Category: Phantom of the Pits

Phantom of the Pits

Chapter 15 – Quicker Than the Eye

Chapter 15 - Quicker Than the Eye

Usually a newly placed trade in any particular market is placed with the greatest optimism and with
human elements of hope for it’s correct movement. Perhaps the hope for the correct movement is
what keeps new traders mesmerized by the market’s inability to comply more times than not.
Can it be possible that it is easier for a trader to do the wrong thing or is it that when a trader makes
a trade all the other information comes out two minutes later?
We will explore Phantom’s insight on why things seem to change rather quickly when a new trade is
established. Why does the market seem to know when we have placed a new position? What does it
take to expel this type of thinking and reaction to our newly placed position?
At what point do you feel that it is the other traders against you in trading? Why should you feel
that someone who is giving objective advice is now your new enemy and on the other side after you
have just positioned. Doesn’t everyone?
Is it possible to do just the opposite of what we think is correct and come out ahead since we seem
to do what we think is right and get slapped too many times? We are talking emotion here and that
is the one element that no one seems to have at the time of researching a position or entry.
Once a position is placed, emotion becomes an element we don’t like to deal with. We get excited
when the position moves our way but become complacent far too often when it totally ignores our
hard earned research for positioning.
ALS – Phantom, I know that you have said that you are not an expert at anything except on your
own trading. I also realize that we are only talking about your insight and that you have said it is
important for each trader to grow and develop his or her own ideas from insights they formulate
from observation and research.
Sometimes it helps other traders to know other points of view on a subject. We know that everyone
has his or her own ideas on what a particular market is going to do. Do you think it is important to
view other people’s insights as a way of understanding our own behavior?
Phantom of the Pits – I’ve read good books on the adult-child theory in trading. We start out as the
child and often times, traders never go beyond that point. Our thinking must become adult in trading
and that is from understanding and knowing what is correct.
As a child, we often don’t need a reason but just the rule. As an adult, to be effective in trading, it is
important to know why and not just the rule.
It is difficult to convey to someone an insight of what happens when a position is placed unless the
person you are trying to convey the information to has the same position on and effectively has the
same environment. Just a simple thing as changing a flat tire for the one whom changes it, is a good
example of what I mean.
If you are not the person who had to change the flat tire, the effect of frustration is not the same.
Because of this you are going to be more removed from the important feelings of such an event.
Trading does have the same type of removal from a situation of a particular point of view as
changing that tire.
Most trades are placed with good reason and backed with good research. If the trader didn’t feel
they had a good chance of being successful with that trade, they would have never made that trade.
That feeling of better than average probabilities is self defeating because with that feeling alone, it
is possible to miss the big moves by being wrong first.
I view the nature of entering positions a little differently and I feel that is a key in better trading. It
is not natural to feel other than optimistic about a trade. What must be done is that the optimistic
view must be projected beyond the initial position.

The most important point of a newly established position is to understand that the initial entry of a
trade is only a small part of the expected process of trading your position. Look at it as if you are
going to make a series of trades anytime you get a signal.
You must have the latitude of knowing and doing what it takes to correctly end up with a position,
which reaches to your goal. Your goal is the important part and not the trade you have just entered.
If I were to tell you that your signal to enter a market has the criteria that you must also be swift in
protecting that position and correcting that position as quickly as you can. Would you be able to
reverse your position as many as three or four times.
You would be more agreeable to that prospect by being alert to the possibility of having to reverse
your original position. That thinking would make it easier for you to make the needed adjustments
to your position. This is what you must do anytime you enter a position. You must know that the
initial entered position is just the beginning of your trade.
Rather than taking a position and letting emotion enter the picture, you must understand that
position does not justify any emotional modification of your thoughts. Stop that position before
emotion even enters the trade by removing the position. You can re-enter the position correctly
again and again until you have no emotional affect from that position.
If your position brings emotion into the picture, it is usually wrong or the wrong way. The market
will seldom comply with your position at first but that in no way says not to trade correctly. Your
entry is a lot of times at the place where many think the same as you. Don’t ever feel bad about this
because you’re not alone in your thinking. It is that you seldom can all be right at the right time.
The edge you have over everyone else’s thinking is that you know you are quicker than the eye. You
can remove your positions quickly because you are alert to the idea of knowing you can re-enter
immediately quicker than the eye. A bad or incorrect position is the best opportunity to do the
correct thing. You are going to always do the correct thing. Be swift! You can stop this emotional
feeling of always getting in at the wrong place immediately and it will soon become second nature
to you.
If you find that you feel you are wrong as soon as you enter, remove that position because you are
right (in removing that position!) Why do I know this works? I know that some of my best days and
trades are when I started out wrong with a position. Learn to understand that an existing wrong
position is the best excuse to get a good position. So what if your are wrong and wrong and wrong
again.
The best part of being wrong is that you are going to do the correct thing by removing that wrong
position. Listen to your inner thoughts on being wrong and when emotion becomes an element,
remove the position. It really works. Emotion has no place in a trade. If emotion is in your trade, it
is a wrong position.
ALS – It seems easy to say but how about execution of that idea of getting out when emotion shows
its face in your trade?
POP – You must make it a mechanical thing. It can be done in various ways. Most new traders don’t
have enough funds to properly diversify so that they have several positions which give them the
opportunity of throwing out the bad and keeping the good with lower overall risk proportionally.
There are other ways of making the removal of emotional positions mechanical such as when you
use rule one. You are going to not become as emotional when a position proves correct as when it
proves wrong.
What you need to do is listen to yourself and your emotional distress of knowing that you and not
the markets are going to tell yourself that you are wrong in a position. Your emotional distress is
telling you to remove the position immediately. Do that without hesitation and it becomes
mechanical to you.

Isn’t the purpose of rule one to also listen to yourself and not the market on telling yourself when
you are wrong. If you let the market tell you, you have an elevated emotional distress, which now
will affect your judgement and decision to properly remove a bad position.
Since we don’t allow the market to tell us we are wrong but only when we are right, we must have
something tell us when we are wrong. What do you think that is? There is probably not a better
signal to get out than the beginning of elevated emotion in a trade.
I know it take practice and a method of behavior modification, which you must devise to help you
work with the implications of emotional elevation when wrong in a trade. You can do it and make it
a habit after a little practice. It is no different than if you were to go to a stranger each day and say
good day. After a period of doing it you would find it second nature.
ALS – Aren’t you going to give us your methods or suggestions for helping with the behavior
modification on getting out of bad positions?
POP – If you have to unbutton your top button on your shirt, you had better get out. If the phone
ringing irritates you, you had better get out. If you are beyond your reasonable time frame to hold a
position, which does not prove correct, you had better get out.
We know that a broken clock is right twice a day. You could assume that when you don’t know the
position is correct, you just as well reverse as you still won’t know but you can be sure that you will
soon know one way or the other. Of course this isn’t a very good assumption so it will actually keep
you on your toes more than anything else will. This can also be a dangerous way to position but
believe it or not, I have seen day traders position this way in order to establish a position when not
having an established trend.
I don’t personally recommend it but I don’t advise against it if you do it with good research of nontrending
markets. Sometimes your best opportunity comes when you have initially entered a bad
trade. The opportunity is that you correct a bad position and profit from that wrong position being
corrected. It happens more than not if you are alerted to this thinking.
Be swift is all I can say to impress you to this possibility in markets. The surprise is often the other
side of our current position. Just because we have the expected side of a trade does not prevent us
from going with the surprise side when we know our position is wrong. In a correctly proven
position, we never go against that position though.
ALS – Do you feel it is easier to put the wrong position on rather than the right position?
POP – Actually it works out that what we have just done is often times not proved correct but that
does not mean putting on the wrong position is easier than the correct position. There is another
element, which gives us the feeling that we seem to see the market go against us as soon as we enter.
That element is timing.
Timing will cheat us more than not. An inexperienced trader will fail to recognize the importance of
persistence in our re-positioning after removal of a position. Just because we exited an unproven
position in no way says that we were wrong. It is our intentions to keep the drawdown small and
allow us a better entry when we are not proven correct.
Isn’t it better to get out if you don’t get the expected move? You want to be swift when the market is
working for you but and you want to have the least exposure you can have when it isn’t working for
you.
I realize that most markets spend lots more time going up than down and your exposure will be
longer in a bull market than a bear but why diddle in the middle when the market is doing it’s chop –
hop. You use the chop-chop to better position and to cheapen your position.
ALS – Just as soon as a position is placed we seem to hear all the news which does the opposite of
confirming our entry. Why?

POP – After we enter a position, we are more open to listening to news, which makes us more
sensitive to doubt of our position. The answer of course is to remove our position if the market does
not confirm our position.
If we see that the news is against us, we surely are having doubts about the position and it hasn’t
proven correct in the first place. It is just another signal to ourselves that rule one must be foremost
upon a new entry above all else in order to keep emotion out of our thoughts. That way you can
bring on any news and not let it directly affect your thinking.
ALS – Why does it seem that the market knows when we have just placed our position?
POP – It is true that it seems to happen to us. I think every trader feels that way at one time or
another until they learn to be mature in their understanding of how the markets react to waves of
orders. Price movement makes other traders decide to enter into a position.
We tend to take obvious signals and entries, which many others are taking at the same period of
time. Because of that, the market will appear to make a move against us immediately. Every trader
will eventually face this impression. That is not a bad circumstance to have happen unless we don’t
react properly to it.
It happens much more than you think when the market turns very close to our entry. To be alert to
that possibility is a must in trading at all times. To be able to have a plan to address that situation is
critical in survival long term.
To eliminate the feeling of the market knowing when you enter and immediately moving against
your position, you must know that the most critical time of a position is immediately upon entering.
That is when you must be prepared to be the quickest to protect your position.
I always consider the most dangerous time of a position is at entry because you do not have a
proven position at that time. Why is the most dangerous time of a position upon entry? My answer
is that it is because this is your only opportunity to keep your drawdown small if you aren’t proven
correct with the position.
Keep your loss small and quick, early while you have the opportunity, otherwise you will allow
bigger losses to affect your loss taking and thinking. This is why I call entry the dangerous time of a
position. It is your first opportunity to keep losses small. The first opportunity to keep losses small
is your best opportunity.
What you do immediately upon entry of a trade determines whether you will be a good loser and the
best winner you can be.
ALS – I have often heard traders make the statement that they should just do the opposite of what
they think and they would trader better. What do you think of that statement?
POP – I also have heard that remark. I know my Dad thought that was a good strategy in my early
trading days too. It does have merits. Don’t get this wrong! The merits are that it is good thinking to
have a plan for acting upon that thinking.
Plan to know that what you do is with a good possibility of being wrong and having a plan to do the
opposite as soon as you know you don’t have a proven position. This works better in non-trending
markets.
Let’s say you know that a big news item is going to come out or you have just been given a data
from a big report. Your thinking could be that the news is already in the market but you aren’t sure.
Most traders will trade accordingly and when wrong, get out and that is that! Well, doing the
opposite is the correct thing to do but you do it because you were the wrong way to begin after the
data. It is important to avail yourself of all sides to a market in certain situations such as reports.

So you must admit the merits are true in a sense of that statement. You can do the opposite of what
you think even though you did something that was wrong at first. Isn’t that the same as doing the
opposite of what you thought at first? In a round about way it is!
ALS – I have another question, which just recently became pretty important. On a news channel an
interview with a particular expert was like throwing gas on a fire. The traders who were positioned
counter to a remark made, felt the person making the remark was their enemy for making such a
statement. Is this appropriate to have such remarks made and is it destructive thinking to let it affect
a person’s trading?
POP – It happens all the time. That is the first assumption you must make for it is true you will be
more sensitive to a person’s remarks which are counter to your position. And I suppose that is ok to
be sensitive as long as you keep emotion out of it. But keeping emotion out of it when you see a big
slide or big runaway market is hard and almost impossible to ignore.
The true test of such remarks is what the market does in reaction. I have found over the years that
markets do react to such remarks. But here is the key. You will have more than one reaction. You
can use those reactions to your advantage if you remain swift in your market moves. In fact you
must be swift and you must use what the market gives you for your advantage to position or profit.
Here is why you will tend to have more than one reaction. The local traders will see the remark or
even a report of data first. Their reaction will be as a professional and they will position according
to their beliefs. At first it won’t be in unison but it will pick up a cadence of sorts and you will see
some kind of trend in pricing early. That is usually your first wave of buying or selling. Next flow
the orders into the pit from those who have just gotten the news and you see a further reaction to the
news.
The third wave of news is the customer (public) who have been told the news and have contacted or
been contacted by their brokers. The third wave will usually be the strongest because the
willingness to fade the news is less prominent when their orders reach the pit. This is when you
have your thinnest market and when markets make new highs or lows.
After all three waves of orders are filled, you still have your stranglers upon learning the news
whom take positions. This could take a day and a half to enter into the market. The news is seen on
TV, heard on radio and read in the newspaper after the market is closed. That is part of my day and
half theory on news items and events.
Upon the conclusion of day and half of response and reaction to data or a critical news remark, the
market usually comes to a Plato of understanding of equilibrium.
The second part of your question is that it is not constructive to become emotional about a news
remark but you should recognize the opportunity of such a remark being a mechanical reaction you
can make to capitalize on other peoples behavior to emotion from such a remark. This sometimes
will take a couple of days to play itself out.
It is important to understand that this can change the continuing trend, counter trend, non trending
or inter day trading and void some trader’s signals. To be alert to this is crucial in following your
protection of your positions. More times than not, you can cheapen your cost of your position by
using the knowledge.
You can improve your cost of positions by using the news to properly splitting half of your profits
and re-establishing on the waves of orders. Or you can use the news to establish a trading range in
order to have a better position than from putting it on all at once.
In other words you have the opportunity of scale trading due to an expected wider range of activity.
But keep in mind this must all be thought out in your trading plans and you should be prepared at
all times for these events in order to utilize them in your trading. Most systems do not take this into
account. The surprise side is created often by as you called it, fuel on the fire.

Its is sort of like watching someone pile logs up next to the fireplace. You with almost certainty can
say with high probability as soon as you gather additional information what is going to happen. If
the temperature is very cold you can say that there will be a fire in the fireplace from the knowledge
you have gathered. Well, news stories at critical turns in a market can do the same thing.
You see the logs and you are waiting for the temperature to drop. You certainly don’t use a squirt
gun on the match. You use the warmth to your advantage even if you don’t like fireplaces. Same in
trading, you use the warmth of news items to your advantage even if you don’t like the fact it is
against your current position. Change your ideas on events when you gather additional information
whether being fundamental, technical or tactical (as I call the mix.)
ALS – With a slide of the hand and quicker than the eye, we seem to get back to the same things in
successful trading, knowledge gathering and behavior modification. Isn’t this most everyone’s theme
in trading?
POP – You know I don’t really know. I only know what I have learned over my years of trading. If it
isn’t most experts themes, I would venture to guess it soon will be. I know there are those who will
read this to improve understanding of insight into successful trading. I know they can understand
the problems of trading better because of what we are doing. I am not out to disprove any successful
method by presenting my views on trading but only to enhance the possibilities.
ALS – I think there will be critics of your views.
POP – Do you really think so? I disagree with you. I am wrong in the markets a lot of the time but I
don’t think you are right with that statement. It is like going down one of two roads. Unless you go
down both of them you can not say you chose to take the wrong one for the better view along the
way. It is the same in trading.
I have presented a view along the way. It is just that I have been down both roads and I can
accurately express which road I feel is the better one to take. I am presenting an opportunity to
expand horizons of trading within each trader’s mind. I am not presenting a limit or restriction to
improved thinking on trading systems or criteria.
To be a critic it is important to look at things from all views. You look in a mirror and you don’t
even see yourself the way others do. It is reverse image. To be a good critic you must be able to see
as others see. You must not rule out the reverse image as a correct view.
ALS – Is that what you consider your rules, reverse image?
Pop – Very interesting observation. I suppose you could call rule one a reverse image rule from
what others see. It is just the opposite of most people’s understanding of what is necessary in trading
rules. We do make the market prove us right rather than wrong and that is reverse of common
thinking.
We do assume we are wrong and in an unfavorable game until proven correct. That is also reverse
image. In rule two we do press our winners and that is the reverse of taking losses or the other side
of the coin.
Yes, I guess that by looking in a mirror you could easily understand why others do not see as you
do. You really are looking at a reverse image. Sometimes it is important to see things differently
than others. I have learned it is better in trading to be different. You never need to conform to
anyone’s view but your own in trading. Don’t forget that! Use your own ability to improve your
behavior in trading.
” You really are looking at a reverse image. Sometimes it is important to see things differently than
others. ” —POP


Chapter 14 – A Wink is as Good As a Nod To a Blind Horse

Chapter 14 - A Wink is as Good As a Nod To a Blind Horse

Many subjects of interest seem to intrigue Phantom on trading but seldom is there time in a persons
life or career when the time to smile and have nothing but fun exists. As a child we all experienced
the great fun of a Sunday afternoon filled with surprises and anticipation of newly found fun things.
As an adult we often miss the point of a balanced life in most respects and none more than to take
the time to be happy regardless of the current situation.

It seems fitting that Sunday could be one of those days for traders. With electronic trading now and
world markets, it is more difficult to have the old days of limited hours of trading through the week
and have weekends free. Still Phantom wanted to give a smile upon the serious adventures of
trading.

Today we start with a blank sheet of paper on the so-called cheat sheet in order to convey the
thoughts of fun in trading as well as respect the seriousness of the business required. We never
know the road and the turn this project is taking until we come upon it. Fitting since this is written
as Phantom’s view as a trader’s insight into reality of trading. Nothing more than his presentation
into your thoughts in order to generate your own ideas as to what the possibilities are.

Sometimes a question of how to approach any situation can usually be reduced to a series of
qualifications of one of two states before going into the next priority of thought. Phantom indicated
that as we grow older it seems to be natural to oppose change of any kind. Since change is the one
thing we can count on we must learn to use it to our favor even more so as we grow older or we fail
to grow at all. This is true in trading and is usually magnified as change takes place.

Phantom’s explanation of how the opposition to change is directed was explained as a percentage of
the whole. He indicated that as a child of maybe 6 or 7, we would judge change based on our new
adventures of discovery. Over the next year as a child we would grow much more than the
additional year of 12.5% from age of 7 to age of 8. Mainly that in that additional year of growth as a
child, we would find change an adventure of new found knowledge and not put restrictions on
ourselves.

As we grow older say from 49 to 50 we have increased our new found life knowledge by a smaller
percentage of say less than 2%. Our new knowledge is now not new frontiers of adventure but more
of an uncomfortable reality of unfamiliar situations. Since 98% of our known knowledge is more
comfortable than the 2% of new knowledge we tend to oppose any change created by the new
knowledge for we strive for the simple comfortable life, as we grow older. We tend to feel that our
effectiveness of making changes ourselves is reduced, as we grow older because the percentage of
the whole of new knowledge is smaller and smaller each year.

Phantom feels when we reach the point of not caring about change anymore, we have severely
defeated our most powerful thought process of creativity. Creativity can enhance our ability to
accomplish great things and make great trades.

One point Phantom felt about the question of change was that it is important to expand the
creativity process best by doing the fun or new thing, which gives us a sense of adventure in our
lives. To be young again is not a lost thought if we could decide to be young today in our thoughts
and our motivation toward being creative again. But how do we proceed with our creativeness to
overcome opposition to change? Phantom is no expert on such a subject and so he feels as long as
we could put a fun smile on the readers face, that it would serve to put on notice anyone who failed
to come up with their own excellent ideas or their own answer.

ALS – Phantom, I know that “A wink is as good as a nod to a blind horse” is one of your favorite
sayings. Why is that so great a statement to you?

Phantom of the Pits – My Grandpa was one of the last people to have horses for working the fields
that I knew. It really wasn’t that long ago but to younger people it seems like long ago. When I was
a small child my Grandpa would take his workhorses to the field to plow the fields. I would get to

sit on the big workhorses, as they were very gentle. Being gentle horses had drawbacks, as they
were at times also very stubborn. When Grandpa couldn’t get them to do what was required, he
would say, “A wink is as good as a nod to a blind horse.” Well that stuck with me whenever I knew
I was correct on something and couldn’t convince anyone of it.

Trading is full of situations where that phrase is fitting. There are traders who are as stubborn as the
horses my Grandpa had for working his fields. Still we loved those horses until they died. We never
gave up on them and they proved to be great memories of wonderful efforts of a great team of my
Grandpa and the horses.

Today if I take interest in any particular trader’s view and I see that view as very narrow or perhaps
close to an opinion set in cement, I will use the phrase. It is meant only to provoke thought as to all
possibilities rather than leaving a narrow and fixed opinion. There are often times, which it is
obvious to me that the particular trader is wrong in their fixed and narrow view. I am not making
judgement that the view is wrong but that it is too narrowly based or insufficiently thought out. I
will use that phrase to provoke the important re-thinking process in order to search out new
knowledge.

ALS – You must be careful with the statement because there are traders who will immediately think
they are wrong and go the other way.

POP – Yes, that is mistake newer traders will make. The broker will in order to verify an order will
say “are you sure you want to place this stop?” The trader will doubt his plan at that point and say
“no, let’s hold off on that.”

I don’t mean to be responsible for changing a trader’s mind but only to change their horizon of
knowledge and thoughts. I especially will see it an important statement when a dramatic change is
starting to flag our indicators. A common thinking is what if I miss the move? So what? Is there no
tomorrow?

Ok you put the position on anyway and you are wrong! So what? You expect to be wrong if you are
thinking and trading correctly. It is a big problem only if you don’t properly protect your trade as
required. My statement is to prepare a trader for looking and being prepared to act on any
possibility rather than being convinced beyond doubt.

ALS – You said we would talk and explore fun things, which provoke creativity. Let’s just start with
being a child again and playing games on Sunday.

POP – Ok you have given me good thoughts when you said to start being a child again. I can
remember when just our family on Sunday would play a game called “PITS.” I don’t think many
folks knew of it that many years ago but I just recently saw a deck published in the 20’s recently and
that brought back memories of a game which has been around for a long time. It was a game based
on trading. Now that I think of it, I can take my introduction to trading back even further.

It isn’t my intention to sell the game but I know there will be a run on it now. Perhaps we should
talk “Futures” into licensing their own version for marketing as a courtesy to their readers. The
game was an exciting game and still is today. We would get as many as four decks together and
have 32 people at a time yelling and screaming. What fun that was to everyone from six-year-olds
to eighty-year-olds. By expanding the players to four decks, we were being creative. To be creative,
it is easy to improve upon anything, which inspires your interest. That is what we all need to do in
order to grow, as we grow older.

ALS – Why was the game so much fun?

POP – The game was rather simple and though not well publicized became an adventure of newly
found fun for anyone who discovered the game. It was a deck of cards with different commodities
on the face of the cards. I remember that there were commodities such as hay, rye, wheat, corn,
barley, oats, and I believe two others. I will leave the two others out in order to let the readers fill in
the blanks as we get them to being a child again.

Each commodity had I believe eight cards. There was a bell like the one you would see on the
counters at motels, which you could ring by hitting the top of the bell.

The idea was to deal eight cards to each player and the one player who had all eight of the same
commodity would ring the bell and say they had won. At that point the game was over. Each player
who had never played the game before would be shy and say this seems a bit far-fetched. As the
game progressed by the rules the shy player would start screaming the loudest. Each player could
exchange any number of their cards with any other player up to three at a time.

If you had five wheat cards and were trying for all eight wheat cards, you could get rid of what the
other cards were in the numbers of which you had the other commodity cards. For example if you
had two corn cards, you would yell two. Anyone who had two to trade would trade with you. You
wanted to trade all of your cards away except the ones you were trying to get eight of the same kind.
You wouldn’t think much of this game without seeing the action it created. All the players would
start screaming at once as they got into the game. I remember we had a visitor come by one day we
were playing and they thought there could be a war going on when we were playing. “PITS” is the
closest game to true trading emotion and adventure to this day. I haven’t played it for decades but
still remember the fun it gave us all.

If I were a magazine or broker, I would put my advertisement on the cards and give that game to all
of their clients at a discounted price. It’s a fun game anyone can play within minutes of hearing the
rules and it takes less than fifteen minutes for each game. We found that it was the best way to bring
strangers into a conversation at a new meeting or reunion.

ALS – You’re going to start a run here! I am sure there are lots of people who remember the game
and would like to get a game or two.

POP – Ok I know that we have the readers thinking and being creative now. They can improve the
game and the cards, as an example of showing them the nature of how being creative will overcome
opposition to change.

ALS – Why don’t you put your picture on the cards and call them the Phantom of the Pits game?

POP – Why didn’t I think of that? You see you are very creative too! Sure we could do that and give
the game to each person who bought a book. In fact I know you have two artists working on the
trademark now.

I realize we are getting a little away from what the traders want to read. Do you think they will
forgive us and understand the importance of the Sunday fun point we are trying to make?
ALS – To use your phrase “So what?” I know that you are going to cover it all eventually and
interactively with the traders. How can we deny you the smile on your face as you think back as a
child would and enjoy the pleasures of being creative. I know the readers and traders whom you
have so much faith in are enjoying this as much as you.

POP – Yes, it is important to me. There are few things in a child’s life, which allow a child to play as
an adult while allowing an adult to play as a child. I don’t regret bringing up the game I remember
best as a child. “PITS” is a game, which will sharpen your awareness of your surroundings and
interaction with other people without requiring much of a task on your part. Do you remember the
game?

ALS – Yes, and a few others too more recently. I remember playing drop the clothespin in the milk
bottle with a 101-year-old lady. Now how much younger thinking can you get. If a 101-year-old can
go back and enjoy the childhood memories than why wouldn’t a trader be able to understand this
importance too?

Phantom, it looks like you’re on a roll here. I remember a well-known writer saying that he felt that
the books with less in them were sometimes better books. We certainly are giving less in this part
anyway.

POP – I know whom you are talking about. I don’t know whether he would want credit for that
statement or not. I think I know what his point was. It was to express that it was important not to
overwhelm readers with too much data, which could do more harm than good.

ALS – I think so too. Could that be the true Phantom of the Pits who said that?
POP – You’re not going to get me to admit or narrow the field but why don’t you ask yourself that
question. I guess we can narrow the field can’t we? That is pretty clever on your part. By knowing
who POP isn’t I guess you do narrow the field some. But why is it important anyway?

ALS – Ok I’ll drop it. I was just trying to think from the reader’s point of view in asking. I am just
being creative. Can you be more creative in front of a warm open fire on a cool fall day or cold
winter day?

POP – Relaxed maybe but I think serenity sets in with comfort. That too is important in a traders
balanced life. I really see trading as driving a car around the Indy 500 track at 200+ and having to
always be alert at every turn. That is why it is so important to wink at a blind horse sometimes. You
don’t need to operate at 100+ percent all the time for you lose some sharpness that way. Come down
and go a different direction on thoughts. We are kind of doing that now.

One of the ways a trader can be creative is to just pick up the newspaper on a Sunday and ask about
a story they read as to how it could be expanded for more information. I like to do this, as very few
times we happen to see the follow up story of something which, is a question we want the ending
answer.

It is easier to research further today with the news updates on the Internet news posts. Often times
we read news on different trading stories and we must keep in mind that the view is not ours but the
writer’s view.
I don’t want our discussion to be taken as my views but my effort to provoke trader’s views and
ideas.

ALS – Yeah, and I know your draft chapters are just a beginning in getting feedback to complete the
process of interactive feedback in order to continue and complete each chapter. You have presented
ideas, which have generated ideas, and questions of which you want to respond for the benefit of
the readers.

POP – It’s part of the reason I wanted a light part in our discussion here before we get into trying to
narrow down the needed answers to questions, which will, and those that have been presented. We
have many subjects yet to draft before we turn the car around.

ALS – I remember reading an article about motivational speakers recently. Do you see your insights
as doing that?

POP – Not at all! Who would want to replace their own intuition of what they see as success with
someone else’s? It is important to have your own thoughts and ideas. You can’t be someone else so
why would you want to be totally guided by someone else’s idea on what is best for you?
Motivation speakers have a place and it is important to be motivated but most that follow forget one
of the most important truths. You are the one who motivates yourself. It must be you. As in trading,
it is you who must make the trades not someone telling you make a trade.

I see my insights as a guide to knowledge which, the trader may not have had otherwise. This
always leaves open the interpretation of their own ideas and thoughts. In fact that is what makes
markets. In trading we make assumptions based on known knowledge and we use theory to prove or
disprove our expectations being correct. I am trying to take away the feeling that a trader usually

has the advantage when they do not. I am trying to take away the feeling that there is no way to
succeed in an unfavorable game.

My insights are not anyone’s ideas but experience in my trading career. When I was in Junior High
School I along with the class was asked to select one of two stories to write. The first one was
“Clothes don’t make the man” and the second one was “Clothes makes the man.” I chose Clothes
makes the man. It was the worst grade I ever got.

The teacher was biased toward clothes don’t make the man. Well I chose the one I felt would be the
hardest to prove with theory and assumption. I had good arguments and I think to this day that I did
the best piece of writing in that class. The teacher had her mind made up as to anyone who chose
what I chose would be wrong. “A wink is as good as a nod to a blind horse” was what I thought of
the teacher’s grade.

I have proven that I was right in my lifetime and I think that story is part of my success. You see a
person must believe something and then proceed to either prove or disprove their theory. My theory
proved out over the years. My theory of clothes makes the man built my character and my
determination that I would someday be able to prove in fact that it was beyond theory and
assumptions true in my case. Now that does not mean it would be true in all of the class mates cases.
This is what the teacher missed.

ALS – How did you prove you were right by fact?

POP – My assumption was that how a person feels affects their actions and reactions to situations in
their lives. My main point was that someone who had good clothes and was dressed well would
have a different feeling about themselves than someone who would be wearing lets say just shorts
in important situations. The key was important situations. Can you imagine being at a funeral in just
shorts? How would you feel? Wouldn’t your actions and reactions be more agreeable with your
feelings if you were dressed in good clothes? Of course you would.

My fact proof came as a parallel to that article. I considered the well-dressed person and the well
knowledgeable trader as a parallel in points of feelings. In the pits trading with good knowledge
(well dressed) I felt more confident in trading. When well dressed in correct situations such as
meetings and important events, I felt better confidence and my effectiveness was much higher. True
I am the same man regardless of how I am dressed but I am not the same person if I have not
prepared my knowledge before I trade.

For the traders, I want to impress in their minds the same parallel. If you trade with lack of proper
knowledge and behavior modification in situations, which the market will present you with, you are
only wearing shorts at a funeral. How does that make you feel? It certainly won’t say to you, clothes
don’t make the man! It will strike you to know that being prepared properly is the same as having
the proper clothes for any situation.

ALS – Ok, did you ever want to get back at that teacher?

POP – I don’t think I was smart enough to know what getting back at someone even meant as a child.
I had lots of stars in my eyes. I still do for that matter. It is a waste and non-productive of time to
have anger or greed or regret or fear.

ALS – How about hope?

POP – Hope and love have a place in my life. Hope must be tied to action and plans. Love is my
reflection of what I have given or am willing to give.
There are few things in a child’s life, which allow a child to play as an adult while allowing an
adult to play as a child. “—POP


Chapter 13 – Behavior Modification

Chapter 13 - Behavior Modification

over his trading career that, was the important elements in correct trading. We will go into some of
the observed behavior modification insights Phantom has seen and used over the years.
Phantom felt he liked the approach of a professional on behavior modification but that it was
important to present the unique situations which trading presents to traders. Phantom is not a
professional in behavior modification and wanted to make sure that was known before we began
any conversation on the subject.

ALS – Phantom, you and I know that we have some thin ice when we talk about behavior
modification. You are only qualified to give examples of what you have seen and used over your
career in and out of the Pits!

Phantom of the Pits – Yes, thanks you for being alert on that point. Your point is important, as my
methods are unscientific to say the least.

ALS – Where do you start in order to change your behavior to proper behavior for successful
trading?

POP – It goes back to History class. Not everyone liked History but it was a way of understanding
prior behavior and events in order to plan for the future. It is the same in trading. We must
understand our present behavior in order to judge what we need to do to make changes in our
trading style if any at all.

A person will make the same mistake again and again if there is not a properly learned reaction to a
particular consequence of an event. We must know the right and wrong reaction before we can
make any judgement as to what is correct for the situation.

Most situations are pretty obvious as to what a proper reaction should be. Most traders assume that
their reaction is proper in the consequence of what the market has done. Some traders are better at
knowing the correct behavior than others. The correct behavior is a learned process and not one that
is always obvious.

Animals are easier to study than humans and I think that perhaps is a good reason for studying
animal behavior. Take a simple action-reaction event for any animal and see what results come
about. Let us say that your family dog has never known what hot meant. In the old days when
stoves burned coal and cobs, my Grandfather would pick up the stove lid to put corn shucks and
cobs in the stove to get the fire to flame a bit.

This would ignite the other coals better. He would lay the stove lid down on a fire-protected
material on the floor-stove board. Well since the dog liked warmth, it would come over to lie near
the stove. When the dog lay on the stove lid, he let out a yip you could hear on the trading floor.
The dog learned behavior modification by instinct. The dog would never lie on a stove lid again.
Now was this correct behavior modification?

ALS – I’ve heard this one before. The dog never would lie on a cold stove lid either. I suppose it
saved the dog from getting burnt again. In the dogs case I would say it was proper learned behavior.
It is the same when your brother threw the hot horseshoe on the ground. He would never pick up
another horseshoe again.

POP – Yes, but you see traders learn that way too. They take a big loss and they will never take that
signal to position again or perhaps just won’t take it next time. Now that is not proper learned
behavior. It is learned behavior by instinct due to a consequence of an event. This is just one of the
examples I mean for you to understand when I say behavior modification is one of the most
important aspects in becoming successful in trading.

How can a trader expect to be successful unless the trader knows the proper behavior to a reaction
of an event, especially unexpected events, which a trader seldom is expecting. I think that along
with my two rules of trading that a trader must have a good inventory of what behavior they need to
survive and succeed in trading. Something that has been missed on my rules up to this point by
traders is that the two rules incorporate behavior modification within the rules.

ALS – Explain how behavior modification is in your first rule!

POP – Look at what the rule states!
IN A LOSING GAME SUCH AS TRADING . . . WE SHALL START AGAINST THE
MAJORITY AND ASSUME – WE ARE WRONG UNTIL PROVEN CORRECT! POSITIONS
ESTABLISHED MUST BE REDUCED AND REMOVED UNTIL OR UNLESS THE MARKET
PROVES THE POSITION CORRECT. (We do not assume we are correct until proven wrong. We
allow the market to verify correct positions not incorrect positions.)

Rule one incorporates behavior modification by expressing the truth of trading as a losing game and
that we start against the majority and assume we are wrong until proven correct.

ALS – Sort of like the IRS, huh?

POP – (Smiles) I think their behavior modification is going to be changed but that is another
example. I am not sure we even want this example.

By stating that trading is a losing game, we think differently each time we position. By also stating
we shall start against the majority and assume we are wrong until proven correct, we also change
our thinking. We should not trade under false assumptions for if we think most everyone wins in
trading, our behavior is going to be based on winning protection rather than losing protection.
In other words our focus will be on when to take our gains without thought on taking a loss much
less a quick loss. We need that correct assumption to be able to correctly incorporate the proper
behavior when we have positioned. With the proper assumption we can now include the proper
behavior.

We are going to concentrate on protecting what we have rather than what we expect to make first.
That is behavior modification. This above all else is just as important in trading as any plan for
entry and exit.

Next we know from the rule the proper behavior for protecting our positions by removing them
unless the market proves them correct. This is the proper behavior instead of letting the market tell
you that you are losing money.

When the market tells you that you’re losing money, your reaction to get out is not by instinct
because nothing really physical happens to you except that maybe you get a sick feeling in your
stomach. That sick feeling or your body chemistry changes don’t teach you anything about the
proper behavior.

It is a fact that you will become braver when your body chemistry changes as that is a protection,
which is natural. This is not the behavior you want to learn. Actually you never want to get to the
point of a market move making you sick. It is destructive and you won’t react properly without
learned behavior modification.

Rule one is designed to protect you from ever being in a situation of distress. In distress you will
make the wrong decision in trading most of the time. There are always exceptions but not at first.
Since all traders must start somewhere, why not learn properly as soon as possible.

ALS – I can see some Psychology majors challenging you on your thoughts.

POP – Yes, they are the experts on psychology and not on trading. I am not expert on either subject.
I am only an expert on myself. That is what I trade with today, expertness of oneself!

I could give you the reasoning behind rule two with the behavior modification incorporated within
rule two but let us leave something for the readers to interpret for themselves.

ALS – Ok, let us leave rule two open to interpretation and reasoning for better understanding of
ones own expertness as you put it.

It’s really strange how we start with this cheat sheet of an outline and we never get to most of the
points and the ones we do, they seems out of order. It goes to show that we really don’t have a
followed plan in such a widely interpretable field such as trading.

I don’t think you are stepping on anyone’s feet, as you were concerned about earlier in your efforts.
How about discussing some examples of observed behavior and behavior modification?

POP – There are so many possibilities and every trader could come up with better ones than I am
going to use here. I will start with the elevator behavior data.

It was my desire to learn how most people thought in certain situations. It was important to compare
ordinary people and then traders. I wanted to see if they thought differently and reacted differently
to situations such as getting on an elevator.

Pretty simple but yet complex enough that we had enough variables to group data. It was not
scientific but it did give me good insight. Rather than give the exact results, I’ll just give the
particulars and let anyone decide for him or herself.

We took an observation at a building away from the trading district at an elevator on the top floor of
the elevator ride. We watched as those waiting to get on the elevator to see what the behavior would
be. We had two criteria.

The first criteria were that they would try to get on the elevator immediately and the second criteria
were that they would stand back. This gave us a better-computed programming input by using
binary input of one of two states.

The second group we observed was in the trading exchange at the top elevator floor. We assumed
most were traders but did not know without trading jackets, which were off floor traders. It was
important to find out about would-be traders also so we included a third group, which we took to
the top floor to observe without their knowing our reason for the tour at that level.

The results were rather surprising. Most of the people would approach the elevator as soon as it
arrived on the top floor. They had no thought that there could be anyone getting off the elevator.
Some would even get on the elevator before all the people on the elevator got off.

This was strange but most who got on the elevator before those on the elevator got off apparently
did not recognize the situation of the elevator being on the top floor and that all who were on the
elevator would get off on the top floor. Others blocked the door when the elevator arrived.
A small minority of people would stand back and anticipate the elevator would not go down before
all were off loaded, new people back on and the door closed. They would wait to get in last and they
were the first to get off on the way down. I won’t tell you which group did the best because you will
have to decide for yourself how you would react.

This little experiment was important because trading is not so different from the elevator. Markets
go up and down and trends take off, stall and fall. And then they do nothing for a period of time.
Behavior modification for the elevator riders didn’t occur to most of the people. It is the same with
trading. Who would teach you this?

Ok we watched behavior and next we would tell the group of would-be traders that they would have
to stand back because the elevator would be packed with people getting off. They became so good
that they didn’t even care to anticipate which elevator would be up first. Now we had our behavior

modification but was it correct behavior modification for the would-be traders? In this case it
worked for them because it is what they were told.

Again, not to repeat myself but it is necessary to say it is the same in trading. Traders mostly change
their behavior by what they are told. Is this the proper behavior modification for traders? The
answer of course is no, not at all.

A trader must learn from research what the proper behavior modification is in all possible situations.
This takes lots of inner soul searching and market data to understand what behavior takes them to
the threshold of successful behavior in trading.

You are most likely seeing my reason for stating that knowledge and behavior modification are
required for successful trading. It never is an addressed issue in trading when a trader opens an
account as to what their behavior might be.

They are qualified as to financially fit to trade, understanding the disclosure documents which
explain the risks but never anything occurring to the trading public that flags them to learn about
their behavior in situations.

You see behavior modification is your responsibility and no one else’s. You can not dictate behavior
to anyone. All I can do is to tell you that I feel it is not possible at all to succeed in trading without
some sort of plan for proper behavior modification. I could never have survived without it.

Behavior modification can take many directions for traders and can be defined differently by
experts. All successful plans have some sort of behavior modification built into the plan. I feel the
best plans are those, which address the proper observation of trading, and the proper reaction of
trading.

ALS – I’ve other examples we have jotted on our sheet here. It might be interesting to give the
readers ideas for their own research.

POP – I don’t really think we could give them ideas greater than their own. But I understand they
might be interested in some of mine. If we get to a few that is fine. We have really made the point
of behavior modification to the readers I feel. That is my concern. We can give them a total book on
it but that is not going to help them search their own souls for their trading.

ALS – I hear what you are trying to say. Are there any people in the field of behavior modification
who you regard as impressive?

POP – Yes, there is this one genius whom I have always admired and have felt is the only one who I
can honestly say has every point in successful trading covered. If I were to tell you who it is, it
would disappoint a lot of deserving people who are pretty close to being exact. Especially when
exact is almost impossible to maintain for long.

Changes mean changing behavior in trading constantly. I don’t know everyone’s trading
characteristics and besides whom am I to judge. I am but an observer and only an expert at
observing my own trading.

I really wish I could give you his name but it isn’t fair. I shall tell that person someday. In fact I
have a diary which I include the accomplishments of great people and that person is certainly in it. I
am not even in it. I don’t think I will ever be.

ALS – I think the readers are interested in your view on how they can imitate or change their
behavior to be a successful trader.

POP – You are going to get me into trouble with someone. I’ll drive around the outside of the track
here. I have another good story and example. In a basketball camp there were about 30 students
trying to improve their shooting.

Half were taken outside and told to sit down and practice shooting free throws. The other half
stayed in the gym to practice real basket free throw shooting. This went on for three days of practice.
On the fourth day all were given one hundred shots at free throws. The outside group actually did
better even though they had not actually been able to shoot prior.

This was astonishing to the main coach and he asked the outside group coach why his group did so
well. His remarks were “Most of my boys were shooting at the basket and not above it so I called
out their name each day and told them to shoot the ball higher above the rim instead of at the basket.
My boys improved on the last day as they never missed a single shot in their own minds.”

Now I not going to paint a picture of the head coach’s face but you can imagine his mouth hanging
open and shaking his head. It didn’t make sense that this could even occur to the head coach. It is
the same with trading. You can not rule out any possibility but must have proper behavior to
address any situation once it happens. This takes forethought.

You see what the outside basketball coach did was to incorporate his knowledge of why most free
throws are missed. It is usually because the ball never clears the rim getting to the basket. He told
his students to shoot the ball higher above the rim. Even though they had not shot a single basket,
they were able to improve their behavior through knowledge. They go together, knowledge and
behavior modification.

I want to give you a well-known statement and it is effective in trading too. You have to think it
before you can act it!

I am a believer in the small trader. We just need to point out that they must shoot higher above the
rim to have better odds. Behavior modification learned from knowledge is what they must research
in their trading careers if they expect to succeed.

It shall happen in the future that the small trader will learn that they can move quicker than a big
trader and that is often times an advantage provide they know how to use it. To make it happen they
have to know the rules. Not my rules specifically but their own interpretation of what is required.

ALS – What is the most important point of this chapter on behavior modification, which you want
traders to remember?

POP – There are several but the one that is often missed or misunderstood is that TRADING IS A
LOSING GAME AND THE BEST LOSER IS THE BIG WINNER!

ALS – Thanks again for your insight Phantom. I know it’s meant as a gift and you are not selling
anything or trying to show up the experts. Surely you are expecting some kind of reward here?

POP – Every day I am surprised by a reward. Today an editor whom I consider the greatest editor of
all times and whom I have great admiration for over the years humbled me by pointing to others as
the reason for success. I can not say that about myself and that bothers me.

I can not point to others yet in my life and say that. It is not because I am selfish. It is because to be
a successful trader we must walk alone in our days and do it alone. I feel it’s very sad until you
actually can point to others as your reason for success. It says a lot about a person who can expand
his or her horizons by including others. Trading isn’t that type of business. Is’s almost a solo flight at
all times. It’s you and the markets.

I shall look forward to my day that I too can say, “any credit for whatever I did belongs to a lot of
people.” When that day comes I can walk taller and I can reach the heavens! Until that day I can
only pass along my insights of trading.

Today an editor whom I consider the greatest editor of all times and whom I have great
admiration for over the years humbled me by pointing to others as the reason for success. “—POP


Chapter 12 – When We Lose One of Our Ownby Harold B. Simpson

Chapter 12 - When We Lose One of Our Ownby Harold B. Simpson

Hello to all,
It has taken me awhile to get my thoughts together after what has become one of the most eventful
trips of my life. We arrived home in time for Allan to make a 7:00 PM class on Monday evening.
He had to mentally shift gears from vacationer to student in a matter of moments. We dropped him
off for his class in Danville and we waited for him to get out before we came home.
Our trip out to Lake Powell went smoothly. It’s always a great joy to drive through the Rocky
Mountains. Through the World Family of John Denver I met some wonderful people named
Virginia and Sam Allen. Sam is a writer and has written a number of excellent woodworking books.
Virginia is a self-described “archseeker.” Knowing that we were going to be passing through their
town of Moab, Utah, they invited us to tour Arches National Park with them and share a few John
Denver notes as well. We met in the welcome center parking lot and with Virginia and her son in
our van and Mom in their 4 by 4 with Sam and their other son, and Cathy driving the station wagon,
we formed a caravan of three vehicles. Virginia and Sam turned out to be extraordinarily
knowledgeable about the park.
I didn’t know it at the time, but found out later that Virginia and Sam had written the guide book
that is handed out when your enter the park! Virginia has spent much of her time exploring the far
reaches of the vast park and has discovered some of its arches. When you find and catalog a new
arch, you get to name it. One of her sons just recently found one and had the honor of naming it. He
called it HIDEOUT ARCH because he said it was very difficult to locate, it was high up in a very
inconspicuous place. They took us to the cave used in the Indiana Jones Last Crusade movie. They
also pointed out Arches Parks most famous Arch of all . . . Delicate Arch.
As we traveled along from one place to another, Virginia and I had some wonderful conversations
about our mutual enjoyment of John Denver’s talents. I happened to have a new 4 CD set of John’s
music called John Denver . . . The Country Road Collection, that Virginia didn’t have. She put a
disc in the vans CD player and we listened to his music as we traveled through the beautiful park.
Our time went much to quickly and we said our good byes around 3:30 or so. We were heading to
Lake Powell via a different route (to us,) this meant a long drive through some of the most desolate
and awe inspiring scenery in the United States. With me leading in the van and Cathy following in
the wagon, we made our way winding back and forth, up and down some spectacular red sandstone
formations that were seemingly not of this Earth. At one point, a little more than an hour and a half
from leaving Moab, I went over the crest of a mountain that gave me a startling, fearful feeling
unlike I’d ever felt before. The sun was low on the horizon and we had been traveling on the shade
side of the ridges for quite some time. Just as I reached the sun side, the glare was so intense that for
a few moments, I could no longer see a thing…I was completely blinded! Not knowing what lay
before me, it seemed an eternity before I could catch a glimpse of the road again. Those few
moments were some of the most frightful moments I’ve ever experienced. I quickly called back to
Cathy on the CB to slow down because you’ll be blinded by the sun at the top of the hill. We have
all experienced the similar effect of the sun momentarily blinding us as we drive into it. Cathy and I
both agreed, this went far beyond that sensation. Along with this blindness came a fear the likes of
which I don’t recall having experienced before. We made it on to Halls Crossing at Lake Powell,
our destination, at sunset. We had an evening to relax before boarding our houseboat the next
morning.
Rising early and feeling about as happy as ever with the way things were going up to that point, I
headed off to an early morning shower. I could hear that someone had turned on the TV and I was
happy that they had. Perhaps we could catch the weather forecast for the coming adventure. Then,
with a heartfelt cry that I knew meant something horrible had happened, I heard Cathy exclaim that
John Denver was gone!

The next moments were filled with immediate denial. It took me into a world of hearing the words,
but somehow not registering in my mind the reality of it all. At least not fully comprehending the
reality. I went through anger, I argued with mom when she wanted me to get going and pull me
away from the news bulletins. I wanted to stay glued to the TV to get every last detail that was
known at that time before we just had to leave for the boat. I’ve always known that it doesn’t matter
how experienced the pilot, how safe the airplane, aviation is at the same time the most unforgiving
and yet the most rewarding activity one can ever participate in. I know John was aware of that, but
life is not worth living if we live in fear.
When I met John Denver a few years ago at the EAA convention in Oshkosh, Wisconsin, I asked
him if he would sign my pilot license. He looked at me and asked me if I was sure I wanted him to
do that. I said, “absolutely!” I was embarrassed by the fact that I couldn’t find a pen and a lady
standing close by offered us hers. The way he said “are you sure?” makes me think I might have
been the only one who ever asked him to do that. A year or two after that he starred in a made for
TV movie called HIGHER GROUND, about a bush plane pilot in Alaska. That was enough to
inspire me to go for my seaplane rating. It was some of the most enjoyable (FUN) flying I’ve ever
done. I learned to fly a Maule Rocket 235 floatplane in the waters of Lake Monroe near Sanford,
Florida. In the process of obtaining my new rating, I had to surrender my old license for the new
updated one. Good bye JD’s autograph. Somehow, I thought that was his gift to me in exchange for
his autograph. I later was able to obtain another of his autographs at a book signing in Chicago of
his autobiography, TAKE ME HOME. By the way, thanks to my brother Art for letting me know
about the event and enabling me to see him again. John Denver has meant a great deal to me for
many years and there will be an empty space for him for the rest of my life.
We had been told that we might be asked to upgrade to the highest class houseboat, should the need
arise. As I began the checkout procedure, I was told we had lucked-out and had drawn the best
houseboat on the lake. The Admiral was a luxury houseboat at its finest. You should have seen the
smiles on my crews faces when they realized what they were in for. The ship can only be described
as awesome!! We were loaded and away in a couple of hours.
Each day on the Lake was warmer than the last. It just kept raising our spirits higher as we floated
along this most unique jewel among the Earth’s treasures. There just isn’t any place that I have
found that gives me the feeling that is Lake Powell. Simply put, I love the place! The days were all
sunshine and the night was filled with the full moon and bright stars and planets. We located an
ever elusive Anasazi Indian dwelling in Cottonwood Canyon. They were experts at hiding these
things from their enemies. We hiked for two hours trying to find it, only to find it was where we had
looked the moment we arrived in the canyon, yet we couldn’t discern it from its surroundings! Great
fun!! The swimming off the back of the houseboat was refreshing to say the least. I never did get
the courage to go down the slide. Seems kind of strange such a thing should give me pause, when
jumping out of an airplane in my younger years didn’t bother me in the same way.
Disembarking from the houseboat following this greatest of adventures wasn’t going to be
something we wanted to do, but off load we did. Our watery travels were not over though, as the
path back to civilization included a ferry boat ride across the Bullfrog Basin to a quicker path back
home than we had come. As we headed towards Colorado, it occurred to me that it might be
possible to attend John Denver’s services, that would likely be in his hometown of Aspen, Colorado.
A phone call to my brother, Art, confirmed that he would indeed have some type of service on
Saturday, in Aspen.
The timing could not have been more precise for us. We would be in Glennwood Springs, Colorado
by the evening and that would be an easy thirty five minute drive to Aspen the next morning. The
service was to be at 2:00 PM and it was to be held at the music tent in Aspen.
We arrived around 10:30 AM. I stopped at the Pitkin County Airport where in 1976 John Denver
learned to fly a Cessna 172 with his dad as instructor. From beneath the tower, looking to the East,
one can see the mountain on which John Denver lived in Starwood. There were many more jets
sitting on the ramp than I thought would be usual. I suspected this was due to the number of

important people who were no doubt here for the services. One particular small craft caught my
attention. I was parked right behind it. It was a Burt Rutan designed aircraft called a Long Easy.
The very same type of craft that John Denver had lost his life in. How ironic, to be standing by this
aircraft, at this airport, looking at that mountain, on this day. Was I somehow meant to be here?
Was this moment just coincidentally mine for my imagination to make of it as it will or was I
supposed be a part of all this? I was awestruck… no one else was aware of what I was feeling.
Something magical was sparking my thinking.
The day before, a formal service was held at the Faith Presbyterian Church in Aurora, Colorado,
where his mother and brother Ron Lives. Today, Oct. 18th, 1997, was to be a final farewell from his
family and friends in the setting that John would have been most comfortable with. His hometown,
Aspen. Cathy and I were about the ninth or tenth people in line. It was a joy talking to those around
us in line. We all told each other of our connections with John and his music. The couple ahead of
us in line, had flown from Minneapolis that morning. They had left on 45 minutes notice, just
barely making the only connections that would have allowed them to make the trip. They were both
married, but not to each other. They both new of each others love for John Denver and were friends
through that. Their spouses, knowing how important it was for them to be there, were understanding
enough to let them travel together. Another lady flew from Nashville, Tenn. She had been waiting
since early morning and was asked to leave so that sound systems could be set and wires safely
strung, etc. She left and came back a short while after Cathy and I got there. By the time she had
come back, the line had grown considerably. She came to me and told me about the fact she had
been the first one there. After I explained what she had told me to everyone around us, by now all
friends, I brought it to a vote to allow her and her friend to join us at the head of the line. It was
unanimous, we let her in. She turned out to be a lawyer . . . a good lawyer, she said, and there is a
difference!
We passed around addresses to each other, promising to get in touch again. The music tent holds
1700 people. The lower section was reserved for relatives and close friends. We had the best seats
available for the “public.” The stage was set up as though a concert was about to begin. John’s guitar
was there, his microphone was there, his band members, from the past and the present were there as
part of the audience. The whole thing took on the look of a concert, but we all knew this was no
concert. This was the last time that we would gather together in such a way to Celebrate The Life
Of John Denver. The music tent was overflowing by the time the ceremonies began.
At about ten minutes till two, a group of small planes flew over in trail, spaced about 15 seconds
apart. Each containing a pilot expressing in his own way, a tribute to a downed flyer. One was a
Christen Eagle Biplane, like the one John had owned and what he had flown solo to Oshkosh the
day I met him there. Another flew over so as to allow his planes shadow to pass over the assembled
mourners. High overhead, a beautiful white sailplane, possibly John’s, was released to soar in the
blue heavens above. I know that John’s ashes were to be released over the mountains of Aspen on
this day. Was I watching this final act of releasing his remains back to the Earth without knowing
for sure it was happening. I somehow didn’t want to know, but had to smile at the thought of how
beautiful a way to return our physical body back to the Earth. The most dramatic of ways to end the
most dramatic of lives. In one of his songs he sang: I can see you in singing skies and dancing
waters, laughing children, growing old, and in the heart and in the spirit, and in the truth, when it is
told. All those things were present at that moment.
With the help of Tom Crum, one of John’s best of friends, Zak, Anna Kate, and Jesse Belle Denver
put together a tribute to their Dad that was at times almost unbearably sad, and at others some of the
best laughs I’ve had. They were all there, all of John’s family. His mother Erma, his brother Ron,
and his first wife Annie. His second wife Cassandra, all of his aunts and uncles, cousins and friends
he had amassed over the many years. His long time producer Milt Okun, who vowed to use his
remaining years to somehow make John’s works accepted on the higher level that it deserves. The
stories were told in a way that made us feel very much closer to the John Denver that they had come
to know by their close association with him over many years of friendship. I learned many things

about him that were intimate insights, precious tidbits of the life of someone whom I really new
little, but on this day was very much privileged to be allowed to be a part of.
The day was as perfect a day that only God and John Denver could have made. The aspen trees
around us glittered with the light warm wind, the sun was gently shrouding us all with a perfect
warm glow, and the sky, the sky, I’ve never seen the sky more beautiful. A shade of blue that
perhaps can only be seen from the eight thousand feet of altitude at which Aspen lies. The day was
one in which not a single person there wanted to leave behind. What was to be a two hour long
celebration of music intermixed with the sharing of eulogies turned into a much more relaxed
atmosphere of the sharing of stories and feelings that lasted more than three hours.
My new friend, Virginia Allen, and another friend of hers named Patty, who had flown in from
Michigan, made it to the celebration. I was able to greet them as they arrived. Some of the people
around us were people that I had at one time met many years ago through various fan clubs. It
seemed that the people to which it mattered the most, somehow had made their way to this
gathering. I don’t know exactly how it all works, but somehow we all felt that John had a hand in all
that. Maybe so. It may seem strange to call this gathering a celebration, but that is exactly what it
became. That is what he wanted it to be thought of. He celebrated life and lived it to the fullest.
At the end of the day, we were asked to bow our heads and close our eyes and to think of John
Denver as being there with us at that moment. To think of him as being in wind, in the mountains
around us, and in the sky above. It wasn’t hard to imagine that for me. They played the last song that
John recorded called, “Yellowstone (Coming Home)”, as we watched hundreds of white helium
filled balloons drift upwards into the blue sky.
It was a kind of closure for me, we left Aspen.
“Love is why I came here in the first place, Love is now the reason I must go, Love is all I ever
hoped to find here, Love is still the only dream I know.” John Denver, Seasons of the Heart
We may never know for sure about the exact timing, but that flash of light that rendered both Cathy
and I temporarily blinded from bright sunlight and which brought with it a feeling of complete
fearful helplessness, occurred at approximately the same time that John Denver crashed into the
Pacific near Monterey, California, on Oct. 12th. At most, there could only have been a few minutes
difference. My mind can make what it wants to of that. We’ll never really know.
Peace, Harold & Cathy Simpson
” During the Aspen service for John, one of his secretaries told a story about a moment that she had
with John. I think it was Stephanie Ryan who said that John asked her if she believed in Astrology.
She replied that she believed in just about everything (with a laugh.) John then said that he had just
been told that his works would become more prominent in 1997 than at any other time. She asked
him if it would be even more than what happened in the 70’s? He responded that it was to far
surpass that. Thinking back to what he had said, she wondered if this had been what he’d meant. “-
HBS


Chapter 11 – God’s Rules

Chapter 11 - God's Rules

This chapter is as important as any chapter of any book written in modern times to Phantom. I don’t
mean to take a platform but today I have discovered many reasons for “Phantom of the Pits” being
written.
Today Phantom was given some very sad news. I have never in my life seen Phantom defeated in
his entire career. Today Phantom is on his knees. He is in pain and distress to understand what has
happened in his life.
He has been prepared for most any possible outcome by being able to protect his positions. Today is
much different! He can only reflect as what the importance his life is to others in this world and
what his purpose has been for presenting his insight into trading and methods of trading in order to
make repayment of his life at this time.
I can only pass to you what some of his views today included and why. Many of you who have read
my efforts to convey his thoughts to you in my own unfamiliar writings perhaps understand my
difficulty as I write with tears on my keyboard.
Phantom is not one who you would consider extremely religious but today has shocked his thought
on reality of what is beyond! Phantom’s heart has been finally torn from him. No matter how
prepared he has been to protect and defend his chosen world.
Today Phantom learned that John Denver was killed Sunday in his experimental aircraft when it
crashed of the coast of California. The aircraft plummeted into the Pacific from about 500 feet of
altitude. Trading has been Phantom’s life and singing has been John’s life.
The love of flying has been in both of their lives. There has been common ground by so many of
John’s family, friends and fans.
Phantom knows the hardships and difficulties of being a public figure and of the struggle of public
figures like John. We keep Phantom’s identity confidential for that reason. I can only request that
you understand and respect Phantom’s request.
John had given a big part of his life to others by being in the public’s eye. This always takes a big
part away from family over the years. This causes Phantom to reflect how trading is such a very

small and minute incident in our lives. Who do we turn to when our world is voided of one of our
familiar lighthouses in life?

Several months ago Phantom indicated it was time for payback and he really didn’t know why it
was so important now or what the true reason was. We both agreed to find reasons or wait for the
answer. Today we understand more of the reasons.

You must understand that Phantom today cried and pointed to when he was asked what his favorite
book was that he failed God’s test. You see his favorite book is indeed the BIBLE. Phantom felt that
no one would understand a different direction than a trader’s highest goal.
He set out to explain and guide traders to the best possible outcome in their trading lives. It is clear
as to how this guidance was meant to point. Phantom actually pointed out the reason for the book
and the word, which was to be understood by all traders and everyone in their lives at one time, or
another.

Phantom tried to point out his rules one and two for the reason of helping you survive in trading. He
has given you the ultimate choice of following the correct path, as he wanted to help guide you
away from the rocks and storms. He always will offer his guidance. But it is you who must make
the correct choice.

It is my interpretation that this following statement is the truth of trading and the reason for the
book. If you do not use proper rules in your trading, you will lose everything you had hoped to
gain.” Phantom has been the messenger but not the judge of your survival in trading!
The Bible which is Phantom’s favorite book gives us a choice also. We are given the choice of
believing or not believing what is written. The Bible indicates that those who believe in what is said
in Bible and accept it shall have everlasting life.

What Phantom has missed is about his favorite book is that we all must make the choice but there is
only one correct answer. Our decision according to the BIBLE can be based on what will happen IF
WE DO NOT BELIEVE or it can be base on what will happen if WE DO BELIEVE!

Just as trading must be based on the correct choice, so must our choice for everlasting life.
“Phantom of the Pits” has another message I believe, besides Phantom’s insights. The most
important part of our lives is what is in our lives. Our family and our friends are above all material
gains from trading and must at all time be the most important reason for our struggle in being a
good trader.

Your God must be the ultimate and supreme in you life in order to have any meaning to those who
love you and want you to be their sunlight in life.
Let us learn from what has just happened to Phantom in his life! Phantom cares and he needs to
understand. His distress is not easily overcome. I think Phantom had to face the reality of mortality
or lack of mortality in his life. Phantom is determined to work harder at giving back as long as it is
welcomed.

Our Farewell and God’s flight to our friend John Denver.


Our Farewell and God’s flight to our friend John Denver. “—ALS


Chapter 10 – Cloud Hopping

Chapter 10 - Cloud Hopping

Cloud Hopping is dedicated to the memory of your and our friend John Denver who died in his
experimental airplane on October 12th, 1997. John touched our hearts with his songs and his touch
of kindness reached out to all living things. Our memories are stronger than death as we search the
clouds and share past laughs. Far out, our Brother in Mankind.
One of the most used tools in trading is perhaps the chart. Charts not only show high prices, low
prices, current prices and other data, which can be used for derivative information generating. Each
trader has their own way of using and interpreting their charts.
Some make up their own charts while others will buy them from a commercial vendor. When it
comes to their use, Phantom remembers when charts were charted on a big graph in the pits
themselves for all to see. We continue our insight with Phantom on charting.
ALS – Phantom, sometimes I wonder how organized traders can be with all of the charts around
their offices. I always thought the less information you had to research during trading hours, the
better you would be able to react to the current market situations. What do you view with your
charting?
PHANTOM OF THE PITS – First of all you mean “Cloud Hopping!” On a Sunday afternoon I
would go out to the park and do my charting.
Let me reach over and turn this old radio on with this funny looking knob here. This big radio is an
old timer and it takes me back thirty years or so. As I turn it on you will hear WGN and the Eddie
Hubbard show with his theme song “Poor People of Brooklyn” playing in the background. I think
that his theme was a spoof on “The Rich People of Paris” but I don’t know that for sure.
I doubt that many old timers will be reading what we say here but just the same, the past is certainly
worth a view once in a while. A look back is good if for no other reason just old time’s sake.
On my Sunday afternoon charting this is what I would see with my charts! I would look to the sky
and see all of these kites flying. My chart would show this as volume. All of the kites on the ground
not in the air and the flying kites would be the open interest. The clouds in the sky would be my
price on the charts.
I would chart all of these with a connecting line from all of the clouds in the top part of the chart
and volume and open interest on the lower parts of my chart.
As I saw the movement of the clouds in my sky market I would place another chart point either
higher or lower depending on whether an existing cloud moved higher or a new lower cloud formed.
Anytime I could get a divergence from the clouds highs and the open interest of kites and volume of
kites; I would get a signal to sell Sunshine futures.
My father would ask me what I was doing, as he would always pick up the trash from our picnic
when the wind would blow it away. I would answer him and say “Dad, I am CLOUD HOPPING!”
I got pretty good at cloud hopping and sunshine futures as I could predict when it was going to get
cloudy again. I think I was all of thirteen at the time. That was my first introduction to charting.
I tell you this little insignificant point of my early charts because I have seen just this week seen
examples of just the same things in trading signals from traders. It may not make much sense most
of the time to most of the people but if it works, who am I to argue. My cloud hopping worked for
me!
There are advantages and disadvantages in charting. When you use them to look back to get signals,
you are setting yourself up to believe you can actually be more right than wrong.

It is possible but you must never forget rule one regardless of how accurate your chart indicator
shows over the past. Just because it worked nine out of the last ten times does in no way suggest
that it will stay ninety percent accurate. Protect your positions at all times.
I think the main advantage which, I see in charts is that you can plainly see what will be dictated to
other traders for them to think at certain points. You will remember that I said I don’t totally agree
that the market is always right at all times but that is what we must trade with or against.
How many times have you seen public sentiment be a massive majority of opinion one way or the
other? What happens? More times than not the thinking was wrong.
In charting I have to say my strongest signals are when support or resistance is broken and thinking
is in the majority against what is happening to that support or resistance.
I don’t want to go into specific type charting and indicators as there are so many of them and so
many ways to interpret them. I will try and point out what I think is useful to all traders the most. I
could explain each type of indicator and charting process but that serves no purpose.
Each trader must decide his or her own criteria for charting. My charting is based on knowing what
the signals of each type indicate to other trades more so than to myself. I am always looking to find
what is the edge to me.
I don’t care about what the charts indicate if they are not my tools but since others do use them, I
must be aware of those indicators. I need to know what other traders are thinking.
I don’t position opposite to my signals ever but that doesn’t mean I don’t position opposite to my
fellow trader’s charts and indicators. My criteria takes into account the other signals though not
directly a signal indicator to me.
There are many trading plans based on various charts and indicators, which can be accurate over a
period of time. The biggest problem with the dependable plans is that rule one and two are not a
part of the plan and the traders never get to trade in the long run.
The trade plan may have what they call money management but that is always a weak point in the
plan. Drawdown eventually demoralizes the traders. In the end all is lost.

ALS – Do you have any specific advice on using charts?

POP – Yes, when you see what most charts give you, it is clear that everyone is looking at the same
data to establish a method of being the most accurate.
The key in usefulness of charts as far as I am concerned is that you take everyone else’s chart with a
grain of salt and establish your own charting to be reflective of data not usually known to others.
All bar charts show the same things. It is a daily chart of high, low, close, open, volume, open
interest and other moving averages or indicators. This is one reason I prefer a chart like a point and
figure chart. It removes the daily bar graph points as the most important for that day.
Let me ask you what would you think of a chart, which takes the same parameters as a standard, bar
chart but your daily high, low, close and open data had a time frame different than daily? You
would laugh. I like that laugh! It tells me I have no competition with the idea.
I will give you an idea and an example here. Let us say you take and make a chart, which starts one
hour and fifteen minutes prior to the close of a market. We will justify this by saying that the most
important trading data for a day is in that last part of the trading day. We will call this the opening
for your next day’s chart.
One hour and fifteen minutes of today’s trading is already on tomorrow’s chart. We will call this
tomorrow’s support and resistance. We continue to chart tomorrow until one hour and fifteen
minutes prior to the close. This closes out our day’s trading chart.

Ok I think you see what I am getting you to think about. Now keep in mind I am not giving you my
way of charting but using this as an example of how to change your behavior when it comes to
charting.
Most traders will never chart this way for several reasons and that to me is good. They can’t get the
data this way as they may only get it out of a newspaper, delayed or through a broker. Other reasons
exist which prevent them from getting a different outlook chart.
I feel you need a jump on tomorrow’s trading to get the edge. The edge to me is important but not as
important as execution. It is just that with the edge, you can get better execution. You are ahead of
the game because you are in front of the day traders, funds, scalpers and position traders because
you are not using their data to follow them.
Instead you are using your data to look beyond their view. By using rules one and two, you can
establish a plan which is a little more remarkable than anyone would think.
You will have to do back testing and research and most traders can’t even come up with that data
yet even today. I guarantee in the future there will be those who look at what I have done lately and
say it is time to make the computers earn their keep. You see the frontier is just now opening!
The sharpest trader with the most intuition will win here. I want you to remember where the idea of
“Different Outlook Chart” came into play. It started with me when I was thirteen. It can start with
you today.
Do your research! Do it again! Learn what different outlook charting can do for your trading plan. I
have given ideas of what my criteria is in trading certain situations so that an understanding of
where I am coming from shows up. Vary your data times. Use fifteen minutes, half hour, half day,
first hour and other time frames.
I am giving you a gift here and someday it will hit you. Just don’t take too long to see what is
behind all three doors. I still want to point out that we will see different outlook charts as the years
go by and they will get better and better. There will be a day when they are followed closely enough
that they no longer have the same value.
In trading you need to change the odds to your favor. By using rules one and two you are moving in
the right direction. By using your own mind, you are doing what that computer programmer did
many years ago. You are looking at a different view. An artist will view his subject material from
all angles. Shouldn’t you?

ALS – Aren’t you making it a little dangerous by telling traders to go find your own plan and make
your own charting system?

POP – I believe I am only making it a little more difficult in showing that trading is complicated
when it comes to getting the edge in trading. I don’t expect them to take entry and exit signals,
which they devise without using rules one for protection and rule two for enforcement of their new
knowledge.
I believe in the small trader! I know what the potential is because I know every trader started out as
a small trader. Not one big trader started just big. You must start. There is no better place to start
than at the start line. Only then can you say you went the entire course.
I want to impress upon you the importance of my belief in the small trader. I believe if someone
important can have faith and expectations in those around them, it will make a difference in their
lives. A good mentor knows that their guidance will grow up one day of those who benefit from
their convictions of belief.
This story I am going to tell you was told to me by a very brilliant mind. I like the story better the
way I like to tell it but will tell it the way it was told to me.

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One year a math teacher in the geometry class had more students that usual. Thirty-eight students
were just to many to have the time to give one on one guidance as required. Not only were there too
many students in this particular class but the teacher had more bad students than usual.
One particular student had never gotten grades above D’s in his entire school years. His name was
Robbie, short from Robert. Robbie was the class clown and had been his entire life because that is
what the other students expected of him. He had no interest in school and would brag that he would
quit school at the age of sixteen in a few short months.
The teacher had three Robert’s in his class. Rob, Robbie and Robert. It was pretty easy for the
teacher after two weeks to keep the Robert’s clear, as the one who went by Robert was the top
student in math.
Five weeks into the school year the first PTA meeting was coming up. The teacher told each of the
students to have their parents come to the PTA meeting. That night only about a third of the parents
showed up.
The teacher knew by how well the students were doing just which parents would most likely show
up at the meeting. The teacher took three to five minutes with each set of parents to chat and find
out a little about them.
The last parents were a little backwards and shy but the teacher shook their hands and made the feel
at ease. The teacher never got an answer when they were asked their name so the answer was never
known. The parents asked the teacher “How is my Robert doing in class?”
The teacher thought and then answered “I have never had such a good student in my class who
takes so much interest and is a delight to have as an example to my other students. Why your son is
a living example of those who will be leaders in our future.
It’s just wonderful to know that in our lifetime we will see youngsters like Robert grow up to make
us all proud to have known him!”
The parents of Robert stood a little taller and smiled as they left the PTA meeting that night.
Over the next three months going into the end of the first semester the teacher noticed his students
doing better than he had expected up to this point. Trying to comprehend how his teaching had
improved and what he had done differently, the teacher spent more time trying to improve. At the
end of the school year, the teacher was in his own glory as no student had failed.
Not even the class clown Robbie. In fact Robbie had gotten all his assignments done, taken a math
scholarship exam and finished at the top score nation wide. He had won a math scholarship as a
sophomore. The teacher was really proud to have taught so well.
The last day of class, Robbie waited until everyone had left and then headed to the teacher’s desk to
talk. Robbie held out his had and said, “My Mother told me what you said about me! I have never
had anyone ever want me in their class before or even cared if I learned. Thank you for giving me
insight into my life!”
The teacher began to cry as all the efforts to improve as a teacher reflected back to the PTA meeting
at the beginning the year. You see the teacher thought when asked by parents how Robert was doing
it was Robert’s parents and not Robbie’s parents.
The teacher had made the biggest mistake of his life at that PTA meeting by assuming he was
talking about the right Robert. Not only was it the biggest mistake but it was the best mistake of his
life.
Can you imagine a grown adult crying? Isn’t it refreshing to know we as adults can learn from
youngsters and it’s ok for us to cry! At one time or another in life we see a flash of light in thought
looking back and realize what we have just been given.

ALS – Pretty touching. You say you like to tell it differently?

POP – I like to substitute Robbie’s name and instead use “a brilliant trader.”
You must understand that somewhere as a trader the light must come on for you. There will be a
point that the biggest mistake of your trading career will be the best mistake you have ever made.
I personally want that student to come to me and say “Phantom, no one has ever wanted me in their
class before or even cared whether I learned about trading. Thank you for giving me insight into
correct trading.”
I do care and I have only one thing left I wish to become. A better teacher!

ALS – How do we go on from here? I think your pep talk has caught me by surprise. I don’t know
what to ask right now.

POP – I’ll go over point and figure charting next. Go and enjoy a walk to the top of your hill with
your wife.</>

ALS – Ok, I would like to reflect upon what you have just given as insight. Not just for the book but
I also want to reflect for my own personal evaluation right now. Thanks
The next interview:

ALS – On point and figure charting one question I see often is what size to make the boxes?

POP – The fact of P & F charting is that the smaller you make the boxes and retrace criteria, the
closer you will see the market characteristics and order flow. To learn the nature of trading and each
market at first I suggest the smaller box sizes. Keep in mind for the retrace that it must have some
significance beyond a normal bid and offer slippage.
Each market can be a percentage of daily-expected moves. I would say that as an example in
soybeans that if the daily range is usually 9 cents, I would use a 1 by 3 box. Each box is one cent
and each significant retrace has to be at least 3 cents. This pretty well says to take ten percent of the
daily-expected move as the box size and thirty percent of the daily move as retrace requirement.
As time goes by you will want to extend the sizes to larger sizes. You may even keep multiple P &
F charts to compare. Today computers can do this for you if you are set up for it. It is important to
realize that at one time or another each trader will try and improve his trading office.
Is it good to improve your data before your success or after your success? The answer is a catch 22
as you will improve your trading as you improve your understanding of how markets work. Most
traders do not want to extend the costs at first due to limited funds.
What really can you do with your data if it is based on someone else’s criteria and information? You
can only be a derivative trader of that restriction.
I am not going into how to specifically use P & F charts but many good books on the subject will be
a good library add for you. Learn the highlights of support lines, resistance lines, three wave
recognition and breakouts. You will be able to see what the trade does each day within the market
parameters. This is important to see first hand and P & F charts are the perfect way to do it.
You are better off if you do your own charting rather than using a computer until you understand
and see what important data is available on these type charts. I also suggest that if you had to use
only one chart it would be a point and figure chart.
I don’t mean to be weak on giving knowledge on charting but it is critical that each trader come up
with his own thoughts and ideas. For someone to give you their thoughts just limits a trader’s
horizon of what is possible for them. Do your own homework and decide what your charting shows.

On some of my programs on charting and signal criteria, I narrow it down to inputs of importance. I
could have as many as 64 inputs. I can weight each one according to how important they are or I
can have them in one of two states only. Some of my criteria input is qualified by going through
several doors first.
In other words if the criteria is met, that input must go through the next set of criteria. It sort of ends
up like an eye examination as you expect one total answer in the end.
Charts and criteria are nothing more than the best set of eye glasses at the end of the examination.
You will wear those glasses after your exam. Same in trading, you will use that data after your
criteria is set.
Why argue with it? Many traders are always making exception. For example the last time they used
their criteria signal they lost money. They won’t make the next trade. The big one! If you lost
money last time and aren’t happy with the signals you must go back over your program or criteria
and reintroduce the correct data that you expect to be required.
If at any time data is excluded which you require, your signals are useless. Get the total picture on
your plan and not just the pieces. Have a definite signal and not a maybe signal.
There are times when nothing you do seems to work. When things continue to go bad, I can say to
you that you have violated another known fact. Diversity helps reduce risk but only in the long term.
In the short run we are talking about luck, both good and bad. Believe me that if bad luck comes
first you are finished if you only depend on luck.
Charts are not an answer alone and have no use if your trades can’t be executed promptly. Anytime
you can’t as a trader do what is required to get the position on, you will take the scales the wrong
way. Remember you must be in before you can get a correct move.

ALS – What kinds of charts do pit traders use mostly in trading?

POP – I have seen P & F charts bar charts with half hour, ten minute, down to 1 minute used. I have
also seen several of the new popular volume based price charts as well as different color charts with
indications of momentum along with price.

ALS – What type do you use when you are in the pits?

POP – I never use anything but mental graphs when in the pit. The mental charts are more point and
figure charts. They are really easier as I am looking for the third wave to position against the public
on the third wave in my desired direction. It works for add on positions well and keeps my entry
cleaner for protection requirements.
I don’t go to the pit often anymore unless it is to be an exceptional day indicated by my signals. I
will go to the pits when I have an unusually downward bias indicated, as gravity seems faster to me
in those markets, which reverse to the downside.
Most of my charts are kept on computers but that doesn’t mean the computer gives me my signals
during the day. I like to have them before the day begins.
It is more mechanical that way and not ever emotional that way. That is an important point in
trading to remove those human elements as best as possible. Only then can you truly be objective.
Look at it this way. When it is no longer your money, it is easy to do the right thing. But when it
isn’t your money you can also be careless.
Just follow the rules and your signals without exception. If they don’t work in the long run, you are
not using the correct system or you’re not using my two rules first and foremost.

ALS – You are still going to have arguments about your two rules as to whether they work for all
traders!

POP – We wouldn’t have markets if everyone agreed on a plan. We would have nothing but limit
day moves everyday. We really need various ideas and concepts. I just want one, which will work
over time and keep my drawdown smaller than when I first started.
I must have a rule which allows me my freedom to know regardless of what happens today, I will
be here tomorrow and tomorrow and next year and next decade if I wish to be.
Don’t ever think that no one ever cared whether you learned anything in trading. I do care and I
insist you take full responsibility to learn the correct knowledge. That knowledge must be not only
criteria for trading but also the correct method of changing your behavior to that which are required
to be successful in the long run.
Your trading career should be a long-term expectation on your part. A short time frame is not
acceptable in trading. I am not saying that short-term trades are not acceptable but that you must
look beyond one day in your trading career.
Some of the best traders started out broke! And then they got more broke. Until success!
I believe if someone important can have faith and expectations in those around them, it will make
a difference in their lives. “—POP


Chapter 9 – Options

Chapter 9 - Options

Option trading presents many more possibilities to vary your trading plan than do just futures,
bonds or stocks. There are as many ways to trade a position or scenario, as there are ideas it seems.
Phantom uses options for various reasons, as do most traders who understand them.
The purpose of this chapter is to give insight to all traders and not to narrow the insight just to the
experts. There is much to be learned about trading options and good research is needed to become
properly prepared in trading them. Keep an open mind as to what the market can present on both
sides of the ledger.

ALS – Phantom, I know you don’t see or do as most traders when it comes to option trading. How
can we better understand proper trading of options.

POP – Most traders know what options are and how they work. I view them as ICE CUBES, which
can either, melt or get larger when the water around them also freezes. When water freezes it will
take up more volume than the water did in the original state.
An option can get bigger than it’s original size if all goes well for the trader. They can also melt
with predictability.
I like to weigh each of my option positions against a futures contract. By this I mean that each
position or combination of positions has a weight. To impress upon you my view let us use a
balancing scale. You know the kind I mean as one which has a platform on each side of a balance
indicator.
Put an ice cube in the glass of water and I consider the weight of the ice cube as a call, which has
been purchased. I consider the weight of the water as a put, which has been sold.
Regardless of how large the ice cube (long call) or how much water is left (short put), the total
weight of that glass will remain the same. The ice cube can become larger when the temperature
drops below 32 degrees and the water can become reduced liquid. It is the same with the call and
the put. They can and will change size.
I call the size of each ice cube the DELTA and also the amounts of water a delta. Anytime you add
the long call delta and the short put delta at the same strike price you will get 100 in theory
excluding the interest rate factor, volatility and time element.
Using this as a rule of thumb for our understanding we will assume positive 100 percent delta in
this case. You can consider the opposite as the ice cube (short call) and glass of water (long put) as
a call sold and put bought as negative 100 percent delta.
On the other side of the balancing scale you will have an equal futures position of some size and
bias which will equal the option side which balances the scales.
Your glass of water with an ice cube (long call short put at same strike) is equal to short one
contract of the futures you are trading. You will remain balanced and have no risk as long as this
position is in place.
We call this a conversion. The option side of the scale is the synthetic future. You would be either
long or short a synthetic future which can be offset with an opposite futures contract.
Pretty simple at this point. You start to throw variables in and it changes dramatically. Each glass is
going to be a different size depending on the strike price. In other words even though the delta of
our initial position will be 100 percent regardless of strike the size of the glass will be different.
I consider the size of the glass as the value of the water and ice cube added together. It will be a
different at different strike prices. The delta remains at 100 percent.

You may be getting into this description and even a little ahead of me. If you have had geometry
you can have some good fun with this approach.
We can now think of throwing out the futures contract but want to balance the scale still! We put on
the other side of the scale the opposite option position and we have our balanced position still! But
guess what? What we have really done is to offset our position and no position exists on either side
of the balanced scale.
We can only make money in certain situations but we must know what we can do to move our
position around when required.
Now we get into the ifs. There is no limit to what we can do almost no limit I should say. What we
want to do is to come up with a plan to make money in almost any situation. We must also find a
way to include rules one and two.
We discover that we can balance the scale by using different strike prices and not just the same
strike price. We also can tilt the scale to one side and leave it biased to the long or short side. Pretty
simple still. Now add a balanced scale on each side of the existing balanced scale. You have three
balanced scales to work with.
You can add four more balanced scales to the last two on each side. You see you now have
possibility of each of the balanced scales giving you an opportunity to move positions around but
still keeping it balanced. It becomes trickier with each set of balanced scales you place in use.
You can even add as many balanced scales as you wish but you are out of control trying to stay
balanced. This is what happens to some option positions not well thought out.
I hope I didn’t confuse anyone with the balanced scales and ice cubes but it is critical to understand
what each move can do to your overall position. My option model is a combination of balanced
scales as data input to the program, which determines what each variable will do to my position.
You can make money when you know how to use volatility, time decay and price movement. The
criteria research becomes a little more intense and expanded.
Without getting into specific programs, we’ll discuss the fact that there are certain option positions,
which work with my rules. Extensive option understanding is beyond the scope of what I am trying
to teach you. I only want to show you how you can incorporate option trading into a good method
of trading while using rule one and two to protect your drawdown.

ALS – I know you use vectors, weights, volumes and angles as part of your computer program to
establish criteria of balance as well as the usual research of option evaluation. I also know you
developed your own evaluation of options worth, which is different from most programs. Is it
because you don’t want to play someone else’s game?
POP – It’s like a basketball, which retains the same shape, but when the pressure changes is a
different bounce. Same with options. I consider an option evaluation in a bull market different than
in a bear market. The market just considers the volatility different. It is only how you can best work
with options.
If I gave you a notice that from now on we would consider bearish options and bullish options and
not just change the volatility to fit the price, you could better understand what is expected of your
trade instead of guessing the changing volatility every day.
This has all been debated before and we aren’t going to change what is believed to be the best
method. In fact sometimes when you are with a different view, you are better off.
I am going to explore some option possibilities, which uses rule one to start. Since we are going to
assume we are wrong until prove correct in options also, we will put a fairly protected position on
to start. Let us say we have a bull market started as we see from our criteria platform.

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Bull spread is buying a lower strike and selling a higher strike price. This leaves rule one in use.
Option experts are going to say we only put a smaller option position on. Yes, that is correct for the
purpose of requiring the market to prove us correct. Let us say we bought a 1000 strike when the
future was at 990 and we sold a 1010 strike just for example use.
If we had bought a 1000 call outright we would have paid more for the call than by also selling a
1010 strike. We have limited our potential loss at this point to the debit we paid out. Let us say we
had a debit of 3. An outright call bought without the bull spread would have cost us say 5. We have
already started to use rule one by reducing our possible loss to 3. Our maximum loss is 3 at any
time.
What can now happen? Three things can happen. One of them isn’t going to happen as the price
never remains the same very long. So we are going up or down. What else can happen to our
position? We can lose time value as the ice cube melts and we can lose volatility as the interest in
trading falls.
We have used rule one so we are slightly protected from time decay because we don’t have as large
of a position as we could have with an outright call. We are also slightly protected form falling
volatility because we are not with as large a position as we could have had with an outright call.
Ok but the experts are saying that we did all this at the expense of potential profit. Yes, indeed right
again. But isn’t rule one to keep our losses as small as we can? Isn’t the name of the game to stay in
the game forever? Yes, so we need rule two to make our money! Rule two actually works better in
options than futures. The main reason is that volatility can increase and decrease.
With futures, sure they may go limit up or down but options move value as expected and then some
extra because of what the experts call volatility changes. I call it changes form liquid to solid! Water
freezes with higher volume as a solid.
At any time you are not risking more than 3 in our example and you are long a 1000 call and short a
1010 call (bull spread.) Let us say that our criteria for being correct are that the market moves at
least 15 points. So at 1005 we accept being correct at this price.
We will make our position larger at this point. How? We have many option possibilities but the best
option is to buy a higher strike than where our current position is due to the increase in volatility.
We want a delta (position size) which can more than double.
A delta of 50.60,75 can only go to 100. A lower delta gives us a possible double plus, triple plus,
etc. Also we are risking less equity.
Ok we buy a 1020 strike for example purposes. Let us say we pay 6 due to increased volatility for it.
So what do we risk now? We risk our original 3 but because of volatility increase and price
movement we have a value of let us say 6 on our original bull spread.
Ok since we paid 6 for the 1020 strike we still have only 3 at risk or do we? We have a value of 6
(1000/1010 bull spread value) + 6 (1020 call purchase price) or a value of 12 and have only paid out
3+6 or 9.
We show a profit of 3 at this point and can work with our rule one and have a no additional risk on
our position by using criteria here forward, which protects us from negative drawdown.
To do this we remain alert to be swift and use rule one properly. We don’t know this position is ok
yet. We have also used rule two here by adding.
The values of these moves will depend on time remaining and volatility changes but for example
purpose of using rules one and two we won’t consider those variables at this time. After two weeks
we have a move to say 1030. We are flagged it is time to reverse. What do we do now?

Now comes the interesting part in options. Most traders want to take their profits. But we are using
rule two again here. We must press our position and the market looks like a reversal. We don’t take
our profits but decide to set up our payday.
We do this by selling another 1010 call. This leaves us with a bull spread and a bear spread with 3
strike prices. In fact we could call this a butterfly. We sell the 1010 call at 20 due to increased
volatility again. Ok so what do we have at risk in the trade. We paid 3 for the first bull spread of
1000 long call and short 1010 call plus we paid 6 for the 1020 call.
But wait we sold the last 1010 call at 20. That means we have -3+(-6)= -9 paid out and +20 received.
We are up 11 points. Ok the experts say you could have had more if we had just offset the positions.
Ok so we’re bad! We still have 367 percent profit so far. That isn’t bad is it?
Two weeks later the market is at option expiration and the price of futures is at 1009. Oh, darn we
forgot our butterfly position! Well let us salvage what we can! What is the butterfly worth now?
The answer is 9. Ok so we offset it and take commission charges or we don’t offset it and let it
offset by our exercising the 1000 call.
In the end by leaving the butterfly on we set up a payday provided the market was within 1000-
1020 at expiration. We made anywhere from 11 to 21 (depending on where the butterfly is offset)
on the trade. We made the 11 from the sale of the 1010 call and anywhere from 0 to 10 depending
on where the butterfly is offset. Don’t take all your profits but let leverage work for you in options.
Our maximum risk was our original 3 and never more by using rule one correctly in options by
having a limited risk. We also added to our position and used rule two. But wait there is more!
Once we put the second short call on to establish the butterfly we were never going to lose anything
because we bought our butterfly by being given 11 to take the total trade of four options over the
range of movement. Two options long at 1000 and 1020 strikes and short two options at 1010 strike
for a butterfly legged into. In other words as soon as we neutralized or balanced the scales on each
side, we could never lose.
The experts again say what if the market had gone to 980 instead of up to 1005 and then 1030? Well
we would have lost 3. So what kind of ratio did we set up for our trade in options? Risk 3 gain 20,
6.6:1 and slightly less with commission and depending on where the market price established itself
at expiration.

ALS – It looks easy. Is that all there is to it?

POP – I don’t want anyone to think it is that easy because you must be aware of what is required in
exercising options and the effects of increased volatility and decreased volatility. This is a start to
give you the desire to learn more about options.
One of the big keys in options is the hidden secret of putting on no or low risk trades by working
the positions into a no risk trade with the potential of a big payday toward expiration.
If you are to trade butterflies you must learn that the proper time to outright buy them is at a large
time out and the liquidity may not always be good to put them on. You can often put them on with
bull spreads and then a bear spread. Commission costs are a concern if you are at a full brokerage.
You must figure all of the costs to reduce the ration of pay out.

ALS – Do you want to go into some other strategies?

POP – Let us put this on the back burner and see what the traders want?

ALS- OK

Note: There are so many good books on option trading and since it was not the purpose to show
different strategies, we will leave you to further research. The main point Phantom wanted to make
is that you can and should incorporate rules one and two in option trading as well as futures only
trading.


An option can get bigger than it’s original size if all goes well for the trader. They can also melt
with predictability. “—POP


Chapter 8 – Day Trading

Chapter 8 - Day Trading

 

ALS – Just by the title of this chapter I can see a picture being painted by an artist. All these traders
standing with notebooks, bow and arrows, alarms ready to sound and no bids in the pit as quiet sets
in.

POP – Yeah, and I can tell you the artist.

ALS – Who would it be?

POP – Leroy Neiman! I’m impressed with his work. It is something he would paint. I can’t help but
put him in the class with Oprah, MJ, Don Gibson, LeAnn Rimes, and . . .

ALS – And Phantom of the Pits!

POP – Phantom of the Opera maybe but not the Phantom of the Pits! You must remember that no
one knows who the Phantom of the Pits is. In fact I can argue that there will be but this one book!
Only this one!

ALS – Now wait a minute. You said it depends on the reception of the traders when we started this
project six months ago. Are you backing out?

POP – That is something I want to discuss with you. There is no big profit is writing unless you can
really write. I can’t and don’t want to write except for my own keeping. You can make more money
trading than writing. This brings me to my point of insight in trading.
I wouldn’t do this insight on my own for it would be a waste of my time. In fact I am sure that
because of this reason is the primary cause of lack of knowledge presented to traders based on
experience. Theory is great but not a learned behavior. Behavior is the key.

ALS – Phantom, you forget easily as it was YOU who came to me about giving back by helping
other traders. You were as sincere as Michael Jordan is on the court. You don’t fool me! I know
what your plan is!

POP – Yeah, perhaps but I know you won’t tell anyone unless I let you.

ALS – I am going to tell without your permission right now! You are going to cut your losses if any
in this project and you certainly will press your gain if any from this insight give back.

POP – That’s good. Wish I had thought of that.

ALS – I would like to know in day trading if you should use the same rules as in longer term trading.
Are there times when you shouldn’t use rule one for day trading or any trading for that matter?

POP – Never, in trading forward from now. Looking back you could say there are certainly times
when you would have been far better off to forget the rules. But that is looking back and that is not
how you trade. You must plan for what will eliminate you from trading in the long run and protect
yourself.

ALS – There are going to be lines of traders lined up to tell you why you are wrong!

POP – Let me point some things out here. Many years ago when I first started to use computers and
their speed was slow, I had so much to do that I had to get outside help. I had this one program
which I could have written but it would have taken too long.

I didn’t want to write it in assembly language because I needed to see every step work before I could
use the program. I contacted newly established programmers and some not so new to help me.
It was sort of an experiment within itself. I narrowed my choice down to about four of five possible
candidates. I asked each one of them to solve a problem for me and gave them access to a computer

and a basic programming language. The question I asked first was what is the answer to every
number from 1 to 100 added up.

Think about how you would solve that problem for a minute before you see the final conclusion to
it. One programmer used the computer and came up with the correct answer. It took him all of three
minutes plus. Of the candidates one put down his paper computer and said the answer is 5050
within ten seconds. I asked the individual who only took ten seconds how he came up with that
answer.

His remark was “I don’t see or do things the way everyone else does. I take and split the numbers
into pairs such as 1 and 99, 2 and 98, 3 and 97 and when I am done I have 49 pairs which make 100
with two numbers of 100 and 50 left. If you multiply the 49 pair times 100 you get 4900 and then
add the 100 and 50 you get 5050 as the answer. Well that made an impression on me I still keep.
Now I want you to understand about day trading the same way. WE DON’T ALL SEE OR DO
THINGS THE SAME WAY! We are all after the correct answer. My answer is to keep you in the
game for the longest possible time.

ALS – Who gave you the quick answer?

POP – You know very well who it was! I didn’t say I wouldn’t give you credit in these insights, just
that I wouldn’t take any. And wipe that big smile off your face. That impression was a start but I

wasn’t done with my experiment. Next I asked each of them to
write me a computer program to give me the correct answer for all numbers added from 1 to 10,000.
They were all able to give me a program to do what I asked of them in Basic language. I judged
their success on how quick the computer would give the answer and not by looking at the program.
I used 1 to 10,000 because I knew it would take longer.
All of the programs came up with the correct answer but at different speeds. Since we were using
Basic language it was slower than I wanted for my particular program but I was pretty well decided
I wanted to understand the program for my own protection. The ranges of speeds were from 48
seconds to 3 minutes for all but one.
The last one took less than a second did in basic. That surprised me so I took the fastest two
programs and called in the programmers. The 48 second program ended up with a loop of : N=0, for
NN=1 to 10,000, N=N + 1, next NN. Print N. 48 seconds was still slow as far as what I wanted. The
fastest program was N=N squared + N divided by 2. print N.
Just as each programmer came up with a different style and program, not everyone was correct for
what I wanted. It is the same in trading. The common ground here is that we are all after the ability
to not ever having to stop trading and we are all after the ability to make more than we lose.
You see there are variables in all of our trading styles. It is just that my rule one and two are
designed to give you the longest answer when it comes to trading longevity (rule one) and the
shortest time to get to your goal of return (rule two.) You need them both.
ALS – You’ve made a good point!
POP – Let the debate continue for we all benefit from knowledge brought forth with each different
situation. The only time I have a closed mind is when there is total lack of understanding of what is
required of a trader. That part of a program, which is not a control from a program but the required
execution by the trader.
ALS – Day trading. Where do we begin?
POP – We’ll start with the reason for day trading by most traders. It is a function of my rule one.
And it is a function of my rule two.

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ALS – You mean you are going to take credit for day trading? I thought you said you didn’t want
any credit!
POP – It is the traders desire to be able to trade and not worry overnight about their positions, risk
and exposure of positions beyond a short period of time while expecting the maximum possible
gain in the quickest possible time. Actually the desire is to have rules one and two in a short time
frame is a perfect prelude to day trading.
ALS – Ok, we’ll buy that. A day trader often is doing just what your rules imply.
POP – There are advantages in day trading but not many because restrictions come into play. In day
trading you are more apt to lose than win due to the time limit being a restriction which creates a
situation of who is ahead at the buzzer wins. In basketball, when the fourth quarter time runs out,
the game is over. The high score wins.
In day trading when the last trade is made, you expect to be out of your positions. You are letting
the clock decide if you win or lose. That to me is a restriction.
I did a study on day trading and came up with some very interesting findings. First learned in the
study was that you could use the day traders to your advantage in trading by knowing that they
would have to get out by the close. Second learned was that day traders actually do a better job of
keeping ranges smaller than do scalpers whose purpose is to fade small moves for quick profits.
Third learned was that day trading did afford traders a way of keeping risk smaller and allow them
to work larger positions in the short run as opposed to large positions in the long run. Without going
into the next ten learned points we will concentrate on the first three. The first three are probably
the most important but they all have merits.
Day trading is good for some traders, as this is the only way they know to keep risk smaller because
of shorter time frames. There are those traders who do not want to put up the margin to carry
overnight positions and have the risk (better known as under funded traders who don’t have the
money in the first place and should not be trading such size.)
Whatever the reason for day trading, it is a valid method of expressing my rule one. The only
exception is that they usually expect their position to be right.
A scalper is quicker to take a loss but tends to let profits run a little less than day trader’s ability to
take losses. In other words a day trader tends to lose on a trade more than a scalper makes. This
leaves a margin of loss in losing trades.
Believe it or not, guess who picks up that extra loss which day traders make? It is usually the
position trader. So that to me is the edge. You must know when you have the edge and just what it
is. It is not an exact thing but I feel it is because day traders are not as good or don’t have the ability
to execute as scalpers. A day trader would do better if execution became a market order on exits.
Especially on taking losers.
ALS – You’re going to discourage a lot of day traders.
POP – Not at all as the day trader is a more disciplined trader. It you take rule one, which is the
assumption of being wrong until proven correct, you will have the other side of the coin for most
day traders. They could become better traders if they were to use rule one. Day trader’s odds are
lower because of their limitations on overnight carries.
Another big drawback is delayed reactions on what the market prices have done. If they use criteria
such as opening range break outs, they will have to be fast at getting the orders into the pits. On that
type of trade they are better to take a position on the open and protect it than to take the opening
range break out. But they want the position proven before they take the position and wait until the
breakout.

As a day trader, they would do better if their trades were within criteria, executed and protected by
rule one instead of the delayed trade due to the lag in information. They must pick the points almost
exact. This is another drawback for them. You put yourself at the mercy of how the orders enter into
the pits as a day trader.

It is almost impossible to be exact in your estimate of price. A better situation is to be able to pick a
range instead of a price on execution. Same with exits. This all reduces your potential profit from
day trading. So what is the answer?

A day trader can do better by averaging but you never want to average in an established trend. The
trend will tease you into bad entry positions if you don’t do your research on market characteristics.
Counter trends will do the same thing. Mainly because there will always be those weak positions
that turn into profit taking. This is a day trader’s nightmare in day trading.

ALS – How can you be so certain on day trading?

POP – The best traders will take what I have to say, study it, research it, and decide how exact it is.
They will judge accordingly and make their own trades based on improved judgement of day
trading. That is what we want them to do. It is too easy to think day trading is everyone’s game and
a good one. It is a good one for some but not most. It can be improved by understanding the
drawbacks. All trading has drawbacks so it is critical as to how they view their trading probabilities.

ALS – You said day trading could be compared with your rule two also. How so?

POP – A day trader tends to take bigger positions because they know they will exit quicker than
most position traders. This will give less risk long term and affords them a way to overtrade. Or I
guess I should say gives them a way to trader bigger. In rule two, the idea is to be bigger after
proven correct and I suppose that is what the day trader is thinking in trading bigger as a day trader.
Right or wrong, it is correct in being bigger within correct criteria. The bad side is that they tend to
be wrong as often as right. This keeps it more of a 50/50 game than an advantage that they would
have if only being larger on correct moves.

Being larger on correct moves as a day trader is difficult at best due to limitations of the day’s range
keeping the adds requirement to be quicker after the initial position. Often day trading will not
allow more than one add if any add at all. Often too the profit side gets taken off sooner, restricting
the range even more.

ALS – Is there a better way to day trade?

POP – You bet there is! Now I have every day trader’s attention. For a price I will be glad to give
that information out. I am just kidding of course. The answer lies in their research. Look at what
causes the most losses in day trading. Now study your own entry and exit criteria and decide what
doesn’t work. Look at the other side and assume a day trading criteria does not work and expect it to
be wrong.
Next devise a way of removing positions until they prove correct. There you have the answer. Can
you incorporate it? Not in all situations, such as we said previously. Trends and counter trends tend
to do a number on day traders due to their not caring what a trend does. Next set up a criteria for
removing your positions. You must not allow the clock to dictate when you get out.
Most important in day trading, you must never play everyone else’s game. Say that for example you
play the opening range break out. Everyone does that. You will wash in the long run even though
you just want to day trade. You set your criteria differently. Let us say you trade the third move
through the opening range.

Why? The market tends to be a trading market if you get the third move through. That is what you
are, a day trader. You can now expect the market to be on your terms as a day trader. You expect it

to come back but what if you are wrong? Well, then you will make your profit instead of being
prepared to break even on a swing trade.

You can also as a day trader without an existing trend, fade the market. Let us say the last 10 days
range averages 8 cents in onions (never heard of them.) Your criteria could be the old fib number of
5. Wait for a 5-cent set back to buy or a 5-cent rally and sell. I am not saying this works in your
particular market but you can study it and establish your criteria in a non-trending market.
I know some day traders who take the day off until they have had two days in a row of a nontrending
market in the same direction. The next day is theirs, as they will wait until it looks like the
reversal is about to take place and then counter the two-day move. Day trading is a psychology
study of the past few days.

If you use rule one, you stand a better chance of being up in the long run. It is not exact and as long
as that is understood and losses are kept low, it is a possible money-maker in the long run. If you
like the odds, you can be satisfied if you do everything correctly regardless of the outcome.
A critical point in day trading is not to just use the prior days high, low, range and close as inputs to
your criteria of signals to use. Point and figure charts are closer to the market as P & F charts don’t
restrict to within a day’s range. Remember you are staying away from the same methods used by
most day traders in order to get the edge on them as well as the position traders who most likely use
bar charts only.

Last of all, don’t just take someone’s word on day trading. Check out your particular market and see
the characteristics in action during the day. What you think is a good trade might not even be
possible when you try to place the position. Use market orders to make sure you have a position but
do it with intelligence. A non-position is a wash.

ALS – Phantom, I have a question and sort of a remark from a successful day trader. Using a
volatility break out system and using a stop after a series of consecutive losing trades, can you use
rule one and two correctly?

POP – I can tell you whose idea that is and what course it is in but I don’t want to disclaim or
endorse the data. There are some markets this method is an excellent method for day trading. Not
all markets will be good markets to this method.

I am sure traders who use this method know which markets to shy away from by experience. Yes,
you can use rule one correctly as it is saying that you assume your positions is wrong until proven
correct and by taking a position after a series of losses, you are certainly aware that you are going
for probabilities of turn around. If no turn around you certainly were expecting to get out. Naturally
the market will have to prove you correct after your entry within your established criteria.
On one of our examples of an onion trade earlier, we used end of day criteria as an example of what
some would consider there last resort criteria for day trading. It is the end of day criteria to get out.
Day traders tend to be or get out by the close.

To watch a market go against you all day and not get out until the close is certainly a challenge in
trading criteria but sometimes your criteria will require this situation to be set up. You just know
you will be out on the close if all does not prove out. This alone keeps you from carrying a loser
overnight.

On using rule two in your question, would you say the odds of increasing the position after a series
of indicator losses allows you a better opportunity to add if the initial position is taken after those
losses? Only if the position was to prove to be correct.

The swift would be able to determine if the position had proved itself and at that time add or
removal should take place without the fade to enter. I would agree that with this plan if your data
feed is quick and your line to the floor is quick, you would certainly be in a position to improve
your pay out.

The part which I like in this style is that you are required to either do one of two things at a certain
point. Either add or remove.

Keep in mind that rules one and two do not negate a successful trading system at any time. They are
to keep you from a huge drawdown of which you would never recover. This could be additional
protection outside the plan or could be incorporated within the plan itself.

I appreciate that question and understand where that trader is in his career. It sounds like proper
research for the proper criteria in his style of trading is paying off. It’s good to hear when that
happens. It proves out that trading is not easy but is behavior modification and knowledge.
You can learn from other traders but you never learn to be them. Just the other day on a business
channel I heard them indicate that a particular trader was selling all day and the question was why
they would sell now. One of the answers was correct. He was offsetting his positions.

I remember one day when I bought all day and at the end of the day when the market was down on
the close, one trader asked me why I went long all day. He didn’t know I had orders twice as large
selling after every buy I made. My point being that you don’t know what a trader did, you only
know what you have seen him do at the time.

You see my plan was to establish what the market was going to do that day. Every time I bought I
had a broker with my exit double the other way. I would try to offset my new short position and
getting out was wrong so we doubled it the other way again.
At the end of the day I had a position twice as large as I had intended and the opposite way I
intended to go. I only knew that it was the day I had to be swift. Sometimes your criteria may be
that you must be swift to take any possible loss. Especially when a certain Fed Chairman speaks.

ALS – Is there a way to plan for such surprises?

POP – Yes there is, by not ever over trading at any time.

” In day trading when the last trade is made, you expect to be out of your positions. You are letting
the clock decide if you win or lose. That to me is a restriction. “—POP


Chapter 7. Trading with Rules One and Two

Chapter 7. Trading with Rules One and Two

 

ALS – Phantom, your required rules seem pretty simple. Let’s use some practical applications in real
time trading.
POP – In trading, rules are not meant to be broken for your own sake. The rules bring you to a no
judgement type approach. You design your trade program and approach to trading by keeping the
major choice of positions within your program while keeping the confirmation to the market. Your
only job is to follow your trade program while obeying rules one and two. The rules take away the
need to decide while the market is open of what to do during the trade day.
You will have a good idea what you expect of yourself at all times rather than guessing what is
actually going to take place with your positions. You will either be proven correct with your
positions or you simply get out of the positions. You don’t stick around to get hurt with exposure if
the market is not proving you correct.
Yes, you will have exceptions when the rules don’t corporate with you and what the markets are
doing. This will be a minimum problem, as the rules will keep you in the trading game for long
term trading.
You must research your trade program well enough to be able to not enter at bad entry levels. Even
if you make a simple mistake such as chasing markets, rule one will still keep you from excessive
drawdown during your trading career.
ALS – I notice a few questions coming up about excessive commissions when using rule one!
POP – Today as an example as I bought the DJIA after a 30 point rise and expected to see a 5 point
plus within 30 seconds. After 30 seconds I bailed. I had a loss of one point on the trade. The market
continued to drop against me and my loss would have been 30-40 times my commission even if I
had paid top commission at the low point.
Now you can’t tell me that it is better to stay in and wait for it to come back then it is to get out and
re-evaluate the situation. In the end I would have been right but my mental standing after a simple
rule one trade is a lot better and allows me to have sanity about my next move.
Most traders think it is bad for them to be wrong and when they are, that’s it for the day. Well, being
wrong is the best chance to put a correct position on with your next trade as you certainly can trade
again.
If you keep a trade, which never proves to be correct within your program of time element, you will
never be able to correct a bad situation but only be able to remove that bad situation. Your mental
well being is worth a lot in trading. You can trade well when you are thinking good.
What I am going to say next is something usually learned not by observation but by making the
assumption itself. Most of your money from trading is going to come from trades, which take off
rather quickly from when you put them on. That is the reason rule two is so important. Just look at
most starting trends and good runs you have once a market turns. The chop-chop markets aren’t
going to give you good income.
While it is true that being in control of your position in the market rather than the market being in
control of what you are going to think about your position next simplifies your trading life, it also
greatly enhances your ability to make good trades. The main reason is that you know what to expect
and have those expectations up front from the entry of your trades.
If you supervise a house building and you have several trades working on the house, you certainly
make sure the plumbing which goes in the foundation is being put in correctly before you walk
away and let the foundation be completed. Building a position is the same in trading as most
occupations. If the plumbing and foundation on the house are completed correctly, you move to the
next step.

Still at any time the prior work finished could create a problem. Let’s say the foundation settles and
cracks the sewer pipe. Would you continue on the house? Of course you wouldn’t. Well no way will
you continue with a trade, which proved correct but now shows problems.
You can never let your guard down in trading. You must always know what the next step is for you
in any situation. You rehearse your criteria of a trade and it becomes second nature. Just like driving
a car becomes sub conscience to you when you are proficient at it.
You start out by not knowing what the trade will ever do when you put it on. You can never control
what the market will do or how the orders will enter the pits. You can not tell me when a large fund
is going to take a profit or enter a new position. Nor can anyone else tell you for certain. All you
can do is build your criteria or trade plan to take every angle which is important into account.
I can give you a plan, which will catch every move, but you will catch moves, which are the wrong
way too. Along with that plan to never miss a move I can give you the big drawdown and the rules
which will eat you alive if you can’t afford the drawdown. In the end you will have what you think
is a very small profit for all your time and patience of going along with the plan.
But yes, you will have a profit. That is not what the usual trader is about. He is not in this game to
earn a few extra bucks for his vacation. He is always after a better return then most would consider
fair in any other investment. That reason is another creator of rule one.
You are expecting a big reward and fail to see the big risk, which faces you at first. Somewhere
along the way you must face the situation for what it is.
Trading is a loser’s game. You must learn how to lose. The biggest loser who loses small will
continue in the game. Obviously the small trader who loses big will quickly go to the sidelines.
Sometimes the sidelines are not even there for a few.
Their losses take away their hearts. Believe me for I have seen them. It is the saddest thing in the
world to take away someone’s dream. More so when they never knew the enemy in the first place.
A trader must know and accept what the market can do along the damage side to equity, to mental
peace and to self-esteem. Every day is a big surprise in trading.
You must plan for the surprise from the time you put your position in place. The big surprise can
sometimes be a friend but you must be prepared for it.
Why do I say the market is going to give you a surprise? Can you tell me exactly how far a market
will move and then re-trace before continuing or if it will continue?
What you can do is to eliminate your reactions to what the market does to you. You do this by not
giving the market the power to control your position or emotions with adverse market moves. You
start out expecting the adverse market moves and plan your action based on those outcomes.
When you place a trade, don’t ever think this is the only trade to make. There are thousands of
trades you can make. You aren’t going to miss a move for long if you trade correctly. You aren’t
going to chase markets if you trade correctly. You must have a plan to enter positions based on each
market’s criteria. Rule one is the rule, which keeps you in control at all times when that position is
in place.
Behavior modification can take place in many forms but you need a rule to show you what must be
done at all times. One trader suggested the rubber band method. Each time you took a big loss or
did some bad trading you would snap the rubber band on your wrist. That’s if you remembered to do
it.
I don’t like this method but it is better than a lot of others. Just because you put on a trade, which
lost money, is no reason to feel bad. If you put a position on and lost big money that is when you
can feel very bad. With rule one you are freeing yourself from having to feel bad.

You put the trade on based on the trade plan. The market either confirms and you now have a good
position or it doesn’t confirm and you are not ok with the position and you get out. Simple! Only a
big deal if you don’t get out when it isn’t confirmed a good position. No need to ever feel bad. Most
of your trades, which don’t confirm within a logical time frame, are usually going to look bad
sooner or later. Why not take the sooner?
ALS – It’s beginning to look like it takes more thought to put a trade on then the time you’re going
to be in it if you’re wrong or I mean not proven to be in a correct position!
POP – The logical step is to have the plan in place for the next step before you put on the trade. I
would guess that 95 per-cent of the traders put the trade on and then wait for the market to prove
they have a bad position. Even if the position is correct, their next step is wondering when to get
out. . It’s human nature to do it their way. It causes a lot of unsuspecting reactions in their lives.
ALS – Human nature is as you say. I know you did some research on human nature of traders and
non-traders. Perhaps we can talk about some of your data.
POP – I’ll tell you what I would prefer to do. It would be better to just suggest some of the
experiments and let the readers come to their own conclusions. Let’s keep that in the behavior
modification tips.
ALS – There were some questions on when to get out of a position. I realize this is out of order here
but I know we need to include rule two.
POP – That’s ok as it is a common question as to when do you know when to get out of a position.
Actually rule two addresses this very well because it says to press your winners correctly without
exception. Rather than getting out of a position with the proper criteria you will be increasing your
position. You only do the adding with correctly proven positions.
The time to get out of a position is not when the market is proving your position to be a correct one.
You have the opportunity to be wrong as often as correct but when you are already proven correct,
this is certainly the time to step off of first base.
We have two rules to keep us protected from our lack of certainty and enforcement of certainty.
Many trading plans have the trader in a position at all times. The thinking being that the market is
either going to go up or go down. Well this is just absolutely an idiot’s plan. Maybe I shouldn’t say
it so strong as I should have an open mind still.
I have to put this in the category of thinking a statement, which says to not do something, actually
says to do the opposite of that statement. Too many times I have watched a fund bid the market so
they can sell the market. It’s a plan to take advantage of the surprise element in the markets. There
was the day when you would only see me on both sides only when I was wrong. I am wrong a lot
more lately. That’s not bad either!
The readers are surely asking by now how do we use these two rules? It’s easier to use real time
quotes and markets to prove the points but since we only have hindsight here, we will do it
differently. Let’s use the old common day trading technique, which I am not going to give you
judgment on at this time.
You say your plan wants you long if you take out the opening range! Ok let us say we are trading
onions and the price is 1000($10). The price goes to 1001 and the opening range was 999-1000.
Your plan says buy so you buy. You get filled at 1002! Why 1002? Well execution is getting the
position filled! You gave up a slip of 1 tick. Not bad, most of the time it is small.
We can go into the importance of execution now or continue the trade. Let us continue the nature of
the trade and cover the importance of execution later. Now that you are long at 1002 you are using
rule one. You assume this is a bad trade until the market proves to you that the trade is good. If the
market does not prove this a good trade you are going to exit the trade. Fine so far!

What criteria in your day trading plan says you are right. Most say what determines you are wrong.
Not us! We only want to know the criteria for being right. Ok for us our program says “if in the first
half hour, the market opens lower than yesterday and moves higher, expect a move above the prior
day’s high within the first half day of trading.”
Our program also says the position is only correct if the market stays in the prior days top half in the
first half hour. Our last criteria for the trade is that it must show a 3 point profit by the close. Now I
ask you what is your next step?
Your criteria for remaining in this position is only when the requirements of your data indicate to
you the position is correct. The other data you would need in the program is yesterday’s range,
yesterdays high and yesterdays close. Your day trading program says to use the old rule of opening
range break out. Yesterday’s data is critical in knowing when you are correct.
For our example we will use yesterday’s high as 997 and yesterday’s range as 991-997. It gets
interesting here because you are going to decide whether you will exit the position. At the end of 30
minutes the market is at 997. What would you do?
The first criterion of our trade program is in conflict with your day trading strategy but you still
bought the opening range break out. We don’t care if the two are in conflict! We only care what
causes our position to be correct. Ok so far.
The market has been open a half hour and our price is 997. As you can see you must know your
trade plan before the market opens and what you are required to do. What makes your position
correct? You must be in yesterday’s top half range after the first half hour of trading.
Are you indeed in the top half range from yesterday?
I am going to give you the answer indirectly so you can’t slip down to find it. We will go to the next
step here. At the end of the first half day of trading the price is 996. Are you still in the position?
You did take out the prior day’s high but you didn’t open lower. Ok we still did it! Stayed in first
half hour. That’s right.
Now first half day price is down to 996 and we bought at 1002. Still in the top half of yesterday’s
range. Ok, we are still in the position. Bad entry though as our plans conflicted. Should have only
taken the position if it opened lower. It didn’t. Well ok because we are day traders we used the
opening range break out. Our entry wasn’t the best but so what!
At the end of the day the market is at 992. Are we still in the position? You have the right answer
but Why? The market had to be at 1005 in order to keep the position. It had to show a 3 point profit
on the close.
How would you get out of this position? You would have used a stop close only order after the first
half day to sell the position 1004 stop close only.
The example gives you several interesting situations and perhaps just as many questions about rule
one. Rule one will not protect you from wrong entries! That is your job. You must solve your own
conflicts in your trading. Rule one did take you out of the trade on the close because you were not
proven correct based on the required criteria.
Keep in mind this example is a very different situation than you would expect of your trading
program. You can’t have a program which says if the market doesn’t go to 980 that it looks for the
market to go to 1100 sometime. There has to be a time frame on when they expect 1100. When a
market doesn’t go up anymore, somewhere it isn’t correct to stay in the position regardless of the
expectations.
The market must prove and continue to prove. It can be simple or complex strategies in your
program but when the position is not doing according to the expectations it is wrong. Not when it
proves your stop price got hit.

Stops, yes we did use a stop to get out. We did not use the stop as the criteria for getting out. The
stop did not prove us wrong but the criteria proved us wrong.
I realize that in the example we put conflict, various criteria which was required for the position to
be correct and a bad entry example. Does this point out more than just rule one to you? Rule one
will get you out of a position which is not proven correct but it won’t fix a bad entry. Know your
plan before the market opens! If you had known your plan in this example prior to opening, you
would have never positioned.
ALS – Ok, I see your point but how can most traders with jobs trade as the example shows?
POP – I can give you other examples but it all comes down to the criteria for proving a position
correct. If you trade by looking in the newspaper each night your trading plan will be different and
your positions must be smaller as you are going to need wider ranges to work with on criteria.
In the above example you could never have placed the order to buy the opening range break out and
therefore it would never have been in your plans. You may have had criteria which said to buy
yesterdays low plus one tick or two ticks and a time of day order which said TOD10:00a.m. sell 993
stop.
The market would have to be in the bottom half after first half hour to get out as criteria indicated to
be correct the market had to be in top half range after first half hour. The other criteria could be met
with either OCO (one cancels other) orders or stop limit close only orders. Not all brokers take all
orders so your plan must include this possibility of difficulty in trading.
Each tool you lose or don’t have in trading, you must reduce your position accordingly to have an
effective long range program. The farther away you are from all the tools you need, the wider road
you must have. Reduce the size of your car (position) for the road that isn’t wider.
Now that we have your attention I think it is clear to see how just two simple rules can be exploited.
You can’t help but understand why trading can be so difficult. You want to be a knowledgeable
trader and you need to take all of the difficulty out of your daily trading when the market is closed.
ALS – I would like to ask you a question, which I have wondered over the past couple of decades.
Do you fell when you take a position you have taken a good position?
POP – Never! Do you understand my NO? If at any time a trader thinks they have what is a very
good trade, they are going to get removed from trading very quickly. I make the best trade on my
trade probabilities program but who is to say my guess is better than someone else’s is? Never do I
know it is a good trade until it proves to be.
Understanding that to feel you are making a good trade is signing your death warrant in trading. The
majority of traders do certainly feel that they have a good handle and they are only putting on good
trades.
There is an old saying that the market is never wrong. I don’t mean to protest directly but I think
that is not always the case. But it is what we must trade by in price. Markets go to extremes and that
is certainly in challenge in always being right. Once we know markets go to extremes, we can put
that on our side and exploit the advantage.
Very few traders exploit that advantage. You must with rule two press your winners. Often times
you won’t understand the importance of pressing the winners but it makes no difference as to reason
when you collect your profits. Who really cares if the market is or isn’t always correct. The market
price is what we are measuring our equity with and always will.
In trading nothing goes right for most traders unless they take total control of positioning and letting
the market only prove when a position is correct. I know I am repeating myself but there is not
better way to impress this information upon the readers of this insight.

I don’t want to see any small traders wiped off the map when it comes to trading but that is what
happens to most of them. They are small and are stopped by the big traders and funds most of the
time. If they can understand the urgency of not letting the big trades ruin their plans and hopes, they
will do much better.
The first step is what we are pointing out. I know because I have driven the big cars on the small
tracks. It is better to drive the small car on the big track but it just never comes out the same. With a
little understanding we shall change that for them.
ALS – I remember an experiment which proved very successful with a group of traders or would be
traders. Do you foresee that situation again.
POP – I have no idea of what you are talking about! I wish them well. No, I think an individual is
the best minority of one I have ever hoped to reward. Only one at a time in trading is fine with me.
It is their dream and my reality. They have to make it happen. If it doesn’t, don’t blame the
messenger. Look in the mirror.
ALS – You and I are traders not writers, doesn’t it seem strange to you to bring foreword your
thoughts on trading for others to read?
POP – You may end up a better writer than you think. It’s perfect as the best time to learn about
trading is when the market is closed. Most traders only learn when the market is open and what a
mistake that can be. It can be costly and emotional. Both are wrong sides of the coin.
ALS – We need some examples of other questions which the traders and readers will have on rule
two. When do we press a winner and when do we get out of our winners.
POP – I know they would like for me to say this is the plan and it is very simple. I can’t say that as it
takes work, experience and execution at all times. Most traders, I don’t mean to group them so
severely and handicap them, but true as it is they look to remove their positions just as soon as they
prove them right. They forget what their true purpose in trading really is. It is to not only make as
much money as possible but it most important is to make it in the least amount of time.
This keeps them from facing the problem of drawdown because they are not trading to face
drawdown but only to trade to make money.
I will never forget my Mother’s words when I was honest with her on a trade one day. She asked
how I did the day she visited the exchange. I said I lost a large sum of money. Well, her remark was
“I wouldn’t have done that!” I didn’t attend to my business that day and left a trade on. You don’t do
that. But that is just what traders do everyday. They leave trades on when their Mother visits!
Believe me, Your mother will visit you every day when you trade! You have to attend to your job of
cutting losses.
Just a couple of days ago, I was asked to go out on a nice boat trip for five days. It is costly if you
don’t attend to your affairs. There are times you must above all else attend to your positions. There
are no long term trades! Only trades which turn into long term held positions.
Don’t ever let anyone tell you that they have a long term position on at any time. How do they know?
How does anyone know? Only the market can tell you and it opens every trading day. Don’t ask me
what I think. It doesn’t matter. I can only give you the best odds. It is up to you to believe what the
market is telling you.
ALS – How about rule two?
POP – What can I say other than let set an example up. Ok today let us say beans opened at 85-88
and after he first half hour 85 was still the low but 90 was the high. What would you do if it was 15
higher at 88 and you put your position yesterday? Would you get out and take your profits, take half
your profits or add to the position?

I will tell you what most will do. They will take all of their profits. That is when you know your
position was proven correct again from yesterday. What do you think the correct answer is?
You must use rule two. You certainly don’t reverse pyramid by putting the same or bigger positions
on because the market could very well take out the lows quickly and you will have to salvage what
you increased if wrong. Do it in smaller numbers. Your plan must tell you when you know what
you did yesterday is confirmed ok that you must increase your position somewhere along the line.
Sure, the argument is, but I am not sure it will keep going up. So what? We never really do anyway.
So what is different about going with the current certainty? As long as you have rule one it makes
no difference if you are wrong because you have all the doors covered. Don’t ever lose sight of rule
one when using rule two.
Some traders will say that they don’t really know where to put the trade on price wise. Yes, you do!
The word E X E C U T I O N means make sure you guarantee you have that added position. There
are times when execution is the most important aspect of a trade. If you can’t get a position on you
sure can’t take on off. I know you have heard that statement in the past but it is with good
foundation. You must say at the market in those situations.
Ok, today we pointed out a situation where it was obvious to add. Looking back it is always
obvious. What matters is that after enough lead on your position after you have put some time
between the position and an advantage price of a little magnitude, you must be pretty sure it’s time
to take your profit.
Well, don’t take your profit. Add to your position. Then if it doesn’t prove correct, take your
remaining profit and expect to re-enter at a different level. So what if you lose a few ticks because
you put an added position on and it was wrong! You will get enough lead on adds that you won’t
ever think twice after you see the run-a-way markets!
It’s isn’t because I say so but because the market catches traders the wrong way. It is seldom that it’s
not the case.
When a market gaps higher or lower, you are in a position to take the profit takers position away
from them. Do it, but use rule one when you do. That way you will never worry if you are in a
correct position or not. Doesn’t matter anyway because with your rule one, you will do the right
thing. It is never bad to be wrong. Only then can you benefit when you are correct.
Most traders will make a trade and lose a good amount and miss the next trade. Out of step with the
market is bad and it gets worse. Don’t get out of cadence for long on any one trade. That way you
can half step right back in line.
ALS – Phantom, you are acting as if everyone can do what you explained.
POP – Not everyone can do what they must do. Learn what you are capable of doing and stick to
those parameters. Use the protection rules in your parameters. Don’t modify them or misunderstand
them for your own satisfaction. Use them as they were meant to be used. They will hurt you if you
don’t use them correctly.
ALS – We could use more examples of how to use your rules but I feel the readers will get a little
overwhelmed if we continue to throw examples at them. We could address every situation and
eliminate most of the required interpretation by the traders. I don’t think we should do that at this
time.
POP – Yes, I totally agree, as the integrity of a subject is not always how well it is presented but
how well, in this case, it is impressed upon traders. It is up to the trader to fully comprehend their
part of what is required of themselves. They can make mistakes but as long as they use the rules
properly, they will stay in the game.

It is a fine line when creating a program to trade markets. I have always suggested they establish
their own criteria based on the best knowledge they can find. You start with point and figure
charting to understand the characteristics of your market. Even if it is someone else’s chart, you
must see what the market is capable of doing to traders.
I am not saying that there aren’t good trade programs but only that the trader must fully understand
where the criteria in these programs are establishing the entries and exits. These programs will
never have rules one and two in them so you will have to incorporate them which could void the
program. So be careful and express your concern with the program vendor on these matters. Your
concern is to keep your drawdown within reason to allow you to trade forever.
Art, have we covered it yet?
ALS – Never in a thousand books can we cover it completely but I think we have made our point
and you have made your mark on the readers thinking.
” You can trade well when you are thinking good. “—POP


Chapter 6 – Rule Two

Chapter 6. Rule Two

 

ALS – Phantom, do you want to continue on rule one or is it time to move on to rule two?
Phantom of the Pits – There will be lots more on both rules so let’s get to rule two and see the other
side of the coin.
We will need to get to the qualifier of rule two but we will do that later. We’ll state rule two right
now.
Rule Two
PRESS YOUR WINNERS CORRECTLY WITHOUT EXCEPTION.
Sounds pretty elementary but correctly is the key.
Quoted most of the time is cut your losses. Cutting you losses is only one side of the coin. Without
rule two, you will find that trading still isn’t even a 50/50 game. Without a correct method to press
your correct positions you will never recover much beyond your losses.
You need rule two to ensure you have a larger position when you are correct. You always want a
larger position when you get a great move or trending market than when your position isn’t correct.
There certainly will be debate on how you know when to add to a correct position and on how a
market can turn a correct position into a wrong position. We will cover those debates later. First let
us get the rules and reasons established. By knowing what is expected in rules one and two we can
prove the theorem based on good assumptions and experience.
Rule two does not mean just because you have a position in your favor that you must now add to
that position. Correctly in rule two means you must have a qualified plan of adding to your position
once a trend has established itself. The proper criteria for adding positions depends on your time
frame of expectation of your trade plan.
You might be a day trader just trading, a short term trader, weekly trader, monthly trader or trend
trader only . The add criteria will be different for each trade plan.
The important point of rule two is to point out the rule is established in order that you can make the
most gain with the least drawdown expectations. You must also use rule one properly.
Rule two is important for it keeps you in a good position as well as impresses upon your own
thinking of having a correct position initially. Most traders are conditioned to want to take a profit
to prove to themselves that they are right. Being right does not in itself make the most amount of
profit.
Most traders also want to get out before the market turns and takes away any profit they may have.
Ordinarily they will let losses get larger but only let gain get started before getting out. This is just
simple human nature when having a market position. Human nature in trading is not often proper
trading technique.
Always a good reason for adding to a winner is because traders usually tend to doubt the position
unless they re-enforce the correctness of that position. Adding to the position correctly best does
this. The other good reason is that you must be larger when correct a positioned than when your
position is wrong.
Correctly adding to a proven position must be done so that a pyramid isn’t established which will
hurt the trader in a minor reversal. Each add of original position should be done in smaller and
smaller steps.

As an example, if you put 6 contracts on as your initial position you should use 4 contracts for your
first add and 2 contracts for your next add. This gives you twice the original position when all three
positions are in place. This is a 3:2:1 ratio in establishment of three levels of positioning.
At all times during the trade it is important that rule one be in your plan. This includes when you are
adding to your positions in order to protect your trade from any major reversals, which often happen.
Your plan for adding positions could be as simple as at each buy signal for longs and each sell
signals for shorts. It could be on 45-degree retracements or support lines. Without exception in the
rule indicates it is not an arbitrary decision on the trader’s part as to whether to add. Keep in mind
this does not exclude the correct method of adding in respect to variables of different trading plans.
What is a correct way of adding in one trade plan may not be in another.
In review of rule two, it states only that you must add to correct (proven) positions and that it must
be done correctly. The rule does not tell you how to add, as this is your requirement in the trade
plan you develop. The rule makes no exception on adding to correct positions. The intent is twofold
of rule two. It is to re-enforce your correct position both mentally in your thinking and by execution
in increasing the size of your position.
ALS – Phantom, what do you say to the traders who are going to ask you if they must add without
exception, why is there any question as to how to add correctly? Doesn’t the fact that a proven
position is correct indicate it is time to add?
POP – Adding can certainly be done this way but it is not always good for all trade plans. I often
times add immediately when my position has been proven correct because I tend to do it in smaller
steps and work more long-term trades. Let us say you are only a day trader trying to take out a little
of the market each day.
You will find your adds at the wrong place by adding as soon as your position is proven correct due
to the nature of the markets. They give you back and forth action much of the time, especially as
looking a day trade. One correct way for a day trader is to see that the position is proven correct and
then add at a proper retracement. This will not be the case for a trend trader.
A trend trader would most likely have at least one add at a breakout or break away gap. It all
depends on your trade plan. Your method of adding must be validated by your trade plan.
Day traders will have a problem with rule two unless they position properly and understand that
their adds must only be made correctly. Day traders are in for the quick profit so it is hard to have a
good add plan. Their best trade is to put all positions on at once where original and adds are all
placed at once and use rule one to take them off unless or until proven correct.
Believe me this is the proper probability in a loser’s game as is trading. Rule two says you must add
to your winners without exception. As a day trader you are only keeping a position if proven correct
or until proven correct. In a sense the market is deciding how large your position will be. The
variable can be from all to none in this situation.
Trend traders will get larger when they are correct but day traders will start larger and get smaller
when they are wrong. Day traders can be large when they are wrong but Trend traders will never be
large when they are wrong. This is due to the nature of a loser’s game for day traders.
By reducing your positions when wrong, your exposure is not extreme for a day trader provided
rule one continues to be followed. Exposure and risk are also an element of time in a position. That
is the edge the day trader is expecting to work to their advantage. Trend traders are expecting higher
probabilities in smoothing out the swings.
ALS – Aren’t you changing the rule here for day traders?

POP – Rule two must be used if you expect to make money in the long run. Your validation of how
you add is according to your trade plan and a day trading plan is certainly going to be geared for the
quick profit so why shouldn’t you have your biggest position to work with from the start.
Right or wrong, you are going to use rule one to protect at all cost. Criteria will be different for the
type of trading you do and scalping or day trading is a lower probability of making money than
most think. You have to be right when you get in and out and twice the execution cost for each
trade.
A day trader takes most positions on a fade of an expected range and on what they consider to be
the edge. Correctly for day traders is different for trend traders.
ALS – Wouldn’t you say that adding for day traders isn’t always a good rule.
POP – Adding correctly regardless of your time period is useful in making bigger gains in the long
run. Day trading is certainly a shorter run. A day trader should cheapen the cost of what they have
and to do this you almost certainly have to have your biggest position on first.
I use to watch a very good trader put a big position on and take it off until it proved to be correct.
He made good trades and ended up with bigger gains by doing it that way than adding after being
proven right. What you are missing here is his positions were larger at first and this really is the rule
two in that you still are larger when you are correct than if you had added later this way.
The drawback is that you are larger when you are wrong too, but it’s still a protected position if you
use rule one properly. It is acceptable but again I must remind you that rule one is critical here.
It looks like a modified rule two but as I stated your trade plan determines your method of adding. It
is understood that you want to be larger positioned when correct. This is a way to do a trade when
you don’t have an established trend and the probabilities are lower. I can’t rule out this method. I
have used it on short trades. When I feel I am trading an established trend, I have criteria for adding
which gives better positioning.
These two rules are to give you the long-term ability to continue to trade with the least amount of
drawdown and the best possibility of making the most money in the long run. Huge drawdown is
the critical reason some traders go out of the business.
You must start your trade plan with rules created to protect your equity. I am presenting those rules
to incorporate into your plan. Experience has proven these rules a necessity in survival and reaching
your objective of making the most return with the least amount of risk.
The follow up to rule two took place after feedback from the Futures talk forum when traders
expressed their questions about rule two.
Follow Up to Rule Two
It is clear that the traders are interested in more review on rule two. From the posts on the forum, it
seems to be a problem of understanding not only why to use rule two but exactly how they should
use rule two
I asked Phantom to give us more detail on his rule two in order that it can become more effective
for the traders. Phantom feels that there are several problems in understanding his rule two from
reading the posts of the trader’s forum. We will address a few of the problems and also try to
explain more on how to use rule two.
ALS – Phantom, It looks like your rule two is not a good rule for most of the traders who have given
return input on your rule?
Phantom of the Pits – By now you should see why we are spending so much time on just rules one
and two. Rule one understanding has been pretty good so far. Rule two has been a problem. I could
see that coming in the past posts. There is doubt in trader’s minds as to the real purpose of rule two

and why they should be saddled with a rule, which requires them to put a bigger position on than
they want to have.
The traders aren’t going to like what I am going to tell them here but I know they want me to be
totally honest with them. There are going to be several reasons why a trader does not want to come
up with a plan to add to winning positions. I will try to cover some of them.
ALS – Why is it that rule two doesn’t seem to work for most of the traders?
POP – One simple fact! That fact is that they are putting their entire position on at their entry into a
market. This is not rule two’s intent. A total position is a series of positions until the complete
expected position is established. They should only have their entire position established upon
getting the move as expected. Rule two addresses this expectation.
Keep in mind that I don’t blame the traders for their views on my rule two. It is not their thinking
but their trading situation we must address as a place to start with rule two. It is a solid rule and its
importance can not be diminished in trading.
Until you see the reward from rule two, it is very difficult to understand a bigger position being
anything but wrong to you as a trader. That is of course going to be some of your behavior
modification. Learning by experience is the only way that most traders will be able to accept this
rule.
It is important to learn this rule by more than just example. It is not a rule you learn by making a
mistake. It is a rule you learn by being rewarded for using the rule.
How can we reward the traders for using this rule by example? I don’t think we really can.
Therefore, we will explain why they are having difficulties and ask them to soul search as to the
truth of the problem being within their own situation.
The nature of trading is that more often you see a negative effect from what you have just done.
Seldom do you see or remember the good effects from the proper trading as often as the negative.
This will leave a plan to add to winners on the back burner when it is time to add unless you fully
understand the need for this rule.
The first problem with understanding rule two is that any time a trader can or does not incorporate a
plan to add to winners, they may be under funded and unable to margin properly the additional
positions in the add. Another aspect of being under funded may only be that over trading in the
original position is actually a problem from the start.
Anytime you plan a trade program; you must consider what size position you are looking to
establish. If your position as mine often is, is that you will have a total of six units upon completion
of your position entering, you can have a better idea of what you must fund. You need to be able to
fund the position from the start properly.
I believe most traders want to have a certain size position and from the start, that is the position they
place. This is not a correct way to allow you to use rule one and definitely rule two properly. You
see from the start of trading an expected move, your thinking is counter to ever adding in the first
place.
True you should be at least twice as big or larger when right than when wrong, but you must work
that position into your trading plan. You never risk it all on the initial position being correct or you
are defeating the rule. You are trading more like a day trader if you put it all on at once.
Another reason for problems with rule two is that traders are actually day trading in order to not
have undue risk in their positions. This will cut their odds of making the goals expected in any kind
of move. It is more of a hit and run type trading. This type trading leaves you vulnerable to the flow
of orders into the pit.

We can never estimate the exact quantity or direction of order flow for more than a very short
period of time except in established moves. Sure we have our three phase theory and it does work to
an extent but never good enough for us to know without seeing before hand just where the price
turns are going to be. Looking back we can always pick the price turns and possible support and
resistance.
I want the traders to ask themselves two questions! “Do you put your expected position on from the
initial entry? Are you planning for adds prior to your initial trade?” If the answer to either of these
questions is no, then you must go back and rethink your trading program. I have said it before. If
you can think it, you can do it. Perhaps the traders aren’t thinking it to begin because it certainly is
not expected thinking without the proper planning.
I knew we would have problems in trying to convey rule two and that is part of the reason we have
stepped back to wait and see the blank stares. We have those blank stares as I can tell from reading
the posts and resistance to rule two. That is ok for it is what can be expected from such a rule.
I don’t want to get into telling the traders their game plan for actual trades or their trading programs.
What I do want to do is to establish that you must consider the favorable side of adding to positions
when they are correct.
More thought must go into rule two as it is not as self-explaining as rule one. It is true that rule two
is what makes my money for me. It does it in the long run and not the short run. There are several
good aspects to the rule. We have discussed a couple of them previously. The fact that re-enforcing
a correct position actually keeps you thinking correctly is one of the important reasons of rule two.
Another aspect is that of course you will be with a larger position when you are correct. I think one
of the of the hidden benefits of using rule two in your trading plan is that it will actually keep you
from over trading from the entry through to the end of the position if used properly.
By incorporating rule two in your game plan from the start, you will be eliminating the desire to be
proud when the market moves your way and want to take profits to show that you are right. Traders
love to be right. This is your enemy to love to be right. Your motivation must be to love to do the
right thing in trading by either re-enforcing correctly your position or removing it should it not
prove out to be correct.
You see when you think you are right in the market, this is just the beginning of your trade. Not the
time to take your profits to say to the world “see I was right!” Let me ask you, who really cares if
your were right? So what? You will become the best trader you can be by being wrong-small not
right small! Get that in your mind now.
You are going to have to press your winners if you really expect to consider yourself with the
ability to make a living or extra income. Otherwise, face the truth that you are only playing to break
even.
Who wants to play for a tie? I sure don’t! I remember a trader asking me how I felt about making
money in my early days. She wanted to know how much I made. I indicated to her that if I did not
make at least a thousand dollars a day, it wasn’t even worth trading to me. She said that she would
be happy with a hundred a day. I asked her if she added to winners. She said that there was no
reason to add to winners.
I didn’t mean to laugh at her but what she said. I pointed out to her that if she had three days a week
where she made money and two where she lost that she would be in the hole for it would be a 50/50
game if she was never able to add to winners. My point was that you must make bigger money on
your good days and not just the same amount of money you lose on your bad days. You would be
better working for a living rather than trading if that is the case.
Now I am not laughing at anyone! I meant what I said about my statements of respect for the small
trader! They need to know just why and how important it is to press winners before they will ever
be able to approach the idea into their trading plans.

It isn’t an obvious thought to think that even before you trade, you must have a plan to be bigger
when the market is going your way. The first thought is always what size position to take to reach
your goal. You must understand that you are not the one who will determine your market position
size. It is going to be the market and must always be the market.
Rule two is going to tell you to put a complete plan into effect before taking the initial position. The
light is starting to come on about rule two now. I can see some raised eyebrows in anticipation as to
what is possible now. Not only is rule two a saver of your drawdown by it’s proper use but it is an
enforcer in pointing that you are looking to have a complete position when your expected move
allows you to be totally positioned.
I am a little ashamed I did this, but I purposely held back the best part of the rule in order to see
who would come up with the important aspects of rule two. Rule one was hit bulls eye by I would
say at least half of those on the forum who thought it out. Rule two may have had a few who
understood but didn’t really make a remark on it.
I do know one who did hit the nail on the head. At any rate, there were others I think who did not
indicate much about rule two who most likely had some good clues.
On adding to winning positions, I could give you my trading plan and my signals and tell you
exactly when to add. But that would be doing the same thing as digging out the Mississippi on the
West Side and changing its course.
I would be better off trading for you and you would be better off giving me your money to trade. I
don’t want that at all. Don’t forget my faith in the small trader. You shall have to see the prospects
of rule two more clearly yourself.
I can not help you with over trading or being under margined. You must correct that situation before
you can ever expect to be on even ground with the big funds. You must at all times be able to only
put a portion of your expected position on at entry and be able to at least double your size
somewhere along the route of an expected move.
The protection is rule one but the biggest protection is rule two! Now I am going to tell you why
rule two is the biggest protection of all. You never suspected what I am going to point out.
You have all heard to not add to a loser! Well rule two takes care of that from the start by keeping
you with a smaller entry position in the first place. You never have your entire position until you are
getting the move you had expected.
Now why would I encourage you to have half of your total position at entry? Because it is a losers
game from the start and you knew that from rule one. Now from rule two, you find out that in order
to trade it correctly, you were never really suppose to have your initial position upon your entry of a
trade.
Can you tell me that you don’t expect the market to fade your trade to a slight point? You really are
going to pick a range when you are right and you are going to be at least half size when you are not
proven to be correct. When you take your loss with rule one, it is a milder way of slapping your
equity from the start.
Are you beginning to see any of the value of rule two yet? We can go into examples but
understanding the rule is what we want now. Trading programs will all have different aspects of
entry and adding. It is up to you now to understand rule two and try and incorporate it into your
plans.
I am giving you a rule which not only makes you larger when you are right but keeps you smaller
when you are wrong from the start of a position. I am also giving you a way to not over trade. It is
up to that you to make sure you are properly funded to make this step an important one in your
favor.

Never to over trade was one of the criteria of my rule two. A lot of thought went into rules one and
two and it must come out the other side for you in understanding before it will work well. Now you
have the background of rule two and can understand it a little better.
Whether we go any further on trying to impress the rule upon the traders depends upon it’s
acceptance by the traders whom I have complete faith. They shall continue to live up to my
expectations and I shall continue to be proud of the faith I have in them.
I say it again and I know for sure! Clothes makes the man in most cases if that man lets it change
his thinking and feeling to a point of betterment. Knowledge is your new suit.
ALS – Ok, you are telling the readers that to use rule two properly it will keep them from over
trading because their entire position is never in place until they have added the remainder of their
initially expected position only after the market has proven the position correct along the journey of
the move that they are working with in the trade.
What the traders have failed to see is that in order to correctly use rule two, they never put the entire
desired position on until or unless rule two is needed to be used along the way. Am I correct so far?
POP – Yes you are. What other points am I making?
ALS – Your rule two also is protecting from adding to losers and keeping the initial position smaller
until proven correct. Is that right?
POP – Not exactly, what I want them to understand about that point is that they will only get bigger
when their criteria in their trading program tells them it is time to add. They will not add just
because the initial position has been proven correct. When they have completed their adding of
additional positions, then and only then should they have their entire expected position established.
Traders are over trading most of the time when they say that they can’t seem to justify adding to an
existing position. Most of the time a trader does not think about the reason for adding because they
have their initial position on from the start. This is their maximum risk from the start. That is never
what you want in trading.
You must take some risk but never your maximum. That is exactly what they are doing if they can
not plan for added positions along the way.
ALS – It is so obvious now! It is just like playing chess and seeing after the stalemate that you could
have won so easily if you had just thought there could have been a stalemate.
POP – Yes, the trader is playing for a stalemate if they don’t use rule two in some form somewhere
along the way in their trading plan. Isn’t it simple? To want to have a correct position from the start
is over trading when you place an entire position.
Traders don’t add because they have their position. The big drawdown is that when that original
initial position is wrong, their losses are as large as there gains seem to be if they were right. We
don’t want that. Keep in mind that trading is always a losing game unless you change the odds.
With rules one and more so with rule two, you are changing what you can in trading to your
advantage. If any position is taken without forethought of adding to it later when it has been a
proven correct position, you are in a 50/50 game at best.
ALS – You also said the light should start coming on for the traders. Do you think this is enough to
digest or should we continue?
POP – It’s time to step back and let them get off the elevator. Let us see how many frowns we still
have and if we need to review more on rule two. My faith in the small trader is that they are the best
majority of one I could ever want in my class.

I am willing to consider the questions of my little Phantom’s. I can do it for a day, and I can do it
always? I am trying to make it possible for them to become the best traders they can be. I know that
they will grow up faster than they realize. Good luck to them as we see what their new plans
become.
ALS – Any lights coming on? Do we understand CORRECTLY yet?
” PRESS YOUR WINNERS CORRECTLY WITHOUT EXCEPTION “—POP