Wednesday, November 4, 2009

Stanley Kroll on Futures Trading Strategy

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.


  1. Dragons and Bulls by Stanley Kroll

    Consistent gains
    The first thing that impressed me was how much Kroll's Dragons felt like and reminded me of Jessie Livermore's How to Trade in Stocks.

    I knew for sure this would be something special because Stanley was not trying to make a textbook or have somebody else write it for him. Unlike many books written for no one in particular, Kroll assumes readers know how to read charts and has had some experience speculating. This book is inner Kroll. Dragons supplements Reminiscences.

    Not written to praise the market or pay homage to his experiments with technical analysis. Dragons covers the essence of speculating whether it is securities that require the greatest risk margin like stocks, minimum margins like futures, or practically no margins at all like calendar spreads.

    It is clear that Kroll dabbled with fundamentals. He got over that. Then he may have gone a little to far with technical analysis. But it is clear that he honed in on his true contribution to trading with Dragons. Stanley finely figured it out. He had to draw on none other than Sun Tzu to pull it all together with a little help from Partridge. Traders should be more concerned with an overall profitable operation than catching tops and bottoms. The most expensive loss effecting success, is the loss of confidence.

    Dragons is light on Livermore the trader, heavy on Sun Tzu the philosopher. It is not so strange that many people expound on a philosophy as life itself draws to a close. Do you suppose this acceptance precedes death?

    The long shot pays better, but the favorite is the way to bet. Presuppose that every with-the-trend trade will be the big one. You maintain your potential for profit when you hold on, build positions, and sell your losers. Buying strength and selling weakness applies to portfolio management, right thru selection of markets to the time differences between contracts. Buy what's going up, sell or even short what's falling.

    Oscillator/ Indicators
    Stochastics – entry
    Parabolic – pyramid and stop
    Macd – trend confirmation
    Bollinger Bands – volatility

    Moving Averages
    Kroll suggests that moving average crossover systems, combined with the slope of the moving average are good enough to confirm a trend. Stanley reinforces a theme that has made has been taught before by Joe Ross in his excellent "Trading Spreads," and by Wells Wilder in "New Concepts," by Jake Bernstein probably in "Seasonality," and spread guru Jerry Toepke of "Moore Research." It does not matter what technical studies that you use, as long as you are comfortable and use them regularity.

    Control losses and allow profits to run
    Limit risk – percent of exchange margin
    Avoid overtrading – churning or too large a position relative to capital
    Cut your losses – advance your stops

    The most difficult part of developing a trend following system is fine-tuning your stops. Using a percentage of exchange margins has the advantage of being related to the volatility, risk, and the profit potential of each market. Another strategy is to advance your stop after each week. You have to develop a method to reenter lost positions as well as build your position in a trending market.

  2. Spreads
    In the early 80's Stanley told me that he did not specifically trade spreads, but sometimes they showed up to advantage requiring fewer margins. Kroll notes that Spreads advantages include higher profits. Here Kroll shows spread charts from the mid eighties and has a whole chapter on spreads in Dragons. Kroll suggests traders watch spread differences as an accurate indicator for managing positions.

    Spread Orders
    Stanley does not mention market on close spread orders (MOC), preferring instead to leg in and out. But he does suggest giving your broker the spread order. Stanley details the three reasons that you might want to place a spread, switch, or straddles order.

    Entering a new trade,
    Shifting forward (rollover)
    Spreading a losing position

    Kroll's tactics remains about the same as he marketed a decade before with Wells Wilder. You can see this in his long-term winners, short-term losers philosophy.

    Kroll sets up for a major move entering with-the- trend positions, and try's to stay with them as long as possible. Diversification with the addition of China stock indexes. Price based entry signals, no longer optimized. No long side bias. Stop placement that allows time & space for long-term trades to develop. Kroll may get in late on an entry signal that is showing a loss, but when he gets stopped out prematurely he would get right back on board a day or two later, when the trend resumed.

    Regardubg Oruce Keveks?

    Just as Stanley likes to quote Jessie, following are some quotes from Kroll's Dragons:

    I am a long-term trader on my winning positions and a short-term trader on my adverse ones.

    Scores of brilliant or lucky market operators have had the heady and envious sensation of closing a position with a million-plus-dollar profit. I too, on a few occasions, have had the good fortune to be included in this exclusive group.

    The traders who make money on a consistent basis are the long-term position traders.

    One of the traits of successful operators is to close out losing positions and stay with, and even add to, the winning ones.

    In two related markets, you should buy the strongest acting one and sell the weakest acting one.

    The most important tactic for consistent and successful speculation is to control losses.

    A long-term holder speculating with the trend should not try to capture small counter-trend profits by trying to get in and out.

    I might lose my position, and with it the certainty of making a big killing with the big move. It is the big swing that makes the big money for you.

    If you exit a trending position, regardless of the reason, and on the close of the next two days the trend is still in the original direction, you should get back on board.

    The most damaging loss, and the one to be avoided at all costs, is the loss of confidence and belief in your ability to trade with consistent success – you must avoid that loss at all costs.

  3. Thanks very much for the comments on Kroll's Dragons and Bulls. I haven't read the book, so your notes were very helpful.