I’ve been meaning to record this video for a very long time. An email from TK earlier this week prompted me to finally get it done.
“Dear Barry, Hope you are well. It seems you have a special place in your heart for Larry Williams. I wonder if you might consider a video about Larry and what you like about him? I’ve visited his website and he has a lot of information to try and absorb. As a Better Indicator subscriber, I was wondering if there is one thing or another we could review from Larry’s site to gain a little more trading insight. Thanks.” TK
Transcript of the video
Hope you’re doing well, hope your trading is going well and I hope you’re looking forward to Christmas. As you would expect, coming up to Christmas, the markets have gone very quiet. Although Thursday, today, things have perked up a little bit. But Monday, Tuesday and Wednesday, were they slow! Extremely light volume, very slow, almost no volatility or range. Best to be very careful on days like that – I always find it’s best not to trade when the market is that slow. Just because trending moves don’t have any follow-through and you get yourself in trouble.
Anyway, got a very nice email from TK this week about Larry Williams. I’ve had this presentation on the go for a few years and I just thought, with a little bit of down time, let’s finish this thing up and get it out. But let me read you the email from TK first of all. It says. “Dear Barry, hope you’re well. It seems you have a special place in your heart for Larry Williams. I wonder if you might consider a video about Larry and what you like about him? I’ve visited his website. He has a lot of information to try and absorb. As a Better Indicator subscriber, I was wondering if there is one thing or another we could review from Larry’s site to gain a little more trading insight. Thanks Barry, TK.”
Well, I think there’s a huge amount we can learn from Larry Williams, so let’s get into it. First a caveat. Larry Williams is a hugely polarizing character in the trading community. You either love him or you hate him. He comes in for a lot of criticism online. I must admit, I think a lot of it is just totally unjustified and driven by jealousy.
A little Larry Williams background
The story behind Larry Williams, he burst onto the scene I think in about 1987 when he won what used to be called the Robbins Trading Competition. I think it’s now the World Cup Trading Championship. But anyway, he turned a $10,000 account into over $1.1 million in the space of 12 months. He actually turned the account into over $2 million but a couple of final trades didn’t work out and the account ended up being closed out at $1.1 million.
Not only that, 10 years later he taught his daughter, who is the actress Michelle Williams, to trade. She also entered the same competition run by Robbins Trading and won it in the year that she competed. She went from almost zero trading experience to winning an extremely prestigious trading competition all based on Larry Williams’ principles. So he’s kind of famous for that.
Then, of course, he’s written a large number of books, I think about 11 trading books, done a number of speaking gigs around the world and he also used to run the Million Dollar Challenge. Personally, I think he is number one, a genius. Number two, incredibly generous with all the things that he has published and talked about and he is a super nice guy. I’ve met him on a number of occasions and just a genuinely good guy.
Now, what can we learn from any trader? I always come back to this. It’s a great quote:
“Absorb what is useful, discard what is useless and add what is uniquely your own.” Bruce Lee
You’re never going to trade exactly like another trader. But, study what they do, understand what they do and take what works for you. I just think that’s just good advice for anything you read, learn or see online, in books, wherever, about trading in general. It’s such a personal thing. You need to take the ideas that resonate with you and work on those and make them your own. That’s the best way to trade, rather than trying to mechanically follow what someone else is doing.
What do I know about Larry Williams?
Now, why should you listen to me about Larry Williams? Well, first of all, I’ve read pretty much everything he has ever written. Even some of the obscure books that you can’t find on the shelves anymore.
If there was one book that I’d recommend as an Emini trader that is really worth getting, it’s “Long-Term Secrets to Short-Term Trading”. That book is really focused on trading the Emini and Bonds. It’s a very solid book, so if you want to pick up anything from Larry Williams, that would be one suggestion. I also saw him every time he came to speak in Sydney when he used to come on a regular basis. Eventually, I signed up for the Million Dollar Challenge in 2001, so that’s 15 years ago – which makes me feel very old. But that was quite a big deal for me.
At the time, it cost me A$6,000 to attend. It was a 3-day event. We started on a Sunday afternoon, where Larry went through his principles and taught us as much as he could about trading his way. And then we actually traded the Emini markets during the day session, which started at midnight in Sydney time on the Monday and the Tuesday.
The deal with the Million Dollar Challenge was that he would trade his million-dollar account and then he would share the profits with people who attended. 20% of the profits were to be split among the attendees. I think there were probably about 15 of us who were at that particular session back in 2001. Unfortunately, he didn’t end up making money that session and so we never got a refund of the cost to attend. But I still think of it as money well spent from my perspective. It was about the time when I was saying that I needed to take my trading really seriously. And so it was one of those things that I did that kicked me into a higher gear.
So that’s why I know a little bit more than most about Larry Williams. However, I have to say, since then I really haven’t kept up because I went off on my own tangent. And so, I’ve not kept up with his latest ideas. But I’ll give you as much insight as I can – without breaking any confidences – about the way he trades and what I have learned from it.
Larry Williams trading methodology
This is Larry’s trading methodology as best I can summarize it. He says that he is not a technical trader, doesn’t rely on technical analysis if you like. Because he says the setups are based on fundamentals – good reasons for getting into trades, long or short. He uses three major market indicators to figure out where setups are happening:
- Commitment of Traders: He was one of the first to analyse the Commitment of Traders data and he’s written a number of books on it.
- Intermarket Relationships: The relationships between the equities market and bonds, bonds and gold and so on. Those Intermarket relationships are very important for him.
- Seasonality and Multi-Year Patterns: Month-to-month seasonality patterns in some of the commodity markets is incredibly important. But also, multi-year patterns. For example, the four-year cycle in the stock market which is driven by the Presidential election cycle. Then a 10-year cycle that he’s identified in the stock market, and so on.
The setups, the ideas for the trades come from these fundamentals: Commitment of Traders, intermarket relationships and seasonality. Then to actually trigger trades, he’s basing a lot of his entries on patterns. And lastly exits, how he gets out of trades, there’s a couple of ways he gets out:
- ‘Bailout’ Exit: This is the first profitable open. Now, remember, a lot of Larry Williams trades are swing trades. He’s not really a day trader. If you have a profit on an open trade you get out at the open. If you’re in a losing position, you hold to the next open to see if it’s profitable and so on.
- Number of Days: 3, 5, 7, 10 days or something like that. He’ll put in a number of days as a mechanical exit.
- Wide Stops: These keep him in trades a little bit longer. It’s a source of a lot of criticism. A lot of traders say that the wide stops are kind of crazy, with the amount of capital that he has to trade in order to make those wide stops work, but they do work.
So there you go, that’s it in a nutshell, my view of Larry Williams’ trading methodology – setups, entries, and exits. So what can I pass on, in terms of lessons learned, from trading with Larry Williams. Just general principles about trading. Not passing on any kind of confidences, no specific setups, but these are general principles, things that I have observed and learnt from reading and watching Larry trade.
Lesson #1: Use the market’s tendency to revert to mean
The market is either in a horizontal channel and bursts out of that channel. It’ll want to come back into the channel. Or it’s in a trending phase, either up or down and it temporarily gets overboard or oversold. The market will want to come back into a mean reversion position. Periods where psychologically things get out of kilter temporarily, get sorted out by coming back to the mean.
This was made clear to me, either it was the second or the third day of the MDC, and Larry was explaining one particular setup. He was very keen on where the open was compared to the close, high and low of the previous day. Someone in the audience said, “What happens if the open was further away?” And Larry went and coded that using his Genesis Software – which is very powerful for trading patterns and using intermarket relationships to back test. He said, “Yeah, that’d be a great trade because it tests well and the open in that particular position would lead to a winning trade.”
Then the trader comes back and says, “Well, what if the open was somewhere else?” And again, it seemed to me that what Larry Williams was doing was actually saying was the further away from the mean, the more likely that the trade was going to be profitable. He was always looking for those opportunities where the open got out of whack, was out of position compared to historically where it had been. He was looking for options to close that gap and for the market to revert to mean.
So the market reverting to mean is a very strong force in the market, and he was using that to look for trading opportunities. That’s the first lesson.
Lesson #2: The market is more often random than rational
These aren’t actual things that Larry Williams has said, but it’s my view on what, effectively he is saying. And again, this came from a question at the MDC. It would’ve been the second day where one of the traders asked, “What is the one thing that you’ve learned in trading that is the best idea that ever came to you?” He said, “The ‘Bailout’ exit.” Exiting on the first profitable open when you’re swing trading a position. He said, he hadn’t actually come up with the idea, but he’d done so much back testing on the idea he felt as if it was his own. I think, when it comes to the literature, he’s probably done more work on this than anybody else.
The ‘Bailout’ exit works with a large stop because you are using the market’s randomness and volatility to get out based on a position being profitable. And so it basically says, “If you’ve got a profitable position, exit, get out.” It’s the combination of using a first profitable open with a large stop. Those two things together. The large stop allows you to sit through quite a lot of volatility in the market. Then if you happen to have a profitable open position, close the position out, take your money.
The market is more often random than rational. Your attitude to trading should take that into account. I think that’s really a very important lesson that we try to see logic and that the market being up or down on a particular day, or trends in a particular direction, why does it do that? There’s no rationale to it. I think you can look at the stock market and look on a longer-term basis, a medium to long-term basis and yes, come up with some rational reasons why the market did that. But minute-to-minute, hour-to-hour even sometimes day-to-day the market is just oftentimes irrational and more random than actually moving in a particular direction for very good kind of fundamental reasons.
Lesson #3: Failed technical patterns are often the best trades
This one is really the result of technical analysis and trading books becoming so pervasive. There’s been so much written about trading patterns, but you can almost fade popular trading patterns. These days, those patterns are so well-known by all the players, that in fact, the strongest moves come when you fade these well-known patterns.
For example, a candlestick pattern like a Shooting Star which where you gap up and make new highs and then close on the lows. The general consensus is that this would be a blow off move that a lot of people will see as bearish. Well, if everybody looks at that pattern and says, “Well, it’s time to short.” There’s a lot of stops sitting above the high of that bar. If the market trades above that, you’re going to bust out all those people out of those stops and that position, and you’re cause a rally in that market.
So when common, well-known, traditional technical patterns, fail, or are faded by the real professionals, they end up being very good trades. Because so many people, more the amateur side of things, have taken an obvious trade and so will get stopped out when it doesn’t work to plan. Those are really worth looking out for.
Lesson #4: Use the market’s volatility and cycles in market volatility
There are so many relationships that are ethereal in trading. They’ll work for a while and then they’ll break down and they’ll reverse. There are very few things that you can rely on – not just week in, week out, month in, month out, but year in and decade in, decade out. There are two things, though. One is day-to-day volatility cycles. The market goes from periods of being very active to very quiet, to very active to very quiet. I don’t think that will ever change, that will never stop. And so use that to your advantage.
If you’ve had a couple of super big range days in a row. Chances are, the next day is gonna be quiet. If you’ve missed out on trending moves during big range days, don’t expect the same activity after big ranging days. Then, if you have a series of days where things are very quiet and very subdued, eventually you’ll bust out of that into larger range days and big trending days. That’s one aspect of cycles in volatility, and that is a relationship that will just continue on ad infinitum. It’s a psychological, human-type thing.
The second one is the daily range. That’s using big days to get on top of big moves. So when you’ve got a big day setting up like an open range breakout, those will tend to travel and go the distance, and you end up with big range days. I think those types of days will always persist. If you can find them, they will be good trading opportunities. Don’t expect every day to be a trend day, but when you do identify trending days, big range days, jumping on board. Opening range breakout-type trades will always be a winning proposition. They’ll be good times and bad times, but over the long, long-term, opening range breakouts and cyclical changes in market volatility are good principles to build into your trading approach.
Lesson #5: Use intermarket relationships to filter out losing trades
Now, with this particular lesson, I put a cross against it. The other ones have got ticks against them because I agree with them. These I don’t. The next two I don’t actually agree with. Whether I think it’s a strong no, as in a cross here or just a big question mark, it’s probably more appropriate that I say the jury’s out, I’m not so convinced about this.
In Larry Williams setups and trades, he relies heavily on intermarket relationships. Particularly when he’s trading the equities market, looking at the bond market, and then trading the bond market and looking at the gold market. I am not convinced that these are long-term relationships hold up. He is looking at patterns in the current trend, the short-term trend in these markets against each other, rather than long-term correlations between them. But still, that being said, I’m not convinced that these kind of relationships will hold for the long, long term.
For me, the thing that changed was the Financial Crisis of 2008 – a lot of these relationships that looked good and worked well for years and almost decades prior, broke down entirely. I still think with the Global Financial Crisis that we’re through the looking-glass, everything’s upside down. With the advent of quantitative easing, with the advent of bank bail-ins and bail-outs, and all the crazy, funny stuff that we’re doing in financial markets. Central Banks around the world taking positions in equities and corporate bonds and all this crazy stuff. The world has changed.
I don’t believe that these intermarket relationships can be relied on for the long, long term. If you build a trading system based on short-term trends in bonds versus equities, or gold versus bonds, I’m not convinced that those are going to work in the long, long term. Your historical system testing results might show that they work historically. But looking into the future, are they going to hold up and still work? I’m just not convinced.
Lesson #6: Don’t be a slave to sample size and statistical significance
In the back testing that Larry Williams does, particularly with the intermarket relationships, the sample size of the trades is scarily small. You know, in the teens or in the twenties. Although the results might look really good with high percentage profitable result, a lot of that is being driven by the ‘Bailout’ exit and having a large stop. They are just the result of the market volatility to generate the system results rather than real relationships between patterns and intermarket relationships.
The criticism that he gets is that the sample sizes are way too small and there is absolutely no statistical significance in the results that you’re getting. And so, you shouldn’t rely on these patterns going forward. So I’d be very wary of using small sample sizes to build supposedly a robust trading system that is going to work for years and decades in the future.
There you go, six lessons about trading with Larry Williams.
What was the personal aftermath of trading with Larry Williams at the Million Dollar Challenge? The first thing was, I built myself what I thought was the perfect system. But, at the time, the way I was coding with TradeStation, I was not able to incorporate the intermarket relationships successfully. That is a tricky thing to do with TradeStation and EasyLanguage. The Genesis software that Larry Williams uses is perfect for it, but with EasyLanguage in TradeStation is very difficult. I built myself what I thought was a perfect system, and then within about three months of running it, it blew up and I blew up my account.
That was a personal lesson learned. Totally my fault, nothing to do with what I learned from Larry Williams. I just shortcut something, to try and make something work. However, it did get me switched out of a purely systematic approach to a far more discretionary approach. It reinvigorated my trading and research, and it spurred me on to a number of years of, from my perspective, very fruitful research. So the direct aftermath for me, although I ended up blowing up my account, was a very productive period.
And so I have to say thank you to Larry Williams. He’s a great guy, he’s a genius, he’s incredibly generous, with his research and his work. Read whatever you can, watch as many of his videos as you can. Go back to the Bruce Lee quote, “Absorb what is useful, discard what is useless and add what is uniquely your own.” He is a font of knowledge for trading futures, commodities, short-term trading and swing trading, there will be ideas that you can glean from his work.
There we go, lessons learned from trading with Larry Williams. I do hope you find that helpful. Hope your trading is going well and Happy Christmas.