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Larry Williams How to Trade on the Side of the Smart Money

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One of the best setup conditions for trading involves the positions of “commercials,” the hedgers whose business decisions move markets. Larry Williams’ pioneering analysis of the weekly CFTC Commitments of Traders report has produced indicators that reveal when and how the status of these traders is shifting and why these big boys are usually right about price moves.

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I’m talking with Larry Williams today about his indicators exclusively in TradeShark.  We are going to focus today on the commitment of traders report.  It’s very important and Larry has some things to say about that.  It’s put out by the CFTC and a lot of traders are looking at it these days.  Larry, a lot of traders are looking at it these days but they may not know what they are looking at.  Talk about first of all, why the COT report is important.

The commitment of trader report is published once a week by the United States government, one of the good things the government does for us and it tells us, it breaks down into 3 categories, people operating in the market place.  First of all a group called the Commercials.  These people actually use or produce the commodities.  So it could be say ah somebody that is growing wheat or it could be Pillsbury that is using wheat, that’s the Commercials.  Then there is another group of large traders that used to be people like myself that traded in large quantities.  In today’s market though that’s really the Funds, they have a lot of Funds that are now trading.  They are primarily trend followers.  So that’s the second group.  The third group is the average trader, that’s called nonreportable positions or small speculators.  So its small specs, large specs and the Commercials, those are the three groups.  The important group that I have noticed over the years is the Commercials.  I first started to write about that back in 1970, literally the first person who ever about it.  There was one little tiny article that I stumbled across in about 1968 about somebody in the industry was talking about Commercials and my mentor Bill Meon, who had been a member of the Chicago Board of Trades, said Larry, it’s all about the commitment of trader report and he explained to me the commitment of trader report is invaluable but you need to understand how Commercials operate in the markets.  They don’t try to buy the lows and sell the highs, they are hedgers by definition.  Once you understand that they are hedging and how they handle price, it’s an invaluable indicator. 

So what have you done within TradeShark to make it easy for traders to digest that information and take action on it?

We made it easy to use the commitment of trader report by putting it in the indicators and the important thing isn’t just the indicator, there is a lot of COT indicator out now based all on my book, my writings from the 1970’s.  However, it’s the significance of the relationship of price to the commitment of trader indicators and the time frame.  Because, when you stop and think about it obviously gold that can last importunity it probably has a different time cycle than hogs that are born and in 18 months later are killed.  So this is an 18 month cycle, Commercial industrial cycle in that market that doesn’t exist in the gold market.  So each market has a natural cycle and need to be measured by the business cycle of that market.  Stocks is a good example, stocks clearly have a 13 week cycle in them, why? Because every 13 weeks we get earnings reports coming out.  So you want to look at the commitment trader report with a 13 week view.  So the time period that you use for these markets, that’s critical.  I’ve developed these indicators, my version of them which so many people are following now, stopped working about 1999.  About 1998 we developed new COT indicators for the electronic markets and there is a world of difference between the typical COT indicators and mine.  I mean a huge difference.  Mine work theirs don’t, it’s just as simple as that.

Now you’ve talked about the Commercials and watching what they are doing is so important.  Is the indicator about following what they are doing and piling on on top of that?

Not quite, that’s been some academic studies on, say if you buy when the Commercials are net long you might lose money and that’s true because the Commercials come into the market, they buy and then as the market moves up they will liquidate their position.  So it’s not like a light switch, the switch is off, the switch is on, long, short, you have to understand, I have to teach people that.  That what the TradeShark people help people do.  Look, the professionals, the Commercials are accumulating, it doesn’t mean we are going to rally now.  Think about this, if you’re a Commercial, your Cadbury, you make a lot of candy and the price of sugar goes down and goes down more you’re going to buy more sugar because your still selling a candy bar for $3.00 but your cost of sugar is now less, if it goes down more you’re going to buy more sugar and more.  So they tend to buy weakness and sell strength.  Remember they are not buying to sell sugar they are buying to take delivery of the sugar and use it in their product.  So when they’re heavy buyers it says we have a condition here, it doesn’t mean rush in and buy today.  We still need to bring something like my trend measurements in to say ok, they’ve accumulated, trend has changed, now let’s go long this market.  It’s a combination of ingredients.

Now a lot of people think about indicators as signals to buy but probably this is as important is staying out of the market when you shouldn’t be in it.  It sounds like this helps you do that.

Oh yeah, I’ve had a lot of losing trades.  I know a lot of times I should have stayed out of the marketplace.  You need to have something that says we’re set up, now we take a buy signal or trend change.  A trend change signal when there is no condition for a rally isn’t going to work or it won’t work very well.  So I want to find the condition, my gosh, the Commercials, what a phenomenal condition.  This is the biggest money in the marketplace.  We know when they are heavy sellers or heavy buyers, that’s our condition.  Then you can bring in a trend measurement and say OK, the trend is changing, now let’s get aboard.

If I have questions about using these indicators, because there is a lot of complexity behind then.  I know it’s simple to use in TradeShark.  What are my options, what do I do if I have questions?

Well the biggest option is to go right to your representative at TradeShark and they can help you with the indicators.  They can review it with you and they have learned to do this, not only because of looking at my work but because they have taught it to other people, so they understand this.  They watch the markets, they follow the markets.  You’re going to get support.  That’s what’s really critical for me to give my indicators to somebody.  I don’t want to just say there’s some indicators, I want people to follow my indicators, to know how to use them and to have some support with them. 

The trading decisions that traders make based on your indicators, do they need to start at a certain experience level or a certain dollar amount in their account?  How does that work?

Well, you have to have at least $1.00 in your account obviously you have to have some money to trade with.  But your experience level, I think, my personal view Tim is it is better if somebody comes with no experience.  Then they don’t learn all these things that they have to unlearn later on.  They have no experience in trading and go, oh, this is the rules of the game, this is how it’s played, these are the indicators, like ok, I got it, this, this, this, this…  It’s much better to start there than have all these preconceived notions in your mind of things that simply don’t work.

And I suppose you can use these indicators on their own, but so you recommend using several in conjunction to see there matching and see that they are agreeing in what to buy or sell.

I like to have a couple indicators confirm.  I like to see that the Commercials are long, that the public is short a market so we have a ducks position here, the pros are saying, look, we should buy it and the public is saying, oh no we want to sell it, cuz they are usually wrong in the market place.  I want a couple, three things like that.  Then I know I’ve got a good setup.  When I was a kid there was an ad on the radio for something called Anacin.  Anacin is like a Dr.’s prescription, a combination of ingredients.  Now it’s stuck in my head as a little kid, like, oh yeah, probably better to have a combination of ingredients, especially when I started trading, why would I want just one tool?  I want a couple, three easy to understand, easy to follow but all speak from a different vantage point.  One talks about Commercials and one about cycles, one about the public.  When all those come together coalesce my opportunity for trade, the accuracy of being correct will be substantially higher.  So I wait, I do a lot of waiting.  I do more waiting than trading because I want to be successful. 

Larry, with 50 years of experience in the markets, you’ve been trading for a long time and holding these indicators kind of for your own trading for a while, why release them now.  What is it about now that makes it the right time?

Because I’m 72 years old.  I’m not going to be around forever, I know that.  I certainly from this point forward want a lot less contact, I want to just trade.  So it’s nice that people can take my indicators, they have some support staff with the indicators.  But I’m really getting out of the business as opposed to getting into the business.  So, this is a little bit maybe egotistical on my part, say here’s my indicators guys, go enjoy these things, work with them, they work for me, they work for a lot of other people.  I think they’ll work for you.  So it’s part of the legend in a way, say hey, look, I want to create the Larry Williams legend I can’t do that if people don’t see my tools.

Larry, thanks for your time.

Thank you Tim.

We’ve been talking with Larry Williams whose indicators are available exclusively in TradeShark.

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