commodity and futures traders, the technique of using
cycles as a trading strategy will undoubtedly bring to
mind trader and analyst walter bressert. bressert has
been in the trading industry for nearly 30 years. stocks
and commodities editor tom hartle spoke to bressert via
telephone on december 22, 1997, about trading, being in
control, cycles, oscillators and the 12 cardinal mistakes
that traders make.
did you start in the business?
first started out close to 30 years ago, with a mutual
fund company. unfortunately, that relationship was
short-lived because the stock market fell apart and i was
laid off. so i took some time away from the business and
when i came back, i noticed an ad for a position as a
commodity broker. the position was trading on the floor
of what was then the west coast commodity exchange. i had
a little experience because i had traded commodities
while i was in college, but i didn't really know what i
was doing. i went to work on the exchange floor, and i
got caught up in all of the excitement, but i quickly
realized that i still didn't know what i was doing. so i
began to read everything that was available. there wasn't
much information available back then, but as i looked at
everything, i became interested in researching cycles.
was looking for something that worked. i had been shown a
few systems, but those methods simply churned accounts.
but i could see a rhythm to the markets that could be
found a couple of books published by ned dewey. dewey had
been hired by the us government back in the 1930s to
determine what had caused the great depression.
was his conclusion?
conclusion was that it was cyclical in nature and there
was nothing that the government could have done to stop
it. after that, he left the government and started the
foundation for the study of cycles. the foundation
publishes a magazine, and has since the 1950s. so i read
their research on cycles. plus, i studied the catalogue
of cycles, which lists about 20,000 different cycles. it
became very clear to me that there are cycles all around
did you bring this to trade the
made sense to me that if the long-term cycles existed,
then short-term cycles should work, too. i set out to
work with shorter cycles in the markets. because cycles
gave me an element of time, i started to make price and
time forecasts based on the shorter-term cycles.
your newsletter hal commodity cycles followed?
before i started the newsletter, i was doing my own
research, and during that time, the classic the profit
magic of stock transaction timing was published. after
the book was published, the book's author, j.m. hurst,
started holding workshops. apparently, there were a lot
of closet cycle technicians, and we all went to his
workshops. i met a lot of people who were as intensely
involved in the markets and cycles as i was. it was
during that time that i decided to start hal commodity
long did you publish the newsletter?
published it for 12 years, and it was profitable 10 out
of 12. i wrote it as an educational newsletter because i
realized that what people needed in the futures business
was education. i wanted to demonstrate cycles to the
public and show how cycles could be used as a forecasting
tool for trading purposes.
does hal stand for?
and low risk. however, i quickly discovered that
everything was high risk. while i was very accurate in my
early years, i tended to struggle later on, probably
because i became too deeply involved in my new studies of
was that a problem?
work was and is a continuing evolution. my book, the
power of oscillator/cycle combinations, was part of
the progress. the cycletrader software was part of the
have you changed?
all i did was project the periods for tops and bottoms.
once of the first things that i realized i needed to do
was to quantify the techniques. that's always been a real
factor in what i do. i've got to quantify my methods
because i want to eliminate the judgment. using judgment
is what causes losses.
get so caught up in the excitement, the emotions of raw
fear and greed. you can't use your judgment; it's
impaired at that point. you really can't see what you're
were the steps you were taking back then to quantify
was doing all of this by hand at the time. there weren't
any personal computers back then. i had nothing but
charts. i plotted the charts by hand and i found what i
thought were the cycle bottoms and tops. i counted all
the measurements from low to low, low to high and high to
low. i came up with these very long periods in which
cycles had topped and bottomed and plotted them on a
chart. i realized, of course, that the time periods were
much too wide for trading.
what did you do?
believed that if i could just be right in my timing 70%
of the time, i could make money. so i took the middle 70%
of the time periods and low and behold, i had a
relatively short period. i called that a timing band.
with that timing band, i could forecast from the time
that a bottom occurred when the next cycle top would
occur. i could also forecast from that same bottom when
the next bottom was going to occur. so now i was
accomplishing what i wanted to do with cycles. i was, in
essence, looking into the future. from there, i set out
to find tools that would work better with cycles.
were some of the technical tools you looked
were one of the first approaches i tried. i wanted to
identify important cycle tops and bottoms, not with just
an element of time and a cycle count, but something that
would say this was a cycle bottom or a cycle top. in
addition, i was moving more and more toward making this
analysis mechanical and eliminating the judgment.
judgment issue appears to be a recurring theme.
found that in my own trading, i would make incredible
profits with the tools i had developed. but i would give
back the profit and sometimes more. or at least i would
always give back a large piece of it. then, as i
progressed in my profitability, i came to the point we
all know: the king kong complex!
feeling of invincibility.
was right about the markets and nobody could tell me
anything different. i just knew that i was going to be
right. i was a money-making machine for a while, but then
i'd get slammed and i'd retreat.
time, i would take notes about what worked and what
didn't. then, as i started trading, i would observe how
cautious i would be this time, and follow my notes
regarding what i should and shouldn't do.
as i started making money, i would forget the notes. i'd
get involved in the market and the same thing would
happen again. i came to some important realizations.
realized that i don't have the temperament to be a
trader. i think that very few people have that
temperament. if they are born with it, then they probably
have a hard time being a member of the human race.
a little extreme.
talking bout the base emotions of fear and greed, hope
and love. at any rate, i realized i had to find a way to
control my emotions, so i started looking for ways to
mechanize my trading decisions - oscillators and cycle
counts, all of the standard tools. i kept looking for
ways to take the judgment out of trading and to make it
more mechanical. that's when tim slater approached me
about starting computrac.
of the first technical analysis software packages.
the beauty of computrac was that it has oscillators. by
this time, i was using three or four oscillators, but i
tended to bounce from one to another. so i decided to
take one oscillator, and i spent three months going over
one market and detailing everything i could with that one
did you look for?
a cycle person, i look to buy bottoms and sell tops. but
the real key to buying bottoms and selling tops
successfully is trading in the direction of the trend. i
had to find an oscillator that would turn when prices
turned. to do that, i had to find an oscillator that
would be one oscillator?
stochastic. it's an excellent cycle oscillator. use a
stochastic with a lookback period half the length of the
cycle you are trading. the problem with the stochastic,
though, is that it can wiggle. i like an oscillator to
come down and turn up as prices turn up, but because the
stochastic wiggles, you'll get false entry signals.
there a way around that?
there is. the fix is to use the stochastic with %d. while
that provides a very good advantage in that you eliminate
the false signals, though, you will receive your entry
signals into the market further from the bottom.
get in a number of bars after the bottom. i realized that
one of my problems in my trading was that i was always
trying to anticipate the exact bottom. i would think that
i had hit it right, and then i would watch the market
keep going down. i realized that in order for the trade
to work, i had to get in after the bottom. after all,
there's only one bottom. even in a move that goes on for
months, or one that goes on for days, there will be only
one tick or price that is going to be the absolute top or
not easy to identify quickly.
the odds of my getting that one tick or that one bar was
really slim, but i kept trying. that led me to decide
that i wanted an oscillator that's going to let me get
into the market as close to the bottom as possible, but
after the bottom, because what kills you is hanging onto
the losing trade. as a backup, you have to have that
was that the next step? to add a risk management tool?
to be in control, i had to control my risk. that's what i
learned from trying to pick those bottoms. if i am not in
control, i'm always under stress, and i am only in
control when i have a stop in the market. so i had to
find a way to get a stop in the market.
did you do it?
only way to get a market stop was to wait for the market
to turn. i could do that with the oscillators i was
using, but i would often get that turn signal two, three,
four, five bars after the bottom, and the dollar risk was
often too big to trade.
on the lookback period of the oscillator?
type of oscillator, yes, and some of the popular ones at
the time didn't get you into a market until you were
halfway through the cycle already. my focus became to get
as close to that cycle bottom as possible, because by
doing so, i would have as small a dollar risk as possible
per contract. that led me to trade multiple contracts.
besides making more money per trade, i mean?
this sound familiar? if i went long, the market almost
always bounced and i'd be confident that i had bought at
the bottom. of course, then it might reverse and start
trending down, and i wasn't about to get out, because i
knew it was going to go higher. so i was just going to
wait until it went back up again. and then it would go
down and stop me out.
how did you figure that for a possibility?
saw that i could trade that bounce. so i figured that if
i traded with two contracts, i could trade the bounce,
especially if i could forecast a minimum size of the
bounce with 70% accuracy. in order to trade two
contracts, or multiples of twos, i had to have a low
dollar risk. along the way, i added a third contract, and
that way i was in for a longer-term move (figure 1). so
the smaller my dollar risk, the more contracts i could
put on and the more i could take off of my number 1
contract at my first target, because i could get that
with a high degree of reliability.
you'd at least capture some profit to reduce the risk
over the full period of the trade.
and that would balance me. as long as i am at risk, i'm
under pressure. the more pressure i'm under, the poorer
my decision-making is going to be. so what i found was
that as soon as i took the number 1 contract off, it was
like there was a bright light. it was as if the tunnel
suddenly opened up and i was no longer under pressure.
you are managing your financial risk and you are managing
your own emotional risk as well?
staying with the topic of financial risk, and for the
sake of argument, let's say you've got 10% of your money
at risk with a three-contract position. therefore, you've
got 3 1/3% in each position. if i take that first
contract off, that lops off 3 1/3% of my risk. that 3
1/3% in my hand also offsets the second 3 1/3%. so my
exposure for that trade then drops from 10% to 3 1/3% by
taking that one-third profit. this money management
technique is a tool used by many professional traders.
just get that first one off real quick. bring your stop
up and you won't be hurt financially or mentally.
1: controlled risk money
in order to trade two contracts, or
multiples of two, a low dollar risk is
necessary. along the way, bressert
added a third contract, and that way he
was in for a longer-term move. so the
smaller the dollar risk, the more
contracts bressert could put on and the
more he could take off his number 1
contract at his first
the technique for identifying the bottom. did you narrow
your method down to one oscillator?
i did. at first, i was using the 3-10 oscillator and i
was using the stochastic, although i was cautious with it
because of the many false signals. a major disadvantage
of the stochastics oscillator is that in a strong bull
market, it will stay at very high overbought levels. in a
sharp bear market, it will consistently produce very low
readings. but after a while, i began using the relative
strength index (rsi) i started working with the rsi and i
did something unique.
order to work with these oscillators and find things that
work, the best thing somebody can do is just sit around
in the middle of the night, when there is nobody around
to disturb you, and start trying various things. i looked
at extremely long lookback periods, or subtract one rsi
from another to detrend it. i tried a lookback period of
three, but it is so short-term that it looks like static.
but i marked my chart where the cycles were.
how did that turn out?
saw that even though the rsi was volatile, it was still
coming pretty close to where the cycle bottoms and tops
were. to smooth the volatility, i applied a three-bar
average of the three-period rsi. that smoothed the
indicator's fluctuations. suddenly, i had a very tradable
oscillator that was better than the stochastic. so those
were the three oscillators that i was using. they all met
my criteria of showing me when a market was
overbought/oversold, and seeing that the oscillators
reversed when prices turn, and they didn't wiggle too
much. i don't like to have to use crossovers, because by
its nature, it takes you further away from the cycle low.
so the stochastic still required a crossover, but the
other two didn't. most important, each was constructed
overlaid on the centered detrend is the
rsi-3m3, a 3 rsi smoothed with a 3 ma. note how
the oscillator flows with the detrend and makes
a dip as the cycle bottoms, dropping below the
buy line at 30 for the significant bottoms. the
entry pattern of a drop in the rsi3m3 below the
buy line followed by an upturn causes the price
bar of the upturn to be colored blue. this is
the setup bar, and a rise above it is the entry
signal (a red dot).
outlined the issue of the time element, your cyclical
analysis and oscillators. would you give some examples?
i found that in using the oscillators, unless i
mechanized it, i ran into the same problem of judgment -
deciding the market had bottomed or topped, placing a
position too early. so to mechanize the decision, i
developed a two-step process. the basic pattern is
referred to as a setup entry. it's simple. i look for the
oscillator to drop down below a buy line, such as the 30
on the rsi, and when the oscillator turned up, that bar
would be my setup bar and that would tell me that the
market had a change in momentum (figure 2).
use the three-period smoothed three-bar
the reason i like this oscillator is that it doesn't
wiggle much and you avoid the false signals. so if it
turns up, that's often the bottom, and i put my buy-stop
one tick above that high to enter into the long position.
by using one tick above that high, i would increase my
odds for buying the cycle bottom by 10% to 25%, depending
on the market and the time frame.
with going long on the close of the setup bar?
and there are traders who like to buy on the close, and i
did too, but i found that if i bought a market on close
of an upturn, the market could slam down the next day.
that's not uncommon. so to improve that setup entry
pattern, you wait for the next day's trading, put a
buy-stop in above the high of the day, and if the market
moves higher, you're in. if i've got a cycle bottom in,
say a 20-day cycle, i could put my sell-stop loss in one
tick below the low.
do you go about deciding that there was a 20-day cycle in
i did it by hand. i used a process called centered
detrending (figure 3), which was the process initially
used by the foundation for the study of cycles, and they
still use it today.
the process is the same for any
market in any time frame. plot a
centered moving average the same length
as the suspected cycle. most markets
have a dominant daily cycle of 14 to 25
days, and a 20-day ma is a good cycle
length to start with. the red line in
the prices is a 20-day ma calculated to
the most recent price close. however,
it is plotted back the length of the
pretty simple. you look at a chart and see if you can
find what the cycle is. my method was to find the lowest
low on the chart, and then start looking for the
significant dips. i marked those. then i counted the bars
between those. most often, i would come up with a cycle
length that would average around 20 bars, or somewhere
between 14 and 25.
there could be a range?
cycles can contract and expand and skip a beat.
sometimes, the 20-day cycle would drop even down to 10
for one cycle, and sometimes it would go up to 35, but
that was infrequent. sometimes they would seem to
completely disappear for a beat. so i borrowed this
technique from the foundation, and i found that most
markets tend to have around a 20-day cycle.
the steps are?
take a centered moving average, which is the same length
as the cycle, calculate it up to the last day and then
plot it back half of the length of the cycle. which means
i would take a 20-period moving average and plot it back
on day 10. ideally, it should be between day 10 and day
11. i plot it back on the 10th day. once it's centered
like that, i detrend it.
the steps to detrend the data?
detrend it by subtracting the moving average from prices.
subtracting that difference between the moving average
and the prices shows the cycle tops and bottoms much more
clearly. it shows the cyclical nature of the markets very
nicely. but here's where the problem came in, that the
centered detrend lags back half of the length of the
cycle. so you look at it and you find the historical
cycle. and anyone doing this the first time will think
that this is great, and that they've found the holy
grail. but the data is back 10 bars from current time.
i tried a real-time detrend. i found that if i took a 10-
or 20-day real-time detrend, the real-time detrend was
not as accurate as a centered detrend. that realization
led to oscillators. that's when i started using a detrend
and the 3-10 oscillator over the detrends. i saw that the
3-10 often turned right at those cycle tops and bottoms.
did? anything else you've found?
right. and the three-period smoothed three-bar rsi does
that very well too.
you plotted your detrend chart, that's where you came up
with your bands for when you were in potential cyclical
lows and highs, right?
what i used to determine the bands. once i had those
bands, then i could forecast. as a matter of fact, once i
had those cycles down, then i could quantify the
technique. i could see how cycles skipped a beat, because
when you do a centered detrend, that little cycle you
don't see actually shows up with that centered detrend.
and i could see left and right translation in the market.
right and left translation, i mean? a right translation
occurs when a market is in a bull move. that's when the
cycle highs lean to the right. a left translation is when
the market is in a declining move. the cycle top leans to
the left (figure 4).
this is important to a trader because?
important to a trader because when you're getting into a
market, it gives you a much better feel for what a market
is likely to do. if you look at a chart and you see that
the market's been moving up, you can see that right
translation, and you can anticipate that it's going to
continue to occur until it tops. if you're aware that
once it tops, you're going to get a left translation,
you're not surprised when it occurs, and so you can
believe your oscillator.
4: the cycles.
a right translation occurs when a
market is in a bull move. that's when
the cycle highs lean to the right. a
left translation is when the market is
in a declining move. the cycle top
leans to the left.
example, in a 20-day cycle, ideally it's 10 days up, 10
days down, 10 days up, 10 days down, but in a bull market
it might be 15 days up and five days down, or 12 days up
and eight days down, or 20 days up and three days down.
then when it shifts over to a bear market following a
top, suddenly you might find it's five days up and 15
days down. well, this is where bad habits catch up with
you if you decide to hold onto a position because you are
convinced that it's going to go up. you only have to live
through a translation shift once to end that bad habit.
so right and left translation tells you what kind of a
market you're currently in. it tells you what to expect
when the trend reverses. trend is up, right translation.
trend is down, left translation.
discussed the setup for an entry. what about exit rules?
easy to get into a market. it's a lot harder to get out
of it. we are afraid of leaving too much on the table.
that, again, is why i trade multiple contracts. getting
out of the first contract at a predetermined price gives
me money in my pocket. the second contract is designed to
look for the top of the trading cycle. the third contract
is there for the longer-term move. but you've got to know
what the trend is. this is one place where cycles give a
very distinct advantage, in that the trend to the time
frame you are trading is the dominant cycle in the next
longer time frame.
that means -
if i'm trading a daily chart, the trend for that daily
chart is set by the cycle in the weekly. this works for
bull trends as well as bear trends, but to keep it simple
i will refer to bull trends. i'm looking to get in at,
let's say, a daily cycle bottom. i take my number 1 off
on a daily chart. i've got to get that off within four
days, five at the most, or the odds are very good that
it's going to drop. by identifying the dominant cycle in
the next longer time frame, i've got trend. by using my
timing bands for the weekly chart (figure 5), i can
forecast a trend reversal, even though i don't go for
what i think is going to be the trend reversal day.
do you go for?
wait for a trade after the reversal. i'll look for a
short-term pattern after the reversal day or look to get
in at the next cycle bottom. i take my number 1 off, then
i look to get out, as i think the trading cycle is
topping. i get a 70% timing band, so i am not going to
even consider getting out until i'm into that 70% timing
band. because only 15% of the tops have occurred before
5: weekly t-bond top, daily on
the cycle in the weekly sets the trend for
the cycle in the daily chart. the top is a
weekly of the daily data below. the 21-week
cycle topped at a, bottomed at b, topped again
at c, and bottomed at d.
what takes you out of each contract?
do a number of things. i'll check how overbought the
oscillator is. if it's extremely overbought, i might put
a sell-stop below a previous bar low. i've developed
mechanical trailing stops. parabolic stops can be used.
swing highs and lows can be used. weekly highs and lows
can be used. i'll also look for an oscillator sell
signal. if i am in the timing band and i get an
oscillator sell signal, which is the mirror image of the
buy signal, i'll put a sell-stop below that setup bar. so
i'll reserve a number of techniques to get out.
the longer-term trade?
for the longer-term, keeping that number 3 position to
let the daily cycle come down and start back up again.
hopefully, when i make that daily cycle bottom, i can buy
three more contracts and ride up to the top of that
weekly cycle. but in the meantime, i have one contract
that i am holding from my earlier entry, just in case the
market doesn't come down to give me a cycle buy.
also written a book called the 12 cardinal mistakes.
would you like to talk about that?
wrote the 12 cardinal mistakes around 1981. i wrote it
because i had done an extensive review of my trading and
realized all of the mistakes that i had made, and i
realized that i had made them over and over again. so
after i evaluated my trading, i put together a chart of
my equity moves, and showed them to other traders.
are the 12 cardinal mistakes that can send a trader
to his or her doom, according to walter bressert.
of a game plan.
of money management.
to use protective stop/loss orders.
small profits and letting your losses run.
your commitment with success.
to remove profits from your account.
your strategy during market hours.
of patience, or trading for excitement, not for
brave of you!
was kind of embarrassed to show them, but i would make
money and give back so much, and sometimes a large profit
would turn into a large loss. but these were usually
campaign moves where i would build up what i thought was
going to be a big move based on seasonals and cycles.
my surprise, many of the traders looked at what i had
done and they said that it looked an awful lot like their
own trading. that's when i realized that it wasn't just
there is a common ground among the traders?
what's in everybody. it's the emotion. that's what
prevents us from being good traders. that's when i really
started doing some soul searching and realized what the
futures market does more than anything else is that it
pushes our buttons of fear and greed, and goes right
through to our weakest points. i decided to list those
problems and explain them, because if they had occurred
in me and the professionals i had talked to, they had to
be happening to everybody.
you'd like to wrap up with?
on the years i've been trading and the traders i've
interacted with, and i've probably taught several
thousand traders how to use cycles and trade, i think
there is a common thread among us.
order to make money in this business over time, you've
got to develop structured trading, a game plan unique to
your personality. one example that i can point to is the
orange county bond debacle. i received a call from a
reporter who wanted to know what i thought about it when
it happened, and we got to talking about technical
analysis, and how i looked at the markets.
called me back about three months later and said that she
had spoken to a dozen or more traders. she had been
struck by how we all use completely different approaches
to the market, but all the approaches seemed to work for
us. she was amazed by how something so simple as the
market can have so many different traders using
approaches that don't come close to each other. the
common thing is that we all find very basic approaches to
controlling our risk, controlling fear, controlling our
greed and being in control. it is unique to our
the key is to find something that you are intuitively
comfortable with so you can implement it?
right. you've got to be comfortable with the size of your
risk. you've got to be comfortable with where you think
the market's going to go. people who trade cycles tend to
want to feel they have an idea as to where the market is
going to go.
years you're starting out can often be the worse.
sometimes you make money and you don't know quite how you
early success can be bad?
the worst thing that can happen to you, but it happens,
and when the market turns, you're still using the same
rules and you get destroyed. i've told this to people as
long as i have been in the business. the best thing you
can do in the futures markets is practice for months
before you trade. get a set of charts to study, read
everything you can and come up with a method that you are
for all your trading needs. contact adest.
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