Proprietor and office manager Pete Rednor had a good deal going with the Peavey office in the Colorado Club building on South Colorado Boulevard in the 1970s. He had several reliable brokers, professional traders and a mix of amateur traders. Into that latter mix were the here-today-gone-tomorrows who would show up with a system or market tip, stay a week or two or three and disappear. I guess one could say they added a little liquidity to Pete’s income.
I lost track of Pete and Peavey after I moved to Hawaii. When I returned, he had reopened in a large street-level office in downtown Denver. Peavey eventually sold to Geldermann, which eventually sold to Refco, and you know the rest of the story.
The Belly Man
One morning a middle-aged fellow came in and opened an account to day-trade a pork belly system. He was well prepared with a tablet of graph paper and a nice HP calculator. Over a day or two he met most everyone, including me and Charlie. You did not get too friendly, as you more or less suspected they would not be around very long.
The fellow’s system traded two or three times a session, so of course Pete had to love it. Alas, it seemed the system might have some issues: every single trade it made was a small loser. Not most of them, every single one. The temptation became too great. Two of the brokers began fading this guy’s trades. They would quietly saunter to the far corner of the office or whisper their order into the phone and call in the exact opposite trade.
This went on for two to three weeks. Eventually, as expected, the fellow ran out of money and no longer came by to trade. One of the fading brokers suggested that he should have put some money in that account so he could keep trading and they could keep fading him. Some laughed at this. Some, like Charlie, did not.
Charlie’s Post-Mortem
Charlie and I talked about the belly flop a few days after the trader departed. We were going over charts at his Denver house in the afternoon and the February Belly chart came up. “What do you see for the past two weeks, if I cover this week’s action?” The belly market had clearly been in a tight though volatile trading range while the belly man was trading.
I noted the same and Charlie said, “That system of his was a moving average approach. I think he had slightly modified a well-known trading system utilizing moving averages. He left his notebook open one morning and I saw literature with the system logo. He should have known something was wrong when it generated so many trades.”
He continued, “Now look at this week’s bellies.” They had broken out into a trend with three or four consecutive up days. “If he had stayed a little longer, he might have been okay, and those brokers would have started losing their ill-gotten gains back!” Charlie was much less than amused at the fading of a poor fellow and taking advantage of him.
Charlie Says: On Trading Systems
Most trading systems I’ve seen are either moving average or momentum based. They either work in trending markets (moving averages) or trading/sideways markets (momentum) but never both. Of course, the specific parameters make a difference. For example, given a steep trend with very small corrections, a short-term moving average will yield better than a longer-term one. But it will get kicked out of a choppy trend where a longer-term one will stay in the market. Ditto with momentum.
If you insist on using a mechanical trading system, use one moving average based. A trader simply must have a few big wins from time to time to stay in the game. You can do that, at least in principle, with moving averages but not with momentum-based systems.
This post is educational commentary. It is not investment advice. Trading futures and FX involves substantial risk of loss.
Good Trading!
Michael Duane Archer
Related Reading
- Three Charlie Goodman Stories and the Trading Lessons in Each
- Charlie Goodman’s Agate Marble: Focus, Luck and Skill
- Goodmanisms: Charlie Goodman’s Sayings on Trading, Explained
Keep Learning the Goodman Way
If this article was useful, these are the next steps:
- The Method: propagation, intersection and the 3-C Principle, drawn plate by plate.
- The Goodman Library: the books, from Goodman for Grasshoppers to The Goodman 6 & 6.
- The Trader’s Playbook: the Molokai setup in one printed, numbered volume.
- Mentoring: work one-on-one with the authors.