Published Bimonthly For Graduates Of The Trend Dynamics Course
Strategies :: Tactics :: Analysis
With this issue, we continue our exploration inside the minds and trading rooms of professional traders in the Trend Dynamics trading community. In this installment we visit Timothy Morge at Blackthorns Capital in Chicago, Illinois where he manages a private fund and trades stock indices as a private speculator. Over the past twenty-five years Morge has been immersed in price action as a floor trader on the CME (Chicago Mercantile Exchange), a cash FOREX trader, an institutional arbitrageur, a professional offshore fund manager, and private speculator.
In the interview that follows, Morge shares his experiences as a trader and reveals how he trades in today's markets.-Ed.
Ed: Tim, tell us how you first became interested in trading?
Timothy Morge: My father was a welder and a self-taught engineer. One of his business acquaintances was a wonderful guy who ran a large scrap-metal operation. He traded copper futures and that fascinated me. He gave me access to his extensive trading library that featured rare courses and manuscripts from the pioneer trading technicians of the 1930-1950 era. I love the technical analysis research of that period-one of my friends aptly calls it the "golden age of technical analysis." That was when I first came across Dr. Andrew's Median Line concepts.
I spent whatever time I could watching him update his charts, talking with him about what he thought about the Copper market or what he was doing with his positions. That was in 1974, and I was just turning 16. I graduated from high school a year early, and enrolled at the University of Chicago as a math/physics major in 1975.
Because I was a math/physics major, I had large blocks of time available to me on the university's mainframe computers. In fact, I had more time allotted to me than I could use, so friends would barter with me for my excess time on the mainframe. One of my dorm buddies came to me one night and told me he needed some time on the computer because his father wanted to build a predictive model for U.S. T-Bill prices. I offered my buddy some time blocks and volunteered to pitch in with the project. I spent a great deal of time constructing a database of historical raw commodity prices for them and a Fed-action database (with information such as weekly Fed actions such as regulating the money supply, discount window activity and changes in Fed funds/ discount rate) and then wrote a model that made a prediction for three month interest rates. It was a great learning experience, but when the computer model's predictions differed from the father's hunch about where interest rates were heading, he chose to ignore the model and proceeded to lose some $4 million dollars in margin. [This illustrates an object lesson about how a trader can be blind to evidence contradictory to his position or expectations.- Ed.]
Right after college, I was hired as a junior economist for the Harris Bank in Chicago. My department was charged with managing and developing a model that forecast the federal budget for Harris. At the time, Harris' Chief Economist was Dr. Beryl Sprinkel. Ronald Reagan was just beginning his run for the Presidency and many of his economic facts and figures concerning monetarist economic policy came out of our department. After he became the President-elect, Dr. Sprinkel was chosen to join his Treasury cabinet; shortly thereafter the bank's heavy funding of the economic department came to a close.
What did you learn by developing these two econometric models, the interest rate model and the federal budget model?
The faculty at top Business Schools like the University of Chicago and MIT spend a great deal of time teaching that markets are random, that trying to model them is useless. I found that false - that markets do have repetitive patterns; and it was not a great leap to take the data management skills I had developed in building econometric models and turn them toward evaluating and exploiting trading opportunities in the markets.
In 1980, I was offered a new job trading T-bills. For my training they sent me to their Foreign Exchange (FX) area and I seized an opportunity to become a cash FX trader. I traded mostly cash FX from 1980 through late 1988 for Harris, Bank of America, and First National Bank of Chicago in late 1985. First Chicago hired me as their chief dealer and by late 1988, I was put on their risk management committee, which was a part of their Board of Directors. I was in charge of executing and monitoring the bank's risk in their multi-billion dollar portfolio of proprietary trading positions that included: cash FX positions, cash bond and note positions; and even stock index and cash stock positions.
What important lessons or attitudes did you learn from that vantage point?
The realization that all traders are created equal in the eyes of the markets. I had several clients that held huge currency positions. They would constantly speak about how the normal trading rules didn't really apply to them because their portfolio was several billions to $50 billion (in U.S. dollars). They really believed that their portfolios were important and were subject to a different set of trading rules. This became more glaring when it came to taking losses. I would hear they weren't taking their losses at a certain price level, which was their initial stop loss area, because the market was just too thin; or, because they wanted to see how the Asian or European or U.S. markets reacted to these so-called "ridiculous" new price levels.
When I started managing other traders as part of my responsibility, I'd hear similar justifications for exceeding stop-loss limits. And finally, I'd have to take over their position, pick up the phone and liquidate it for them. There's always a price for getting flat-you may not like the price, but there's always a price if the market is trading. And chances are, if you blink at the first price and choose to wait for the next price, the first price was cheap.
So, I learned that markets treat all traders in like fashion. We may think the tried and true rules of trading don't apply to us for one reason or another, we may think we are bigger or faster or stronger or better prepared or smarter, but in the end game we are all traders, and all the same in the eyes of the market we are trading-its the market itself that wields the ultimate scale of justice.
I left the bank in 1991 to form a CTA. I managed offshore money for a large commodity pool until 1994. In 1995, I took a break for a few months, then leased a seat on the CME. I had always wanted to try trading on the floor, and now with the pits disappearing, I'm glad I took the time to try it. It was a fascinating experience and I am still amazed how much work it takes to stand in the pit jammed among several thousand other traders looking to ply their edges. Besides quick thinking and discipline, it takes a great deal of physical stamina. After five months, I found I was trading as much off-floor as I was in the pits, so I did not renew my lease and I returned to my trading office at home.
"If you blink at the first price and choose to wait for the next price, the first price was cheap."
"It's amazing how well prepared the great traders are before they step into that pit each morning."
What did you learn on the floor that helps you trade off-floor today?
The first thing I learned was the value of preparation and just how outstanding some of the floor traders really are. It's amazing how well prepared the great traders are before they step into that pit each morning.
Something else I learned is the importance of becoming content with what the market has to offer. For example, the first trading manager I worked for got a huge bonus and left to go trade on the floor in the currency pits. He was there for about 18 months, eventually leaving to work for Morgan Stanley in New York. The next time I saw him, I asked him why he went back to the institutional world. I didn't really understand his answer until I traded on the floor myself.
He said, for the first few months on the floor, he was making a great living by "finding dollar bills on the floor all day long." And after three or four months, he would start to "find a few five dollar bills and even a ten dollar bill here and there on the floor." Life was great. After 9 months, he started to "find five and tens more often."
After the first year, he didn't even bother looking at the one dollar bills, and just spent all his time looking for fives and tens. And then he quit looking for fives. Soon, thereafter his trading had deteriorated to the point where he wasn't effective as a floor trader any longer.
In other words, traders often get bored or dissatisfied with what the market has to offer. As an example, if I can take a few patterns and trade the E-mini S&Ps every day as a speculator and make $2K a day, that's more than $500K a year - ah, but that's only if I have the discipline to trade only those patterns and I am happy with just `printing the money every day.'
Another thing, when I worked for institutions, I thought of myself as a purist -and had some mystical idea that I could lose money on a trade and still have performed great because I lost money but performed as well as I could on that trade set up. So if I was long, and the market broke and I did a great job cutting my losses, I'd take solace and perhaps even pride in knowing I did a great job cutting the loss. That's just nonsense. To me, a losing day is a losing day. Everyone has them, but there's nothing good about them, other than their utility as learning experiences. Each day I try to remember that the exercise is to make money. I'm not there to entertain myself or amaze my clients. I'm there to keep adding to the trading kitty.
Where did you go after you left the floor?
I visited some of my institutional contacts and landed some offshore unregulated money to manage again. I continue to manage institutional money, as well as trade my own capital. Lately, my trading has focused on trading the U.S. stock index futures, though I still take swing positions in U.S. T-Bonds and currencies.
What's the physical layout of your trading room?
I have a large "L" shaped trading desk configured with three main stations. One component, is a Dell twin-Pentium III with a single 21" monitor that serves as my on-line/ internet computer. This is where I retrieve e-mail, do research using MS-Excel and other math-crunching tools. I also create charts using Advanced GET Real-time and maintain a Fibonnaci retracements and projections database. This station also has a real-time version of TradeStation 4.0 running using a Quote.com data feed.
A second workstation is comprised of a Dell server with twin 21" monitors. This machine runs E-Signal and Tradestation 4.0 and is my main data server. Its function is to capture data in TradeStation 4.0 and run TradeStation charting and a proprietary model I use to trade.
My third workstation, a Dell Pentium IV with twin 21" monitors, runs TradeStation 4.0 and CQG (Commodity-Quote Graphics) from a dedicated phone line feed. This is my back-up data and quote source. The proprietary model is also mirrored here in case the main server has a data problem. I also run several MS-Excel spreadsheets that crank out real-time indicators from this machine.
While trading, I am usually sitting in front of the first workstation, watching and charting using Advanced GET RealTime. I generally move back and forth between the 13"and 39" day-session only charts of E-mini Nasdaq and E-mini S&P 500 futures. My electronic execution platform is also on this first machine. The second machine is on the same desk to my right and I usually have a window with a set of quotes updating on the screen closest to me and a cash NDX (Nasdaq 100) chart up with the model's current position and statistics on the second screen.
The third station is on a second desk. I generally have a second quote screen on one of its twin monitors and a few of the spreadsheet generated applications on the second screen. These applications provide information like a real-time Nasdaq 100 cash index generated tick-by-tick from each stock's real-time tick activity, my own version of advances and declines, etc.
How do you prepare for a typical trading day?
My data collection and charting regimen is quite rigorous. Immediately after the T-Bonds and currencies close on the International Monetary Market (IMM exchange) at 2:00 PM CST, I begin to update charts.
I keep hand-posted daily, weekly and monthly charts for the following: U.S. T-Bond futures, a 30-year U.S. yield chart, cash and futures Dollar/ Yen, cash and futures Dollar/Swiss, cash and futures Sterling and cash and futures Dollar/EuroFX. I've been keeping these charts by hand since the early 1980's.
I also update a database on each of these instruments with swing highs and/or lows that may have been made that day, as well as upcoming daily, weekly and monthly support and resistance. I use a simple tool, FibNodes developed by Joe DiNapoli, that calculates a range of Fib relationships. I feed it minor and major swing highs and swing lows and it generates a sheet for me for the next day's trading. I use this to locate areas where there is a confluence (multiple counts of) support or resistance.
"There is something that happens as your eye processes the bar data and then your brain transmits that into a signal to draw a bar on paper."
It's rare to run across a trader who hand-charts anymore. How does hand charting make you a better trader?
There is something that happens as your eye processes the bar data and then your brain transmits that into a signal to draw a bar on paper. There's a certain intimacy that comes from hand charting many commodities. I do not find this holds true for all markets. The S&P and NDX futures, for example, are noisy to the point of being painful for me to hand chart! But for bonds, currencies and copper, for example, I really feel I trade much better because I'm in tune with some markets that are a part of the entire market. And, in those markets I hand chart, I am much more patient with entering and exiting positions-I am just a better trader because of hand charting.
How about intraday timeframes?
During the last hour of index trading, if trading permits, I update intraday charts (13", 39", 55") for the Nasdaq 100 futures and S&P futures, as well as cash Dow Industrials, Nasdaq Composite, Nasdaq _ and S&P 500 index.
Is 13" the smallest timeframe you look at?
Yes. I then go back to all of my intraday charts and re-work S/R (support & resistance) lines that I draw and use to identify what I call "trading energy areas". I draw Andrews Median Line sets, multi-pivot lines,' and simple trend lines. These lines identify S/R areas.
From each day's trading activity I note which lines "described" price. I highlight those lines while deleting lines that are either no longer relevant or that price simply ignored.'
What do you mean by "describing" price?
I see the simple lines I draw as price attractors. I expect the majority of Andrews lines I draw to be tested. On the other hand if price never interacts with the lines, they are useless, and I'm quick to jettison them. By "describing price" I mean that price moves to support and then bounces higher; or price tests support, bounces or pauses there and then plunges through and the break is a meaningful break. The longer you work with these lines, the easier it is to tell, early on, whether a line you just put on the chart is working or is useless.
Once I have finished updating all the charts, I go back to the database for each instrument, and I look for areas of confluence. I look to see where Fib numbers, S/R lines, swing tops or bottoms highs/lows are clustering. These are the energy areas I look for, areas price will generally be attracted to, but will also tend to be where failures and changes occur. Timeframe is not important for these numbers or areas. But the more these areas have been tested and survived without being violated, the more I pay attention to them. It's really less confusing than it may sound. The majority of the swing highs and lows will show up in most, if not all, timeframes and a confluence involving lines tend to be repeated in most timeframes.
Finally, its back for one last crack at the charts to add whatever energy points or confluence areas may have popped out from the updates. Recently, I have been trying to keep a web site updated regularly so I try to translate a small portion of my thoughts to the charts and commentary posted there. I find it always helps to write out my thoughts and so the web site is a good resource in that it forces me to write down some of my immediate thoughts once I finish updating the database and charts.
Multi-pivot lines are horizontal or diagonal trendlines that intersect multiple swing tops or bottoms.
This is a good example of what it means to attain formlessness and stay flexible in your analysis. - Ed. Do more of what is working, and less of what's not- J. Hart.
What do you do pre-opening?
Right after the alarm goes off in the morning, right before I shower, I go into my trading room and eyeball the charts for new highs or lows that occurred overnight in the Globex session and do new Fib calculations, projections and retracements. This allows me to let what's happened overnight "roll around in my skull" while I shower. I then -,,down to breakfast with the little ones and my wife. I don't listen to nr before or after trading. Most days, my wife will tell me that such and such happened this morning, and I won't have a clue until she tells me. I do note the days of important releases and decide beforehand whether I want a position into the numbers. There are many where I go into the major economic numbers flat.
Can we review a few trades based on the aforementioned regimen you just outlined for us?
Sure, the charts that follow illustrate my basic tactical approach to trading. Chart 145,opposite top, is a 39" S&P 500 futures chart (day session only, Globex price action is omitted)
I saw a well-defined swing from the 1143.75 low on 03/29 to the 1178.75 high on 4/02. Using the Median line technique, I bisected that swing with a line drawn from the high at 1194.50 on 3/27.
As price sagged down from the 1178.75 high, I noticed a congestion holding in the last few hours on 4/2/01 at A.
I dismissed buying that congestion because the Median lines are sloping downward, an expression of selling pressure. In a downward sloping median line structure like this I'm looking to sell short, not go long.'