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MC: So you would basically wait for a trend reversal before acting on the commercial short position.
LW: Yes, that’s really critical. They’re heavily short, but that doesn’t mean sell today - it means I want to focus in on that market. The ideal thing would be a big smack on the market and then some technical rally back where you look to take your position.
MC: This is very interesting. Do you plan on releasing an updated version of your COT report to include these new developments in the market?
LW: We don’t have enough data yet but I’m doing something for my subscribers in March about what I think we need to do. I think we need to create a true COT index so that it’ll ferret out all these index traders, option people and other data in there. We need to have a true COT index, a true open interest index, and a true large speculator index.
MC: So until these adjustments are made, do you still feel that there is still a lot of value in the numbers we get from the CFTC?
LW: Oh yeah! I also look at just the net position of the commercials. I put it into an index and I also look at their net position versus open interest. A classic example would be open interest is really peeling off in the marketplace. If you just look at the open interest you don’t know what that means. However, if you go inside that report and see the commercial long position is declining and the large speculator position is increasing rapidly we know that there are a lot of large trader longs coming in and they tend to be buyers of highs. So that would be a bearish scenario since open interest is down and without the large traders, open interest would be way down. If, on the other hand, you have open interest coming down and commercials are increasing their longs, that is very bullish because the only player in the markets on the long is the commercials. That’s how I like to look at the commercials in regards to open interest.
MC: In what priority would you rank the commercials in regards to the trend and seasonality?
LW: I put seasonality way down at the bottom of the list. I was the first to write a book about seasonality back in 1973 and that started this whole industry of seasonal tendency people. Seasonality is indicative and that’s all, it’s not mandatory. I like to start by looking at the commercial position; I look at the buys and sells and then put that in phase with the trend of the market. I would then like to see the trade backed by the seasonality. If I have one trade backed by seasonality and one that isn’t, I’ll take the one that is backed by it.
MC: I know you have many intermediate term tools to help you pinpoint your trade setups. What has led to evolve from an intermediate term trader who holds his position for several weeks, to a short term trader who holds his position for several days?
LW: I guess it would be my fascination with the market. Now that I’m in Australia I’ve reverted back to the old style because here the bonds open at 12:20 A.M. and I just can’t handle going to work at 12:20 in the morning and getting off at 8:00 in the morning. So I’ve gone back to finding a trade, emailing my orders to my broker, going to sleep and waking up in the morning to see what the damages were. As everybody knows I made a lot of money trading the short term stuff for the contest and everything. I think eventually I learned how to trade on a short term basis, and it took a lot of time to figure that out. Once I found that out, I thought it was enjoyable and there’s a lot of action, but I don’t think it’s for everybody and I think it’s a very hard way to trade.
MC: You are very well know for winning the Robbins World Cup of Trading, where you turned $10,000 to over $1,000,000 in a one year period. Did technical analysis play a large role in winning, or were your trades based more on fundamental indicators?
LW: Both. They were mostly short term trades, but they were based on the fact that markets were in uptrends and the commercials were long or short that market. On top of that I use a lot of patterns and something called a volatility breakout which is a common word now but not when I stumbled upon the whole idea back in 1982 - nobody was using anything like that and now everybody is unfortunately. It was a new approach to the market and it helped a lot. Also I was very focused, all I did that year was trade and I had some decent result. However, it was a combination of fundamentals and technicals, but really about patterns in the market place, almost all of those trades were pattern trades.
MC: You often mention that you have a lot of patterns, such as your “oops” pattern, and you are well known for developing the %R indicator. What thought process helps you to develop these indicators?
LW: I think a lot of it is looking at charts. The idea behind the patterns is that I look for patterns that look very bullish and then I’ll use that as a sell pattern. A bar closing right at its high looks very bullish so I figure if it takes out that bars low or does something that’s abnormal, then I use that as my sell. I’m looking for psychological failure of what everybody sees on their chart such as buying on a trendline or whatever it is.
MC: That is very interesting. In essence it’s a form of contrary opinion in that you’re taking the opposite view of the crowd.
LW: Yes. If the chart pattern looks really bullish I think “great,” and it might be. But if that puppy fails you have a great short.
MC: You use investor sentiment as a tool in trading. Do your own sentiment and emotions affect your trading? If so how do you overcome it?
LW: Well, of course. I think the easiest way to overcome it is by not making big bets. If you make big bets you become very emotional and that is what the public does, they bet more than their emotions can handle. I think the best formula for a technician is from Einstein, E=MC2 because what that tells us is that E is your emotion equal to your money multiplied by the square of the number of contracts your trading. Everybody bets too big and then they get emotional, and a lot of your emotions can be controlled by your bet size. You still can become emotional with the markets, but every time I put a trade on I know where my stop is and where my risk is. I’ve already accepted that I can lose that amount of money on the trade and it’s done, what else can I do?
The interesting thing about that is if you look at all the great athletes, they can always come back. That means you need to have the energy and the stamina as well as the skills. In trading the only way you can come back is if you have money left - the most important thing for a trader is to have money left. If you bet big, you’ll lose big, and then you can’t come back.
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