Q: How did you begin writing? A: I became a writer in college taking the usual college writing courses. I liked them so much that for a brief time I worked on the college paper as a columnist. I found writing my thesis to be exciting and interesting. In my current career as a commodity broker, I have found my affinity for writing to be very useful. I produce a newsletter more or less monthly and a daily report on market conditions. I never intended to be an author(though it seems like a good idea. I don't like to write just to write. I write when I have something to say, and for that reason, I do have a specific reason for writing each book.
Q: What do you like to read? A: I love murder mysteries. The current raft of popular writers suit me fine. Sue Grafton, Tom Clancy, Parker, etc. It's hard to say who has had the greatest influence on my writing. Possibly Jack Schwager, author of several books on commodity futures. I very much enjoy the breezy style of his interviews and discussions in his Market Wizard books.
Q: What are your mundane details of writing? A: I prefer to write in the morning and to stay at it until I feel complete with the segment I am writing. This is much easier for me than trying to come back and pick up the thread again later. When I am writing, I write about 1 1/2 hours per day. I always use my computer. I prefer to write in my study at home where I can close the door and shut everything else out. Sometimes I put loud rock and roll on the stereo to get my juices going.
Q: Where do you meet your readers? A: I enjoy meeting and talking with readers at conventions, over the telephone and via email.
Q: When and how did you get started on the net? A: I use the net as a research tool, strictly for business. Although I have never tried a "chat" group, our company is setting up a question and answer hot-line and discussion group on scale trading on our website. Our website address is http://www.scaletrading.com.
Q: What about your family, home, hobbies ...? A: I live with my wife and two sons in a small Iowa town. I play pick-up basketball three times per week, practice Transcendental Meditation, and occasionally just hang out with my buddies while my wife gardens, rides her horse and chauffeurs our boys. Our greatest passion is skiing. We could easily end up living near a Colorado ski resort some day. In addition to working my jump shot and skiing style, I am practicing new listening skills and making progress toward long-term goals everyday. My focus is on developing the habit of bringing greater attention and awareness to my daily routines so that I am not just operating on automatic pilot.
From the Back Cover
Invest Like the Pros introduces the prospective futures trader to the world of scale trading, the long-term investment approach to trading commodity futures. It discusses in non-technical language the environment within which to scale trade and how to do it in the most prudent way.
Hal Masover describes how he came to scale trading and what has kept him there. Scale trading has been the only methodology of trading that has allowed his customers to continue trading, successfully, for years. Scale trading relies on planning, not skill or luck..
Here's what Hal's partner Stuart Valentine says:
"For me, the beauty of scale trading is that it is not a system but a methodology. For many this is bad news, as the quest is for that Holy Grail black box that magically spits out profits without any input or emotional involvement. When I fall into a lethargic attitude about life I also wish for such a system. If you really think about it, though, you may not really want a life where it is that easy.
Scale trading puts you in the role of being captain of the ship, where the quality of your strategic planning directly determines the success of your voyage. Without question this takes courage and discipline. However, the difference it makes between you and the average commodity trader is dramatic. Unlike the common "trader" you are never lost out at sea, because scale trading provides you with a strong fundamental framework from which to chart your journey."
About the Author
Hal Masover has been licensed as a commodity broker since 1987. Over the past eleven-plus years he has learned a lot about what works and what doesn't work in commodity trading and investing. He has built a company around the concept that commodity futures can be a conservative, intermediate to long-term investment vehicle.
In 1985, after a successful career in real estate investing in Philadelphia, Hal and his wife tired of city living. They decided to sell all their properties and move to Iowa. Hal used the resulting funds to learn to invest. His experience trading his own commodity futures account gave him the perspective needed to effectively(and sympathetically(deal with the needs of his commodity futures customers.
In the fall of 1987 he opened a branch office of Irvine Commodities. They were honest guys, but had little idea how to help a new broker start an office. In the spring of 1988, Hal opened a branch office with the more experienced Wasendorf & Co. In the summer of 1991, he started Crown Futures Corporation with Stuart Valentine.
In addition to articles about commodity trading Hal publishes a newsletter expressly designed for the scale trader and a daily market report available on http://www.scaletrading.com.
Excerpt. © Reprinted by permission. All rights reserved.
SCALE TRADING: ELEGANCE IN TRADING Here's the method. It's called Scale Trading and it is one of the simplest, easiest and most elegant methods of trading I have ever seen. I have searched for years trying to come up with something better. Although I have found a few good things and a lot of promising ideas, I have still not found anything that has proved better. It is a way that individuals, even those with relatively modest amounts of capital, can use some of the same methods the big boys use. Have you ever imagined what it would be like to be one of the big boys? Can you see yourself wading into the trading pit, with everyone's eyes on you to see what you're going to do? Or do you see yourself trading from a large, richly appointed office atop some urban skyscraper? Did you ever see the movie "Trading Places" with Eddie Murphy? Murphy plays a street beggar who magically winds up living our fantasy of trading big time in the pits and in a fancy downtown office. And, son of a gun, he's good at it (only in the movies)! I mention this fantasy because I have seen one trader after another seduced by it. Commodity trading can be an exhilarating and highly profitable experience. But it can also be ruinous and while most people are aware of the possibility of ruination, they don't really believe it can happen to them and because they don't really believe that, they never make plans to avoid it. Instead they try to pull off some sort of real life "Trading Places." Often they find that instead of leaping into the big time, they fall into deep losses. I'm not aware of any big traders that really trade like our fantasy. While they do have a wide variety of styles, the successful ones I have come to know are very sober. We want to discuss one very sane and sober way in which many large traders trade. This method was first developed as an adaptation of gambling methods used in Las Vegas. It can be used for gambling, stocks and commodities, and, while the method can work in all three areas as well as other areas of investment, we believe that it works best in commodities for a number of reasons. We will discuss why we feel this way later. But first, in order to help us understand the method, let's fantasize a little more. Imagine that you work for a company with a huge fleet of cars and delivery trucks. Perhaps it's one of the delivery companies like Federal Express or UPS. Your job is to help the company control fuel costs. Part of your program involves buying futures contracts of unleaded gas to protect the company against a rise in prices. This is called hedging. If you only needed to buy one contract your job would be simple. You call a broker and buy at a time when you believe prices are cheap in order to lock in a low price for your company. This is a very large company and one contract only equals 42,000 gallons. I have no idea how long it would take a nationwide fleet of trucks to use 42,000 gallons but I wouldn't be surprised if it was less than an hour. To adequately implement your program you might need to buy thousands of contracts. As I write this, the most active contract for unleaded gas is the December, 1996 contract. There are approximately 27,000 contracts of open interest (the number of contracts being held overnight). On March 17th, 1995 there were approximately 10,300 contracts traded during the trading session. If you were to go in to this market and attempt to buy, say, 2,000 contracts all at once, you might shock the market. Since you probably wouldn't find one individual seller who would want to sell you that much, you'd have to keep bidding up the price to coax out more sellers. In the end you would have created your own mini-rally in which your company would pay ever higher prices. At least in the short term, you would not have protected your company from higher prices. You actually would have created an artificially high price for your company to pay. Scaling In and Out The way you might solve this problem is to do exactly as many large traders usually do. Scale in your purchases. Once you have determined the approximate price at which you would like to be buying, you would begin to buy at progressively lower prices within a target range. When you buy small allotments at a time, it is usually much easier to find a seller for each buy order. You thereby may avoid the possibility of driving prices higher. Scaling in your purchases also has the advantage of helping you buy at progressively lower prices if the market continues to decline after your initial purchases. You might also implement the same program in reverse when it comes time to liquidate your position, for the same reasons. That is, if you sell all your contracts at once you can have a temporarily depressing effect on the market and you might find yourself getting progressively lower prices. By selling on a scale-up basis, you might even, and hopefully will, sell at progressively higher prices should the market continue to rise after you make your initial sell. Before we leave this particular fantasy it's important to realize that a large commercial firm is in a very good position to know when to buy and when to sell. After all, our imaginary delivery company is in the market to buy unleaded gas every day, all day long. Because buying gas is an important part of cost, part of controlling cost means getting a handle on when prices are likely to rise and fall. Such firms usually have full-time analysts whose job is to gather as much information as possible and make projections of what prices are likely to do. While they may not always get their projections of price movement right, their intimate knowledge of the market gives them the chance to get it right most of the time. In our fantasy about being a large trader I have presented two important elements of the method of trading we wish to discuss: scaling in and out, and knowledge of a market's tendencies. Our fantasy was that of being a commercial trader, but we could have presented the same principles, with only slight, and, for our purposes, insignificant differences were we to fantasize about any other type of large trader. It can be more practical to scale in and out of large trades than trying to go in and out in a block. Also, if you're going to trade large amounts of contracts you'd better have a pretty good understanding of the market you're in. The genius of the scale trade method is that it gives small individual traders the ability to emulate a trading method that the big boys use. Although the system was developed as an adaptation of a gambling system, it accidentally resulted in giving the individual a very simple, yet very sophisticated tool used by mega traders. Scale Trading, as it is called, involves buying a commodity at progressively lower prices until it stops declining. You then sell it at progressively higher prices as it rises. An illustration will help you see how this works. Let's say you believe corn prices are approaching a bottom. Using the Scale Trade method you might begin to buy corn at specific intervals, maybe every five cents down. You might buy a contract at $2.45, $2.40, $2.35, $2.30 and so forth. If corn stopped going down at $2.27, you'd own four contracts. Suppose you decide that you would be content to make $400 profit per contract. Every penny in corn is worth $50. In order to make $400 per contract you would have to sell each contract at an 8 cent profit. If the price rises you would need to sell at $2.38, $2.43, $2.48 and $2.53 in order to achieve your 8 cent profit per contract. This, in its simplest form, is how to scale in and scale out. Buy Low and Sell High With this method, the small trader borrows one of the big traders' methods of entering and exiting positions. There are two advantages to trading this way that immediately come to mind. First, the method buys weakness and sells strength. By buying at progressively lower prices and selling at progressively higher prices you set up an automatic mechanism for buying low and selling high. Precisely what all traders want to do. Time and time again I have found scale traders are taking their profits when everyone else is getting excited about a market. Maybe the news media has just reported that it hasn't rained in Iowa for six weeks and the temperature is hitting 100. The corn market will usually run up on this news. The scale trader who may have bought when nobody was much interested in corn, will be able to sell into this rally when everyone else is buying. Many times I have seen that just when the scale trader is regretting having sold all his contracts because the market looks as if it's going to scream higher, something happens, such as rain in Iowa, temperatures drop into the 70's and the price of corn plummets, creating losses and misery for those who were buying higher during the rally and allowing the scale trader, once again, to buy low after having sold his contracts to those poor souls who bought high. There are some occasions when the scale trader regrets selling all his contracts on a rally for good reason. The market really does run up in a sustained rally that is very profitable for people who follow trends and not for scale traders. This may be perceived by some as a weakness in the scale trade method. It is important to realize that these types of rallies occur infrequently and that trying to trade in a way that will capitalize on them is what often leads to the ruin of traders. However, later in the book I will discuss an adaptation of scale trading that may allow the scale trader to participate in these infrequent monster rallies without significant risk. You Don't Have to Be Perfect The second advantage of using the scale trade method is that you don't have to be perfect. This is very fortunate, since most people, including me, are not perfect. What I mean is that in scale trading, we build a position. If you trade using some of the popular methods, such as buying 1,2,3 bottoms or selling head and shoulders tops, or some such thing, you will probably put all your contracts on at once. If you're a small trader your position may be only one contract. Doing things this way it's important to have a plan that, among other things, deals with what to do when you are wrong. This usually involves using a stop order. So, if you buy corn at $2.45 and you decide to risk maybe $500 on the trade, then when corn drops to $2.27, as in our above example, you will have been stopped out at $2.35 with a $500 loss. When the market later rallies to $2.53 and higher, you probably won't be in it as you were stopped out with a loss earlier. Trading in this more traditional and more popular way means you have to be almost perfect. If you're going to try to buy a bottom, the market better rally now or you're going to lose money. In scale trading you don't need to be so precise. Because you are buying at progressively lower prices, we don't need to have the market turn on a dime; we can give it a pretty wide range and still come out very well. Not being perfect myself, I like any system that is this forgiving. A couple of questions naturally arise. First, how do you know when to begin a program of scale down buying? Second, how much capital does this take? Let's take up the first question in our next chapter. We'll cover the question of capital later in the book.
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