Stanley Kroll on Futures Trading Strategy was published in 1988 by Dow Jones-Irwin and is now available in .pdf form from Traders Press. Kroll was a legendary commodities trader in the 1960s and 70s. Apparently in the early 1970s he parlayed $18,000 of his own money into $1 million; he “retired” for five years in 1975 at the age of 40, subsequently returned to the markets, and died in 1999.
As you would expect, for today’s trader this book does not enter uncharted waters. But it serves as a reminder of time-tested principles that will always trump the latest and greatest systems. Kroll, a trend trader, was an admirer of Jesse Livermore and was particularly fond of his statement that “It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and lots of early bears in bear markets. . . . [But] they made no real money out of it. Men who can both be right and sit tight are uncommon.” (p. 137) Kroll relates an anecdote that speaks to this point (and to later behavioral studies on myopic loss aversion; see my post of October 21). Let me quote it in full:
"On the afternoon of January 28, 1987, some 5 1/2 months after the buy position [in cotton] was signaled [at 34.54], I received a near-cryptic phone call from a pharmacist in Rapid City, South Dakota. He and I had corresponded on occasion, and, if there ever was a rank beginner in futures trading, he was it. Anyway, he was so excited he could barely talk—but the gist of what I understood, after I managed to get him to communicate in normal English, was that his system just that morning had flashed a signal, at 54.83, to sell the cotton position. He had dumped the position and was totally undone at the realization that he had just scored over $20,000 profit on his two contracts. After further conversation, I was also undone when I learned that he had been unaware until that very day of the magnitude of his profit—which may have been the reason he sat with it for the full term of the move." (p. 163)
Every trader is looking for the outsized gain. But, says Kroll, we have no way of knowing when we initiate a position if it “will turn into the big one. Therefore, so long as we are trading in the direction of the major trend, we should premise that every position has the potential to be the megamove and play the market accordingly. And that means holding the position . . . until your stop, which you advance with the market, takes you out.” (pp. 162-63)
One of Kroll’s basic tenets is that a good technical trading system, one that can identify a market trend or the price objective of a particular move, is only half of what you need to succeed. The other half is a viable market strategy and tactics along with sound money management. In fact, he argued (what is perhaps a truism but one that always bears repeating) that “it is better to have a mediocre system and good money management than an excellent system and poor money management.” Kroll discusses stop placement, averaging up, and cutting losses. He concludes:
"My answer to the iconoclastic individual who seeks futures profits while violating most of the proven precepts of sound strategy and money management is to quote Damon Runyon. 'The race may not always go to the swift, nor the contest to the strong, but that’s the way you want to bet.' So, in your gardening, your poetry, your sculpture, or your cooking, be as uninhibited as you dare, break all the rules or invent a few of your own, and think of discipline as just another word in the dictionary. But, in your futures trading, play by the rules in a disciplined and pragmatic manner, trying to keep in step with the trend, which really is your friend." (p. 168)
Richard J. Dennis wrote on the back flap: “This is the best book I’ve ever read on futures trading.” High praise indeed from another legend.