Larry Williams' Principals and Insight into Becoming a Better Trader

Sep 19, 2015 -

Larry Williams is a well-known trader and newsletter writer in the stock trading space. He has over 40 years of experience in the market and has written numerous books including Trade Stocks and Commodities with the Insiders: Secrets of the COT Report and How I Made One Million Dollars ... Last Year ... Trading Commodities. There is something to be learned from someone who has been in the markets for 40 years and been extremely successful. We were extremely lucky to be privy to a recent interview Larry Williams was a part of. Below are some notes we've gathered from the conversation.

1) Fundamental and technical analysis both work, however they will only work under the right market conditions whether it be a bull or bear market. 

For example, in the latter stages of a bullish market, as a buyer, you might find companies with low P/E ratio to be few and far between. Therefore, if you stick with fundamental analysis, you will most probably miss out on buying opportunities you'd otherwise find through technical analysis. In technical analysis, your focus is more on supply and demand in what is most likely a shorter time frame versus how well a company is fundamentally performing over the long haul.

2) For commodities, retail traders like to buy strength, but commercials like to buy weakness because the cost is less. 

Our interpretation of this is that most successful traders buy strength because of human behavior. People see an underlying asset like a derivative of oil go up, they jump on it for fear of missing out even if the prices jump and then more people jump on it. Until of course the prices become too ridiculously high and then people try and sell to lock in their profits. Commercial companies that use commodities like to buy at low prices because it keep their cost of goods sold lower. If revenues are constant and you reduce costs then you'd have better margins.

3) Most indicators are redundant, RSI (Relative Strength Index) and STO (Stochastic Oscillator) are the essentially the same. There are a lot of things to look at, but when using an indicator understand the purpose of the indicator you are using. 

There are a lot indicators out there that essentially do the same thing. Both the RSI and STO both help to determine overbought and oversold conditions. While there are evidently cases when regardless of whether or not a stock or index is overbought, prices continue to print higher. The key is not to have too many, keep it simple, and don't use the same overlapping indicators.

4) Trade your personality, find the system that fits you and lifestyle. Can you trade during work or at home? Do a personality check.

One thing I've learned through trading in the stock markets for about 10 years now is that you have to trade your personality. Take someone else's trading plan and trying to trade against that typically doesn't work out unless the both of you have the same personality. Each of us have a different risk tolerance and financial needs. You should only trade with what you are willing to lose and not only that but you have to be comfortable with actually losing that amount.

Market Related Information

When interest rates go up, stocks have historically been hit hard in the short-term, but you'll want to buy that weakness. The logic behind this is that when rates begin to go up, more people will feel goosed into borrowing and that leveraged money will go into consumption and production.

Market tops are typically well formed and structured thereby also taking a long time to develop. On the other hand, market bottoms are based on crashes and plummet on panic.

How many positions should you hold? 

Any more than 4 positions is a lot of multi-tasking.  For Larry Williams, 3-4 positions is plenty. Any more than that require too much multi-tasking. In addition, he typically puts on a 2% - 4% risk of total trading capital on each trade. Losing four consecutive trades at 4% risk would be a 16% drawdown.

What is the biggest lesson Larry has learned from trading? 

He learned to be humble when you are winning and learning from other people. All highly successful traders are a little unsure of themselves, so they never bet big. None of these successful individuals have had high levels of emotional response to things and therefore don't get emotionally rattled.

What are the four steps to making a trade? 

Find condition, find the entry, set your target, create trailing stops.

What are some other interesting tips and tidbits? 

1) Conditional traders look at conditions, seasonality and overlay technicals.
2) Trading should be like combo lock where you need to get a number of factors going your way.

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