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MC: Are there any ways that you define trend for yourself or do you do so subjectively.
LW: You can probably define trend just by looking at a chart, but of course once you add your oscillators, indicators, and lines, we can’t see the trend anymore because we have all these indicators. A child can tell you in a heart beat what the trend of the market is but because we’re technicians and we have all these indicators on our charts we just get confused. I keep it really simple by using some moving averages along with a couple other trend indicators. It’s not a real complex operation and you’re not always going to be right anyway.
MC: I know that from studying some of your work that you have your own sentiment tool which is called the Larry Williams sentiment indicator. Do you find this to be a useful tool?
LW: Yes I find it very useful. That indicator measures about 100 advisors, newsletters, brokerage firms and websites once a week to determine what percentage of these people are bullish or bearish on commodities and stocks. I think I’m the only one who does it on individual stocks and it was first introduced in a book I did for Bloomberg about 6 years ago. It’s really done well out of sample. By and large you want to fade the crowd and when everybody gets bullish you have to be very careful about being long.
MC: Are there any parts of technical analysis that you don’t agree with or find particularly useful?
LW: Well, people always get upset when I say it, but, I don’t think that Gann, Elliott, Fibonacci and all those things work. Maybe it’s just my inability to make them work, that I’m not smart enough to figure it out, or that somebody didn’t show me the right way to do it, I don’t know. But I know that when I do computer studies on the Fibonacci ratios I found that the markets do not stop at 38%, 50%, or 62% retracements. It just doesn’t happen. I’ve done a lot of studies on it and a lot of other people have done academic studies on it and it just isn’t there.
I’m very much a practical guy - if it works we should be able to program it and see. That’s not to say that we can’t use these tools in some judgmental factor, but I haven’t been able to make it a definable tool. The interesting thing to me is that when Bruce Babcock used to have the Commodities Traders Consumer Report which would monitor the activity of all the newsletters, the consistently worst performers in his letters were the guys that I call the arcane, which includes Gann, Elliott, and astrology - those guys never made money. The money makers were about 3 or 4 of us that topped the mark, me and a few other guys. A couple of people would follow charts and patterns and one year I might be number 1 and next year somebody else would be number 1, it went back and forth between us. It was basically the same group that was at the top and none of us were into the “I can tell you exactly what the market is going to do” mentality which is basically what all the arcane stuff says. You can’t predict the market, not consistently, not accurately.
MC: So basically it’s just follow the trend and try to enter at the best point possible.
LW: You got it!
MC: I know that you mechanically test your work. Do you also conduct subjective analysis or are all of your tools back tested?
LW: I’ve been doing this since 1962 so at some point I just know and I don’t have to put it in a computer to tell me if it’s right or wrong. Some of these tools I’ve used for many years and so I know the pitfalls, the upside and the downside to them. But I continue to do back testing of systems and things that I actually trade in the market. As a short term trader I have a lot of patterns that I follow that are very mechanical and I’m certain that a lot of you people know them, and I just follow those patterns. On a longer term basis I look for a setup market and I look for entry and I look for exits, that’s basically what I do.
MC: After reading your book The Secrets of the Commitment of Traders Report, I understand that the position of commercial traders, the seasonality, and trend of a security are all important factors. Would you like to explain these tools?
LW: Yes, but first let me interject here - a great change that has taken place since that book was written and that is that we now have these basket commodity funds where they buy a bunch of commodities and hold them with the belief that the commodity will go higher. Jim Rogers started the whole idea I guess, but these index traders now account for about 25% of the market volume. When you’re looking at anything that has to do with COT (commitment of traders) positions, and I don’t know the answer yet because we haven’t had the data long enough, it’s not the same old game anymore since you have a huge number of perpetual longs, these index funds, and we’ve got to figure out what to do with these guys. Like I said, I don’t have the answer to that yet because I only have sixteen months of data with it.
The question remains, “How do we still use the data?” I think that what people need to understand, the biggest misnomer is just because the commercials are long doesn’t mean the market is going to rally. You have to understand that they don’t speculate in the market, they’re using the market to facilitate their business. They’re not taking positions in the market like you or I as speculators, they’re hedging their business by pre-selling their production, so you need to understand that their function in the marketplace is not the same as ours. They’ve been selling a lot in the grains now and it looks like the grains should come down - the reality is that a lot of guys are selling forward production because at these price levels they can produce a lot of crop; it’s priced to make money so they’ll sell it. It doesn’t mean they’re short the market - they just sold their future production. We really need to put their commercial position into phase with the trend of the market as well.
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