward it has been to see the
speed of thought in our lives today. I believe because of the faster speed of communications that the
markets are quicker today and my rules are even more appropriate.
I don’t know why I say my rules anymore for I feel that they are suppose to be the small traders
rules now. I don’t mind or regret the route it took to give what I have to give. I am not capable of
carrying a burden. I have just lately learned what tears are about. I have been told, scolded and
directed to a different light in my life. It has all been for a good reason and I thank my new teachers
for all of the effort to let me be in their class.
You must accept my thanks and appreciation for your understanding of my weakness and loneliness
of trading. Only a trader can understand that darkness. I thought I was alone but find out that there
are many lights along the path. Those lights are our new-found friends who have walked the path
strategically placing their brilliance in order that we continue our walk.
What a JOY to received the oldest book of Shakespeare from New England. What a lesson to
received guidance form more countries than I have visited. It’s important to learn again the zip code
of every state in the U.S. It’s an important lesson to learn what I would never have imagined thirty
years ago of how thought and feelings could transit the world so quickly. This is my shock to new
learned knowledge.

Winston Churchill once stated that “This is not the end or the beginning of the end, but could very
well be the end of the beginning.” We’ll accept that. We have started! It gets better. There are more
of us now. I no longer shall have to walk around in a majority of one.
It is going to be difficult because there are those who would pull my mask off. But all I can ask is
for understanding. Understanding of why I do not want or mostly why I can not accept credit for my
insights. To answer your Brother, Harold, yes, I was meant to be here! As long as I know why I was
chosen to be here. Only others can me why I am here. I shall listen to them! They will give me joy
from their hearts and allow me to bow at their feet in appreciation, for they know more than I of
what need brings in my life.
Traders are a macho bunch but look at me, Art! Am I macho and the true image of what a trader
looks or acts to be in the world of finance? No, I am just a teddy bear in my own world of big
complications. I am a very simple man and a small image of God.
I no longer shall ask Harold’s question. I accept the idea that I truly am supposed to be here and I
have the responsibility to respond and give what I can give in order to satisfy my inner needs or my
boss. You and I know that it is the readers and the givers on the forums and all walks of life who are
the guides in our lives. We have learned behavior modification well and acknowledge that criteria
in our lives from here forward.
Just ask and you shall have the answer. But it is in your own thinking that the appropriate ration be
dealt. Consider your reasons and you shall change your destiny. It is Phantom’s duty to follow and
see that you don’t stumble for I have already walked the path. I do not lead and I do not follow. I
only walk your path in appreciation of knowing you shall grow and be the leader that is expected of
you.
I need to show the starving how to take a bushel of rice and instead of eating, sowing instead and
learning the magnification of effort in prosperity. The starving are my traders who are my little
Phantoms in an overwhelming world of giants. My Phantoms shall become the leaders in the world
of traders. Not by my hand but by their own. You see they are the chosen ones to lead the New
World of finance. There are cycles and a new one shall surface. The little Phantom’s shall learn the
smile of trading in their lives. What more can you could you ever wish for them!
Art, I hope your wife isn’t getting tired of my stepping on her cats and it has been good to share
some of the sad times with you both and the traders who have helped us get beyond a period of
sadness in our lives. I know that someday your hill behind your house will be famous. I expect your
brother Harold has already re-named it. Take it to heart. It is not your hill. It’s only your walk,
which is yours. It is the same in trading. It is not our success it is theirs. Not by forfeiture but by
design that the student of a good teacher shall surpass the teacher.
I asked Alfredo if we could use his ideas on a post to convey more of what my intentions are. It
surprises me that others seem to pick up on what I am supposed to do than I do. Look at his post
and see what you think.
Can you forgive me for not sticking to the subject on this chapter?
ALS – I and the readers and traders understand where you are coming from and the importance of
what it is to walk alone. I know that you are pouring your heart out to us in an effort to show your
genuine appreciation of what has been given to you. I know that you are humbled again by what
others have presented to you. You have always prepared yourself for the possibilities as well as the
expected probabilities in your trading. When it comes to being an expert on everything, it just can’t
happen.
I know what a genius you are and how it sometimes robs you of simple happiness which most
people take for granted. To continuously move swiftly into the next step of life is true, as you have
stated thus far. Opposition to the unknown is high. You are no different than any other person or
trader. It is just that you have been given a different view on life, events and reactions of events,

which puts you where you are. You have been given a gift and you are the first one to accept that
you do not have a right to accept any credit for what you have been given. It is your time to give
back!
So it takes us a little longer to get to our chapter theme? We have only shown what an ordinary
person the Phantom really is. You are no different from the inside out than any other trader. You
may see the line a little clearer as you said that you are the observer and you do see the line in the
sand. You have been patient enough to wait for others to see the line in the sand. And they will see
the line in the sand. It only needs to be pointed out to them that there really is such a line.
Phantom, I am not saying this because you are my long time friend but because it has been proven
to me. You are the light in the lighthouse for the future, current, expert, and novice traders, not just
in the U.S. but in the entire world. You are their hero because you dared to be great. And you are
great. Anyone who could teach Christine to sing surely must be worth something (said with a grin)
in somebody’s life! The fact of you Phantom is that you are a very simple man! That is what you
have always wanted to be! So Be IT!
POP – Do I have your wife sew my buttons back on? You have exposed me more than I could ever
have shown. I have to put it in the category of committing a random act of kindness! I do appreciate
what you are trying to do. Let’s just turn the tables a bit here so the readers know more about you
now.
You see I know of your love for music and your first trip to Nashville in the 60’s and your collusion
with Floyd Cramer on your song. I know you didn’t make much on your first song and that trading
has been better to you. Maybe you should go back to your first love, no offense to your only wife
ever! After all what is important in life?
ALS – My brother is the singer and the musical part of our brain sides. It is funny how dare to be
great can change our lives. It is the same with traders. You hear! Go ahead and dare to be great!
Phantom knows it can be done and he is giving you the gift. Somewhere you will know how the
thank you will be directed.
I am impressed with the faith you have in the small trader. Just today on CNN I heard an expert say
just that same thing about the small trader leading the way. It is true you know that the word has
been written already. A small trader can and, Phantom if you are correct the small trader will make
a big difference in life. I use faith and not hope in your view.
You know Phantom if we keep this up we are going to have to pay the readers and the other traders
to pay attention to us!
POP – We know where we are going so what difference does it make if we can be real people like
everyone else. I think that for the first time in my life I have an outlook on life, which is a total
shock. I can’t get enough. I don’t care what my positions do tomorrow.
ALS – You never did! I guess that is why you are who you are. If the other traders who read your
insights can understand how simple it can be to not care because of your rules and just do it, – DO
IT! I mean as you say, it only matters what you do with your losers which determine your success.
I don’t mean to change the subject but the CD we are listening to now is Floyd’s “Losers –
Weepers.” Do you think that has any significance in this interview?
POP – Yes, Keep emotion out of it. If you do the right thing in trading, never be a weeper. Hey, that
is pretty good don’t you think?
ALS – 12:15 a.m. and I have your attention and tomorrow is Friday. I know you have big positions
on in the stocks. It is a long drive to Chicago! How do you think you will trade tomorrow?

POP – The same as always. I will sell more corn on the rally and cover when I am wrong. That will
be at 9:30 a.m. but first I will run the stocks. Lucky I covered on the close today. It has been down
and then up. I like it. More opportunity for us tomorrow, don’t you think?
ALS – Why don’t you just take tomorrow off?
POP – Ok, I will get out at the open or perhaps we can do it before tomorrow’s open with the night
trading.
ALS – How far do you think the corn will move if you get out tonight?
POP – You don’t even want to know! At least I am on the right side. We could see by going at the
market heavy. I can’t for I know better. Ok we’ll just have to look for a Saturday and Sunday walk
back to the top of the hill.
I notice that song you wrote in the 60’s is now playing on your CD. Are you ever sad you sold it for
such a miser of a penny?
ALS – You may not know how much I got for that song. It is the best price anyone could ever get
for a song. I have the greatest memories. I don’t make many of them anymore. Nor do you I bet!
POP – I’m pretty simple! My memories are no different that our traders or our little Phantoms I
mean. I hope Phantoms can grow up faster than children. I don’t want to watch from the sidelines. I
want to pass the ball once in a while.
ALS – Phantom, we are losing out here. I think this is all going to be cut from the book. Maybe we
had better call it a night until we get back on the subject.
POP – Ok, we can cut our losses. We will start over again. I just want you to do one thing for me
tonight before I head back. Put this on the Futures forum and let the other traders know I am one of
them. I’m no different. I’m just a bigger size!
ALS – Ok you win again. I will be up until you get home. See you for the true part of our trading
after the big DD.
POP – I’m going to take that bushel of rice to starving you now! First I would like to go to Lake
Tahoe for the best Chateau Brian. See you beyond!
ALS – We will get to the point soon!
Note: Alfredo posted the following in reference to his parallel of Phantom’s rules with his loved
game of Chess as it relates from his view.
[top] [post reply] Date: 30.Oct.1997 (Thu) – 06:03 Author: Alfredo A. email: mailto:
I consider myself a weak amateur of the game of chess. But an amateur (in the sense of lover)
nevertheless. There are some fundamentals that even beginning players know that they must
execute properly in order to stand a chance of at least forcing a draw against a better player, or
checkmating a weaker one.
1. The opening is critical. You have to be both aggressive as well defensive and work your pawns
looking ten or twelve moves down the road. Some games are won during the first five or six moves.
(Phantom’s Rule 1 ??? )
2. Next comes the consolidation. You develop your horses, bishops and towers and protect your
king. You are preparing your pieces in such manner as to later on permit you to launch a successful
attack. You explore the weaknesses demonstrated by your opponent. You try to tire him as much as
possible. (Phantom 2 — press your winners ???)
3. If possible, the final attacks, and checkmate. Against a stronger player, a draw will do. (Phantom
3 — this one he owes us — when to liquidate and take your profits ???)

Battles are battles, be they on the air, sea, land, chessboard, or the PITS. Is this a very futile
analogy???
Any chess players out there to correct/improve my reasoning?
Good trading
ALS – Phantom, I think Alfredo has you pegged pretty good! Did you ever play chess?
POP – In my younger days I would pride myself in chess but as I grew older, I never felt I had much
time for the game. I should play more chess to relax but there are so many things to do now.
ALS – We’ll cover your chess matches someday but for now let’s go to “trading after the big
drawdown.” Why do want to put this part in?
POP – First it was a question that one of the forum followers posted and I want to answer their
questions. It is a good question. Second, most traders wouldn’t be reading this if they had never
been faced in a similar situation as a big drawdown. It can happen in so many ways.
I am not going to judge why a trader would have a big drawdown because it has searched each of us
out at one time or another. A big drawdown is what will stop you from trading. I am going to
approach the reason for the big drawdown as if a trader had fifteen losers in a row! I am not going
to judge any other reason of character as to why the big drawdown. I want you to also forget the
reason for you misfortune from here forward.
ALS – We both know that holding a loser too long is the biggest cause of the big drawdown! Why
are you so kind?
POP – Really, this is the best part and to go forward is what we are after here. We don’t look back
except to learn from what has happened in this case. Another reason I want to approach the
drawdown as you having a series of fifteen losses in a row is because that is an event every once in
a while.
We are going to recover and I shall show you how to recover after the big drawdown. I am pretty
intent on not giving you specific trading plans or signals from my programs but I do need to give
you the way to recover. To do it correctly I will have to give you a good suggestion to take in your
recovery. I want you to research on your own and take the suggestion only after you have
understood the suggestion correctly and can approve of what I say to you on your own. In the end it
will be you who make the decision to make the trades. Therefore, please verify your data. It leaves
some interpretation to you the trader in your trading program.
To start we are going to make sure we have enough funds to continue to trade. If you don’t really
have enough funds then you should postpone until a later date. Notice I did not say you had to quit
trading! We all quit trading for some reason. It is just that your reason is different at this time. Ok
we proceed now that you are satisfied you have enough money to continue to recover from your
past misfortune.
I want you to go into the next stage of your trading by accepting an assumption. I want you to
accept an assumption that you have made fifteen trades in a row, which have all made money.
ALS – I thought you said we were going to assume the big drawdown was caused by fifteen losing
trades in a row. What do you mean now that you say assume you have fifteen trades in a row, which
have made money?
POP – Frame of mind is what I am changing for you by asking you to make an assumption that you
have fifteen winners in a row. The reason I am asking you to do this is because you will be more
careful if you have had fifteen winners in a row. If you assume you had fifteen losers in a row, you
will be sort of careless in your thinking by expecting that surely you won’t have many more losers
in a row.

Your frame of mind with fifteen winners in a row will put you on the edge of caution. I want you to
be on the edge of caution. Or we could call it being alert to quick market changes. You can no
longer afford to make a bad trade and now that puts you at a disadvantage. We will turn that table
from here forward by doing the following suggestions.
First you must know what your risk to the dollar is going to be on each trade from here forward
until you get to a point of recovering from your big drawdown. How many ways can you know your
true risk to the dollar on your trades? Actually with options you can but only if you are a buyer.
There are other ways to do this too by using butterflies in future positions by using three contract
months but this is too advanced for you at this time so we will stick to options.
I don’t like to give trading advise but it is imperative at this time that you understand at this point,
we are talking about an exception. You do need some advise as to where you can find the correct
road. You know what you want and I am only giving you directions on which road has what you
want along the way. I am not going to give you specific advise but a method of turns and directions
to you in order that you get on the road and headed in the correct direction.
Second I am going to tell you that you can and will recover after the drawdown if you do not take a
side road along the way. You can get to where you are going but you only have enough gas (money)
to get you to that point. Don’t take any detours. Sometimes it is not as much fun to head straight
down the road with one purpose in mind. That is your only handicap. You have a good choice to
make. Knowing you can do it by following correct the road is a good choice. Should you decide
differently, you are putting the recovery in your own hands differently.
Take out your chart book and study it. Tell yourself the nature of the market you are studying! Pick
your best eight markets only. Try to diversify to a point that they don’t all tend to trend together or
that they are all related in their behavior. Pick out the existing trends of the eight markets. Write
them down and notice how many are in up trends and how many are in down trends. You’ll most
likely see that most are not in trends at all. At this point it makes no difference. You are not in a
hurry except to make the right trades at the right time.
What you are going to do in your recovery is to put as many aspects of trading in your favor as you
can in order to change the law of probabilities of recovery in your favor. By knowing the trends of
your chosen markets you are to classify them as bullish, bearish or non-trending. Seems simple
enough doesn’t it?
Place the bearish and non-trending market charts aside for this day and pick them up again
tomorrow to see if any changes have been noticed in behavior. You are going to concentrate on the
bullish established trends at this time.
The main reason we need eight of your favorite markets is because we are only making the highest
probable trades and we need to diversify. You are also going to put advantages on our side. You
have a better chance to predict a bull trend than a bear or tired trend. Or do You? Sometimes a tired
or bear trend is easier to see. Bear markets tend to move down quicker than Bull markets move up.
Or do they? You don’t really know do you?
Ok do your research and look at the market behavior from today backwards a few years at least.
Learn from this research. It won’t do you any good for me to tell you since each market can react a
little differently. Any rate I want you to know not me.
You are going to use options for your recovery because we can limit your exact known loss. Futures
tend to not be an exact known loss when you enter due to the variable factors you have no control
over. You can also get other benefits from options, which we can’t get from futures.
The best advantage we are looking for in options is the fact that in bull markets, options pick up and
increase in volatility most of the time. In a bear market options tend to lose volatility. Because of
our limited required risk, we can use the bull markets to our advantage due to the increased
volatility tendency. Since you don’t want to sell options and have open-ended risk, we rule out the

bear markets for your recover. Also bull markets tend to spend more time going up than bear
markets do going down. Markets, which go up, give us more time to increase volatility while open
interest builds and interest increases. Bear markets tend to lose trader’s interest. Or do they? Do
your research!
I am not going to give you a lesson in options as there are experts in software, programs and about
any other aspect you could want to learn. If you are interested during your recover to learn more by
all means do it. You are however, going to use the best part of options for your recovery. You are
going to put increased volatility on your side as a part of your plan.
Now that you have your vehicle for recovery we now need to get a friendly trend working for us
with some information standing in your corner which also helps from the charts and from research.
Isn’t it a good assumption that in bull markets that volume and open interest tend to increase? Isn’t it
a good assumption that increased volume and open interest increase volatility? Isn’t it a good
assumption that markets tend to have three major waves of buying in a bull wave? Again, please do
your research in order that you have the confidence that those statements are true and good
assumptions.
After looking at all of the charts to determine if any bull market is established, you are ready to
make a trade when the parameters are correct. Just what are the correct parameters? First you must
find a bull trend in one of your markets. Next you must learn which phase it is in. Is it in the first
wave up, the second or the third? How do you tell? The answer can be several possibilities. You are
going to research our own possibilities! You will have to make your own assumptions. When you
are convinced a bull trend has started, look now for a four-day reversal. At that point you shall call
that wave one of buying. Look further and see if you have any other four-day counter trends. If you
can point out another, let us call that wave two. And then look for a third. You may have to look
backwards in your research to find some examples.
On your current charts, look for a market that is established as a bull market. What you want to find
is a possible four-day counter trend starting to develop. We want it to be in the first wave of buying
in the established bull market. You could look at the second four-day counter trend development but
we want the most powerful opportunity.
You will want to take a position on the first four-day counter trend in the direction of the bull trend.
You can make it one of two ways. You can do it on the break out of the forth day’s highs when it
breaks above the previous four days or you can position when the move is above the high of the
established bull move. The best way in your case is the first. You want to establish your position
prior to the increase in volatility. This will be your entry of the fourth day when the market breaks
above the prior four-day’s highs.
You have a pretty good idea of what you want to do and how you want to enter your trade. You are
looking for limited risk trade when you have an established bull trend. You are expecting to be
wrong but with limited risk by buying calls, you can make the trade. You want to either place a call
bull spread or purchase the next higher strike call, depending on your capital available for trading.
You must decide what amount of risk you can afford to take based on your account size at this time.
It is your decision. A rule of thumb is ten percent of your capital on the trade. If the bull spread
costs you 5 and you have 5,000 in your account, we can go along with it. After you put the trade on
you will be looking to get out when it is half value or your position has met the criteria to press, get
out, or reverse.
You want to trade the option with at least 40-60 days of time remaining. An option with less than
40 days remaining will leave you too little time to participate in a good trend without losing too
much time value. You can position an option with time upwards of 120-180 days with little problem
but in a good bull move, the closest contract will be the faster volatility mover. You are after the
fast volatility move in this position.

Your trade can benefit from any increase volatility in the established bull market and the fact you
have entered at the first phase of a bull market. Your entry point is a critical point in that you are
going to see either a continuing of the trend or a failure of the continuation. You have used rule one
by limiting your exposure and risk. You have set your limit on your risk and you are expecting to
only lose half of your risk by placing an order to get out of the position once you have lost half of
the value of the option. It the option reduces in value by one half, you surely are not in the trend
anymore at that time or you have moved too close to expiration. You move to the next trade!
The other criteria of removal of the position is failure of the four-day counter trend to re-establish
the continuation of the existing trend. A failure is confirmed when you have moved below the prior
four-day lows during the next trading day. You could have a very fast trade if wrong and a long
rides if correct. Be prepared to recognize the failure or the continuation. With your option position,
you are protected in the amount of drawdown but be swift in preserving your funds when not
proven to be correct.
You can take the second four day counter trend to establish an added position by using rule two but
only if you were able to properly establish the first four day counter trend position. Be under the
assumption that you may be too late on the third to establish positions. The third four day counter
trend can lead to some pretty wild swings if it fails to continue the trend but still be in a trend. This
is the part of the bull trend you will want to think about taking profits. Since you are in a recovery
stage, you must decide to take your money on this move rather than trying to force another trade.
You make the next trade with the same criteria.
The importance of this type of positioning in your recovery is that you will make a much better
return than what you risk when you catch both a bull trend and the increased volatility of the move.
You want to make the most amount of money with the least amount of risk. You want as many
factors working for you as you can possible have. You will be tempted to take the four-day counter
trends in a bear market but you have an additional drawback. That drawback is that volatility most
likely will fall and your expectations are reduced rather quickly on what is possible in the move.
Therefore, it is recommended that you stay with only bull trending markets and the first four-day
counter trend.
You’ll find many advantages in this style of trading but patience is rewarded in the long run by good
gains only from waiting with the correct trend. On the other had running away from failures of
continuation of a trend still leave you with small losses. This is less fun than most trading done by
you over the past when you had the drawdown.
There will be times you won’t have positions on, in fact many times but don’t let that be your
downfall as you are not trading to trade but to recover from the big drawdown. The best benefit
from this type trading is that you will learn a lot about markets and options this way too.
ALS – Let me review a little here. You are suggesting that after a big drawdown that traders take at
least eight markets, study and determine which are in established bull trends. Next you are saying
that you must see a four-day counter trend to use for entering an option position. You establish
either a bull spread or bull call position in the direction of original trend when the market takes out
the prior four days high.
For protection you suggested that a continuing trend failure is reason to get out on the next day if it
goes below the prior four days low. Also if the option loses one half value that it is time to get out.
You want at least 40-60 days of time left minimum on the options. Have I left anything out.
POP – Yes, you want the first position on the first four-day counter trend and to press on the second
four-day counter trend but use the third to take profits rather than add again. You only add on the
second four-day counter trend and it is best to establish on the first four-day counter trend of a bull
move. You are looking for volatility to be your friend in a bull move and you are expecting to have
bigger profits in a bull move than your risk by at least a ratio of four to one.
ALS – Will this work everytime?

POP – Of course not but there are good merits presented here. As I have said before, I really have a
lot of faith in the small trader. The large trader has all of the data to establish the good trades and
has the funds to back up big drawdowns. I am not giving advise but presenting a situation which
can lead to recovery from adverse market affects on drawdowns. I want the small trader to become
the leaders I know they can be. It has to start somewhere and I think it is going to start from a big
drawdown for many of them. No one is immune from market exposure. To control that exposure
first, we must trade with extra advantages on our side. We are doing that with this type trading. We
are trading with an established trend and we are adding but only correctly. We also are protecting in
two ways our position. Both rules one and two come through again.
ALS – I have been meaning to say something about that. Your two rules as Alfredo mentioned in his
chess parallel, he says you owe the readers a third rule of when to liquidate and take profits. What
about rule three.
POP – I have said on the forum what I feel about taking profits and when to liquidate. I did include
it in the recovery. I am a believer in taking profits in the third phase or wave and within three or
four days of high volume days. Most markets I like to take profits within three days in most cases. I
hope that gives some answers and makes a few traders alert to functions of profit taking. I am not
going into the detail at this time. I really have given more than I intended to give in this book on
profit taking.
I see as the most important aspect of Phantom trading at this time the understanding of rules one
and two. As far as giving a rule three, not yet!
ALS – There are a lot of questions about rule two yet. Most traders are still uncomfortable with it.
They have taken to rule one pretty good. We surely can explain rule two a little better.
POP – Maybe we should do a follow up on rule two. Let’s ask what questions are foremost in
trader’s minds on the forum. If we don’t get it into this part of the book we will do it in a later
writing.
ALS – Ok that sounds good to me. It also sounds like you might have another rule yet.
POP – Time will tell on whether there is to be a rule three.
ALS – Are you giving a hint here?
POP – Have you notice how sometimes things don’t get written correctly or interpreted correctly? I
don’t care about errors about me or my career as I am in the background by my own asking but I
don’t like to see data wrong. I shall challenge when the data is wrong which affects a trader’s
interpretation or their ability to correctly trade. How can I know unless I get feedback. I must get
that feedback before I can move on to other points. I don’t mean to take so long in rules one and two,
but there is no other way.
ALS – Should we cover some detail into recovery after the big drawdown a little more?
POP – NO, let us wait and see the reflections coming back first.
” You want to establish your position prior to the increase in volatility. This will be your entry of the
fourth day when the market breaks above the prior four-day’s highs “—POP