What I Learned Trading with Larry Williams

UPDATED: Wednesday 9 December 2020
What I Learned Trading with Larry Williams
[ Video originally recorded on 22 December 2016 ]

I’ve been meaning to record this video on trading with Larry Williams 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

Larry Williams is a hugely polarizing character in the trading community. It seems like you either love him or you hate him. Online he comes in for a lot of criticism – totally unjustified and driven by jealousy, in my opinion. I actually think there’s a huge amount we can learn from Larry Williams – and my opinion is backed by real life, personal experience trading with him.

So let’s get into it. Use the links below to jump to a particular section:

Larry Williams Trader

Larry Williams burst onto the trading scene in 1987 when he won, what used to be called, the Robbins Trading Competition. It’s now the World Cup Trading Championship. He turned a $10,000 account into over $1.1 million in 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.

Over the years he’s shared his trading ideas and written a large number of books – I think about 11 trading books – which is maybe more than any other trader. He has done speaking gigs all over the world and he also used to run his ‘Million Dollar Challenge’ (MDC). More on that a little later. These days you’ll find Larry talking about his trading on his website IReallyTrade.com.

I think he is, number one, a genius. Number two, incredibly generous with all the trading ideas he has published. And, number three, he is a super nice guy. I’ve met him on a number of occasions and he is 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 why they do it and adapt what works for you. I just think that’s just good advice for anything you read, learn or see online about trading. 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?

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.

what I learned trading with Larry Williams

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 my 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 over 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 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 Larry 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. It was about the time when 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.

Actress Michelle Williams trading

Possibly one of the most impressive things about Larry Williams is that he taught his daughter, the actress Michelle Williams, to trade successfully. Ten years after Larry won the Robbins Trading Competition she entered the same competition and won it! She went from almost zero trading experience to winning an extremely prestigious trading competition all based on Larry Williams’ principles. Yes, a bit of a publicity stunt. But Larry’s point was that his trading skill could be taught.

Larry Williams Trading Strategy

Trading Methodologies Evolve

Bear in mind that trading methodologies are always evolving – that’s as true for Larry Williams as for you and me. These comments are based on what I’ve read and seen up close, but are probably a little out of date.

Entry using setups, indicators and patterns

This is Larry’s trading methodology as best I can summarize it. He says that he is not a technical trader, that is, doesn’t rely on technical analysis. His setups are more based on “fundamentals” and he uses three major market indicators to figure out when these setups are happening:

  • Commitment of Traders: He was one of the first traders to analyse the Commitment of Traders data in depth and he’s written a number of books on it.
  • Inter-market Relationships: The relationships between the equities market and bonds, gold, etc. These Inter-market relationships are very important in his trading.
  • 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.

His trade setups come from these 3 fundamentals: Commitment of Traders, Inter-market Relationships and Seasonality. Then to actually trigger trade entries he uses historic patterns.

Exit using simple system rules

To exit trades Larry uses a few different methods:

  • ‘Bailout’ Exit: This is closing a position at 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 at the next day’s open.
  • Number of Days: This is closing a position after a fixed number of day – say 3, 5, 7 or 10 days. He’ll put in a number of days as a mechanical or systematic 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. Without breaking any confidences, revealing specific setups, etc. these are the general principles, observations and what I’ve learned from reading and watching Larry Williams trade.

Trading Lessons Learned

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 and then wants to come back into the channel. Or it’s in a trending phase, either up or down and it temporarily gets overboard or oversold. Either way, 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, on either the second or third day of the MDC, when 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 backtesting patterns with inter-market relationships. 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 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 opportunities 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

This wasn’t an actual quote from Larry Williams but more a generalisation about what he was effectively 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.

The ‘Bailout’ exit works with a large stop because you are using the market’s randomness and volatility to get you out based on a position being profitable. And so it basically says, “If you’ve got a profitable position, exit, get out.” It’s effectiveness is in 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 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 that you can almost ‘fade’ popular trading patterns and be profitable. These patterns are so well-known by all the players, that in fact, the strongest moves come when you do the opposite of what these well-known patterns predict.

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 blowoff 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 are a lot of stops sitting above the high of that Shooting Star bar. If the market trades above that, you’re going to bust out all those people out at their stops and you’ll cause a rally in the 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 – 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-driven 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, 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 inter-market relationships to filter out losing trades

Now, with this particular lesson I don’t actually agree with it. Whether it’s a strong disagreement 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 inter-market 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 long-term relationships hold up. He is looking at patterns in the short-term trend in these markets against each other, rather than long-term correlations between them. But still, I’m not convinced that these kind of relationships will hold for the long, long term.

For me, the thing that changed my opinion 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, bank bail-ins and bail-outs, Central Banks around the world taking positions in equities and corporate bonds – all this crazy stuff, the world has changed.

I don’t believe that inter-market 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 are they going to hold up and still work in the future? I’m 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 inter-market relationships, the sample size of the trades is scarily small. Although the results might look really good with high percentage profitable results, a lot of that is being driven by the ‘Bailout’ exit and having a large stop. The trades are just the result of the market volatility to generate the system results rather than real relationships between patterns and inter-market 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.

Conclusion

There you go, six lessons I learned trading with Larry Williams.

What impact did trading with Larry Williams at the Million Dollar Challenge have on me? The first thing was, I built myself what I thought was the perfect system. But, at the time, I was coding with TradeStation and not able to incorporate the inter-market relationships successfully. That is a tricky thing to do with TradeStation and EasyLanguage – the Genesis software that Larry Williams uses is perfect for it. So I built myself what I thought was a perfect system, and then within 3 months of trading it, 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 took a shortcut, to try and make something work. But on the positive side it did get me to switch from a purely systematic approach to a 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 result for me – even though I blew up my trading 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 of his, watch as many of his videos as you can. And remember the Bruce Lee quote: “Absorb what is useful, discard what is useless and add what is uniquely your own.” Larry Williams is a font of knowledge for trading futures, commodities, short-term trading and swing trading – there will be ideas from his work that you can use.

I hope you found this video and article on ‘Lessons Learned Trading with Larry Williams’ helpful.