How I Made One Million Dollars Last Year Trading Commodities by Larry R. Williams

Contents  ˅

1) Exactly How I Made My Million Dollars 2) My Key Ingredient To Market Success 3) My Frank Advice For Beginners 4) My Million Dollar Fundamental System 5) How To Find Trades With 10/1 Odds 6) My Million Dollar-Never Before Revealed-Trading Tools 7) How I Read Charts 8) The Great Silver Secret 9) How Transactional Analysis Helped Make My Million Dollars 10) My Priceless Trading Hints 11) How To Start Making Money Tomorrow Morning

What does Larry Williams say is the main reason he made a million dollars in one year? His trading tools and concepts? No. A well-designed plan? No. These two things were important, but Williams credits vision, diligence and perseverance as the main reason for his success.

Vision is needed to have big goals and the belief you can achieve them. But goals and beliefs must have a sound foundation. Trading is not an easy game and reaching your goals will require hard work. You'll also have to persevere through the losses and frustrations all traders experience. During these times you'll discover the importance of surrounding yourself with good people.

Even in great success there can be failures and mistakes. Williams thinks his number one mistake was not focusing on loaded trades. To avoid taking marginal trades, he now writes down the reasons for taking each new position. The best trades have strong support, which this writing habit should reveal. The most money this millionaire trader has ever made, came from solid long-term trades. To follow William's example, he recommends not to day trade or trade reactions in major trends.

Another thing Williams has changed, is using greater discipline in following his trading plan. Greed leads to holding onto trades too long in an attempt to get more profit. This is chasing additional pennies while risking dollars. To combat the effect of greed, he says to act quickly to preserve your money. But act slowly if you're trying to make more profit.

At the same time he was making the million dollars, Williams was also running two businesses. He felt this was a distraction. He recommends giving the markets your sole attention when trading. However, when you take a vacation, don't carry any positions. You should be fully engaged when trading, but when not trading, stay fully disengaged.

The demands of trading cause stress and drain energy. When you can't take an actual vacation, take a mental one. Exercise and meditation are two common ways to relieve stress and boost energy. A hobby or some other enjoyable activity is another good way to relax.

Trading is similar to poker. What's important in poker is not the cards you're dealt, it's how you play them. What's important in trading is not a perfect system, but how you manage the trade. In other words, money management.

On the outside, trading stocks and commodities may look the same. But commodities are uniquely different from stocks and other assets. No one needs to own a stock, but people and businesses need commodities to survive. Supply and demand are easier to track due to a weekly government publication. This report covers the trading actions of the commercial interests and the public. How to analyze the details is explained in chapter four.

For those new to commodities, this chapter covers some of the basics. The relevant terms, "short sale", "commercials", "locals", "floor traders", "taking delivery", and "last trading day" are defined. The Journal of Commerce is recommended over the Wall Street Journal for news and prices. [This book was written before the Internet and there are many more information sources today.]

When it comes to selecting a broker, Williams dislikes most commodity-only brokers. He feels your money is safer with one of the major stock and commodity brokers. His preferred broker is one who only completes trade orders, and doesn't give advice. If you feel you need advice, the chapter ends with a list of advisory services and market letters.

The foundation for commodity price movement is the balancing of supply with demand. This is why it's critical to have a grasp of the fundamental factors which move the commodity markets. There are two basic ways to understand the fundamentals. Analyze all the statistical government and private reports, or analyze the people who analyze those reports. Larry Williams prefers the second option.

The Smart Money Indicator
Large companies remain large, because they make more good decisions than bad. And it's the large companies, the commercials, who are the dominant force in the commodity markets. They are the ones who provide most of the supply and demand. The commercials also have the resources to carefully analyze the market and forecast where prices are headed.

You can see what these companies are doing in the weekly Commitments of Traders (COT) report put out by the Commodity Futures Trading Commission (CFTC). The COT shows the total long and short positions held by large and small traders. The large traders tend to be on the right side of the market. The small traders are usually on the wrong side. When the large traders load up long or short, usually you should too.

The Premium Spread Indicator
A fundamental aspect of commodities is the premium spread. When a commodity is to be delivered in the future, there are costs involved to hold it in storage. This means a commodity scheduled for delivery six months from now, should cost more than the current price. This premium difference normally represents the approximate storage costs.

So what do you do with this knowledge? You should take notice when the premium disappears. If the current commodity price is higher than future prices, it's a significant event. Someone is willing to pay more than usual, just to get the commodity now. That someone, is one or more of the commercials, who are showing a strong need for the commodity.

The Open Interest Indicator
Commercial interests routinely have a need to hedge their positions. Hedging is done by holding long and short futures contracts at the same time. This limits the risk to the difference between the value of the contracts. Hedging is the reason commercials do most of the short selling. The important thing to be aware of, is when there's a substantial change in the total short positions. To detect that requires watching the open interest.

Open interest is the total of the long and short positions in a market. Every buyer has a corresponding seller. So the number of long positions always equals the number of shorts. Importantly, the open interest can only decline if the short sellers are closing out their positions. And a rise in open interest is only possible, if the amount of short selling is also on the rise.

Since the commercials are the main short sellers, a change in the level of short selling reflects their market opinion. Rising open interest is increased shorting, which is a bearish sign. But when the open interest is falling, the commercials are covering their shorts and it's a bullish indication.

Changes in open interest are only significant when paired with price action. Look for a sharp rise or fall in open interest when prices are in a trading range. This is an indication of which direction the commercials expect the breakout to occur.

The News about News
Market news is only what's publicly available, and may not tell the whole story. Whether it's good or bad, it's not the news that's important, it's the market's reaction. If a news event is about a major commodity shortage, a natural reaction is for prices to rise. But if prices change little or hold steady, then the market is more bearish than the news indicated. This is a clear case of action speaking louder than words.

What Now?
Understanding the fundamentals of a market provides the basis for taking a buying or selling approach. And by gauging the strength of the fundamentals, you can adjust your basic position size accordingly. Fundamentals are not about timing your entries or exits. Instead, they give you the confidence to know, more times than not, your position is the right one. The fundamentals show what trades to take. Timing tools show when to take them.

A lack of discipline is a common fault with most traders. It's hard to sit on your hands and wait for the best trades. Even Larry Williams acknowledged he wished he had taken only the loaded trades during the year he made his million. You can't control when the most profitable trade opportunities will occur. You can only control which trades to take, and that requires the discipline to follow a good plan.

High-Profit Trade Indicator #1
As discussed in the previous chapter, futures current prices are usually less than prices for distant months. The first sign for a bull market is when this relationship, the premium, is inverted. If the nearby months are priced higher than the distant months, it's an indication of strong demand. If this premium relationship is not present, the odds don't favor a strong or lasting price advance.

In addition to signaling a bull market, the premium spread can also warn of market weakness. At some point during a bull move, if the spread begins to narrow, it's a sign to expect selling pressure. It shows the commercials, the main source of demand, no longer have the same urgent need for the commodity.

It's important to keep in mind, the premium spread is not to be used alone. It's not a timing tool. Also, not all bull markets have the nearby months at a premium to the latter months. But the objective is to find the best trades, not all of the possible ones.

High-Profit Trade Indicator #2
As described in chapter four, open interest is a reflection of what the commercial traders are doing. Since they are the main short sellers, changes in the amount of short selling indicates where the commercials think the market is headed. As open interest rises and falls, the number of shorts also rises and falls. So in the right context, a rise in open interest is bearish and a falling open interest is bullish.

By itself, a rise or decline in open interest means very little. The change requires context and the context is a trading range. When prices are going sideways, a change in open interest can be significant. A strong open interest increase indicates a downside breakout of the trading range. And a substantial open interest decrease indicates an upside breakout.

Another situation when an open interest change is important, is a reaction in a strong bull market, or a rally in a major bear market. Look for at least a change of 25 percent in the open interest. If the open interest drops during a bull market reaction, a bottom is near. If the open rises during a bear market rally, expect a top soon.

There are several secondary indicators which can help confirm market direction. These indicators are contrary opinion, news, the Commitment of Traders (COT) report, gaps, and the trend of a 10-week moving average.

Making great trades is a two-step process. First find a market with the fundamentals indicating a bullish or bearish direction. Then rely on one or more timing tools to plan the trade entries and exits. Larry Williams used three indicators to determine his entries and exits.

The Momentum Indicator
Throw a ball up in the air, and its slowest speed is just before it reaches its peak height. Price momentum follows this same principle. Prices usually show the least rate of change, just before a top or bottom.

Momentum is measured as the difference between today's close and a previous close, usually about 20 to 30 days ago. There is no optimum period. Experiment to find out what works best for a specific commodity. In general, use a period which is half the average cycle for the market. Pork bellies have a bottom about every 50 days, so the period used for the bellies momentum indicator, is 25 days.

Plotting the momentum numbers results in a line which swings above and below a zero line. An effective way to analyze momentum is with trend lines. Draw a trend line across the peaks or valleys of the momentum line. Then expect a bottom or top when the momentum line crosses the trend line.

An alternative approach uses a 10-day simple moving average of the momentum number. Buy signals are generated when momentum crosses above the moving average and sell signals when it falls below.

%R—The Overbought/Oversold Indicator
Williams views overbought/oversold as the most important type of technical indicator. He sees opposites as a basic part of life, not just in markets. Light opposes the dark, hot opposes cold and down fights up. For the Chinese, Yin and Yang are the two natural forces in a constant ebb and flow relationship. Overbought and oversold are the Yin and Yang of the markets.

%R is a simple tool to measure an overbought/oversold condition. %R subtracts today's close from the highest daily high for the last 10 days. This difference is divided by the last 10 days' range, which is the highest daily high minus the lowest daily low. Multiply the result by 100 to get a percentage. If today's close equaled the high of the range, %R would be 0 percent. If today's close equaled the low of the range, %R would be 100 percent. Any other price would be somewhere in between.

%R should only be used to buy during bull markets and sell during bear markets. Since zero is the top of the scale, a buy signal is usually a reading greater than 95 percent and a sell signal is less than 10 percent. An entry doesn't have to be made on the signal day's close. Often the best price is the open of the following day.

An exception to the buy signal is when prices have just had an extremely fast rise. Wait for %R to hit 100 percent. Then wait until it has been at least 5 trading days since the last 100 percent reading. After that point, %R greater than 95 is once again a buy signal.

%R can also be used in trading ranges. Buy signals are 90 percent or more. Sell or shorting signals are 10 percent or less. When not in a trading range, use %R to signal entries, and momentum to signal exits. If the momentum reading becomes extreme, then exit. Don't wait for a trend line break.

The Trend Indicator
A 10-week simple moving average is used to establish the major trend direction. If the average is moving up, take just the buy signals. When the moving average is headed down, only short the market. If the moving average is flat, then %R can be used to both buy and sell while in a trading range. The moving average is not a timing tool, it's used only to indicate the trend.

Some people trade with charts as if they were looking at cloud formations. They can perceive prices forming patterns of supposed significance for trading. But this approach ignores the probabilities of what can happen for any series of numbers. Instead of using charts in a subjective way, practical chart use is more beneficial.

Charts can aid a trader in three ways. They can show the major trend of the market, which markets are strongest, and where the reversal points are. Use charts to gain a broad general perspective, not the meaning of every minor swing.

When deciding on which contract month to trade, buy the strongest and sell the weakest. Do this by comparing the charts for each month. The stronger months make new highs when other contracts don't. Or they don't make new lows when other months do. Volatility is also important. The stronger months tend to have wider daily ranges than the weaker months.

Using the same type of relative strength comparisons, the strongest and weakest commodity within a group, or the strongest and weakest commodity group can be identified. By stacking charts one on top of another, it makes it easy to make this kind of comparison.

Charts make price turning points easy to spot. A typical daily reversal bottom has price moving lower during the day but then closing above the previous day's close. The opposite occurs at many tops.

There's another type of reversal which is less frequent, but more significant. A bottom is signaled when price closes down the limit or somewhat less, but the next day's open is substantially above the previous close. A weak open following a strong down day is the normal result. When that doesn't occur, it's a strong sign of a bottom. A top is signaled by the reverse of this sequence, when a much lower open follows a strong up day.

Price gaps on charts can indicate future price direction and supply good entry points. When a market is in a trading range, gaps can signal the likely breakout direction. If most of the gaps are to the upside, then prices will usually move higher out of the trading range. The breakout will usually be to the downside, if most of the trading range gaps were down.

Sometimes after a gap forms, price will often pull back into the gap. This offers a good point for a relative low risk entry. The gap indicates the direction of the trend and the pullback is usually a temporary reaction.

In 1930, Burton Pugh wrote the The Great Wheat Secret. In the book he said traders should buy the grain markets when the moon was full, and sell when there was a new moon. Williams extends the idea to include the silver market. A full moon day, plus or minus a day, is a buy signal for wheat, corn, soybean oil, and silver. A new moon day is a sell signal.

The moon cycle is not meant to be followed blindly, but is an alert for buying and selling opportunities. It can be treated like an overbought/oversold indicator. The signals can help confirm an analysis, but not used as a lone indicator.

The concept can also be used to adjust trade stops. When the moon is in one of the two relevant phases, stops can be tightened up as a precaution. If the market reverses on the moon phase day and hits the stop, it's a well-timed exit. But if there's no reversal, and the stop is not hit, no harm is done. However, sometimes the stop is hit and the market continues its previous trend instead of reversing. In that case, get back in and wait for the next signal in about 28 days.

As the late-night commercials say, "But wait…there's more." In this case, the more is the Sugar Secret. According to the trader Mort Cleveland, sugar tends to rally at the moon's maximum north declination and decline at its maximum south declination. Cleveland also says cocoa rallies at the new moon about 75 percent of the time.

You may want to add the Farmers' Almanac to your technical toolkit.

It's no secret the trading world has changed a lot in the last hundred years. A hundred years ago, there was no Internet, no computers, no 24-hour a day news, no sophisticated trading tools, no trading books or courses, and only limited access to markets.

However, there are two things which haven't changed. The first constant is the number of commodity traders who win, which is only five to ten percent. With all of today's advantages, why aren't most traders winners? The reason is the second thing which hasn't changed in a hundred years…human nature. Analyzing how you trade can be as important as analyzing what you trade.

Following the market news is both natural and usually a fast way to lose money. It seems like a logical thing to buy and sell based on news, but markets aren't that simple or easy.

A trader's self-image, and beliefs about making money, can also cause problems., can also cause problems. Some people feel they can't be more than average, or deserve to make a lot of money. And sometimes, these same people act in financially harmful ways, just to prove they're right about their poor self-image.

The books, Games People Play and I'm OK, You're OK, popularized the psychology of Transactional Analysis. This psychological approach describes how we get into habit patterns called "games". And like regular games, human behavior games have winners and losers. It's the losing traders who continue to play negative games despite their market losses.

A popular game for losers is the Dumb Broker game. In this game, losses are never the trader's fault. It's the broker who caused the trader to lose. Unfortunately, there's also the Dumb Client game. Most brokers aren't successful traders, and those who play the Dumb Client game, don't want their clients to succeed either. These brokers will do what they can, to sabotage their customers.

Winning traders don't play losing games. They see the negative behavior for what it is, and resist its influence. Winners take responsibility for their mistakes and don't stubbornly fight the markets. Trading isn't about proving you're right. It's about making money. Winners take their losses quickly and move on. They make the effort to understand any psychological traits which may hold them back.

Along with self-evaluation, meditation or prayer may help keep you mentally centered. It's important to see yourself as a confident winner who achieves success. And when you make more than enough money to cover necessities, give some to help others. This is a physical reminder that money is nothing by itself. It's only value is the benefit it can provide.

Markets have their own logic. And market logic doesn't always match what our sense of logic is. To be successful, trading savvy is required to avoid the market's daily logic traps.

The Morning Bulge
When supply and demand are significantly out of balance, a sharp price rise or drop will happen when a market opens. This price bulge happens most frequently after a very strong or very weak previous close. Buying strength or selling weakness can be a good idea, but not with a price bulge on the open. Avoid this trap and wait to buy or sell on a reaction later in the day.

When to Buy or Sell at the Open
There are two conditions for entering a trade on a market's open. First, the commodity must be overbought or oversold. With %R, overbought is 15 percent or less, and oversold is 85 percent or more.

Second, if selling short, the previous close was at, or near, the day's high. When buying, the previous close was at, or near, the day's low. One of two things will happen on the open. Either the price will follow through on the previous day's strength or weakness, or it won't. If the open follows through on the strength or weakness, you get a good entry price. But if there's no follow-through, when there should be, this is a good sign. No follow-through makes the trade stronger, because it shows the market has most likely topped or bottomed.

Market Cycles
There's no shortage of measuring tools and software programs to detect price cycles in a market. But sometimes the simple methods are just as useful. To find a dominant price cycle, count from one significant bottom or top to the next significant bottom or top. Then add this number to the last bottom or top to show approximately when the next bottom or top may occur. Cycles can help find areas to buy or sell, but should only be used in relation to the major trend. You don't want to short in a bull market or buy in a bear market.

Market Orders
The only time to place a market order is when trade execution is valued more than price. There are two situations when this could happen. The first case is if you've been trying to put on a position for several days but haven't been filled. If it looks like a strong trade, then a market order is acceptable.

The other situation for placing a market order is if a commodity is making a sharp move up or down. If the move appears to be false, then trying to pick the exact top or bottom of the move isn't reasonable. So a market order is a practical way to handle this.

Placing Stops
Place stops based on price or time. Typically, most people place their stops just beyond a price reversal point. If you use these same price points, add a price cushion beyond where you think the crowd's stops are.

Another type of price stop uses a fixed dollar amount. If the maximum loss was set at $500 per contract and a one cent move equaled $250, then the stop-loss would be two cents.

An alternative to exiting a trade at a specific price is to set a time limit. If the commodity is not showing a profit within a certain number of days, get out. Four days is the suggested optimum time to allow.

Some traders like to use mental stops. They might want to rely on their judgment of price action to decide when to exit. Or maybe they don't want the floor traders to know where their stops are. Whatever the reason, intentions don't always lead to action. If you want to avoid losing, don't use mental stops.

Forecast for Tomorrow's High and Low
The formula to estimate the next day's high and low is:

P = (H₁ + L₁ + C₁) / 3
H₂ = P + (L₁ - P)
L₂ = P - (H₁ - P)

P = the pivot price
H₁ = today's high
L₁ = today's low
C₁ = today's close
H₂ = tomorrow's estimated high
L₂ = tomorrow's estimated low

The estimated high is most reliable when it looks like prices will move above the previous close. Likewise, if tomorrow is expected to be lower, the estimated low is usually more accurate than the estimated high. When prices overshoot the estimated price, calculate today's range. Then add the range to the pivot price for the new projected high. For a new projected low, subtract the range from the pivot price.

Before beginning to trade, determine account size and the maximum loss per trade. Limit the individual trade loss to no more than 5 percent of the account. The number of contracts traded and the stop-loss are calculated using this maximum loss amount.

As you follow the book's concepts, keep in mind two key principles. Fundamental analysis comes first, then apply technical tools. And wait for only the strongest trades. The one technical tool to look at initially, is the 10-week moving average.

At this point, you may be excited and eager to start trading. But it's important to be patience. Otherwise, it's too easy to rush in and enter a trade before you should. Wait for the tools you use to confirm a solid trade opportunity. Don't accept a "pretty good" trade or an average "good enough" trade. Have the discipline to wait for the standout trades.

After you enter your first trade, either it will begin to show a profit or you'll get stopped out. If you get stopped out, it was probably due to a premature entry. Assuming your original analysis was correct, wait for another point to re-enter the market.

As long as a trade is showing a profit, it's key to not give up the profit. Place sell stops at about 1½ limit moves and buy stops at about 2 limits. You may want to take your profit if there's extreme market action such as a blow off, or if the long-term momentum trend line is broken.

If there's a market correction and you get stopped out, expect this counter-trend move to last for five to twenty days. Sometimes cyclical analysis may show a reversal is probably near and you could move your stops closer. Another sign to adjust your stops is if the nearby premium starts to decrease.

Your ultimate success depends on your attitude. If your mindset is a losing one, you'll do what it takes to lose. But if you follow the process in the book and have a winner's outlook, you'll succeed.

The most important trading advice is do what the public doesn't do. Buy only on a down day and sell only on an up day. It's natural to want to do the opposite, but that's what the public does, and the public usually loses.

PJ Nance

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