Back in the 1990s, approaching markets from a scientific viewpoint was anathema to trading practitioners, who tended to be bold personalities willing to take on risk. The burgeoning field of technical analysis and systematic trading was viewed with suspicion and its practice was dubbed “arts and crafts.”
Larry Williams was not a trained scientist, but he had an innate sense of applying the correct experimental design and scientific method. Even more than many people coming from physics or other hard sciences, Larry embraced the scientific approach to markets, which is something you don’t realize unless you worked with him directly.
Here, we look at his life, both the man and what he has given to our industry during the last 50 plus years. In many ways, he has been a steward for market analysis, both what has come before him and where it is going in the future. Larry’s life has been about understanding the markets. Running a hedge fund and understanding the markets are different things. Those of us dedicated to research and not as worried about running a large organization understand this. For Larry, it’s always been the intellectual challenge of the markets. Trying to beat them, though no one ever does.
To understand how he arrived at where he is now, you need to understand where he came from. Let’s look at this though the eyes of several of his old friends: Tom DeMark, Ralph Vince and myself. Tom has known Larry since the 1970s through most of his life in this industry. Ralph since the 1980s and me the 1990s. This gives the three of us a unique view together.
Larry’s life away from trading has been interesting. In the late 1970s, Larry developed a penchant for politics and his first foray was a run for a U.S. Senate in 1978 in Montana, which was followed by another run 1982.
Throughout the 1980s, Larry conducted many expeditions in the Middle East searching for Mt. Sinai, as well as in Mexico looking for for ancient artifacts.
As a neophyte in this business several decades ago, Larry took me under his wing. Larry came from the old school thinking that it was the job of the established people in the industry to help foster honest people who do good work in the business to protect future generations. Larry has done this on many occasions throughout his career. He “paid it forward“ before it was fashionable.
Ralph Vince said, “Any good fortune I have had in my work life, I can trace directly back to Larry. If I was in a fox hole, I would want Larry there with me.”
Larry Williams is a loyal friend who takes interest in people who cross his path, even students who have taken seminars with him. Larry continued to help because he wants to share his knowledge for the next generation. Many of my clients were inspired by Larry’s courses, and we have talked about how they started learning about the markets from him. Even if they only took a single seminar, if they reached out to Larry, he would call them back.
Larry’s students have often been winners of the World Cup Championship of Futures Trading. Andrea Unger has won three times: A 240% return in 2010, 115% return in 2009 and an unprecedented 672% gain in 2008. In 2010, Brady Preston finished second. Brady posted a 193.2% net return. Michael Cook won the World Cup Championship with a 250% gain in 2007 and in 2014 with a 366% gain. Students Chuck Hughes, Kurt Sakaeda, John Holsinger and Steve Garner have been past winners of World Cup Trading Championship events as well. What they all have in common is tutelage from Williams. This is in addition to Michelle Williams; Larry’s actress daughter, using Larry’s hotline, had a return of 1,000% in 1997.
Larry, of course, is famous for turning a $10,000 investment into $1.1 million. Many people think this is impossible, but if you do simulations leveraging $50,000 on a one-lot in a single market you are trading (and adding a contract for each $10,000) you can actually get there. Now, things need to go perfect, and this was only really possible in certain years — 1987, 2000-2001, 2008-2009 — when there was extreme volatility. If you added more markets as your account grew, then it got easier. The key was to have nothing go wrong for the first several trades.
Ralph Vince relayed a story at a futures conference in the 1990s about when we were working with Larry and how Larry promised to give him a percentage of the profits from his 1987 Robbins World Cup win. Ralph was shocked when Larry handed him a check for what was about two-year’s salary. That was Larry doing what he thought was right. This was actually a very interesting and key time in money management. Vince worked for Bruce Babcock before Larry, and Tom DeMark recommend that Larry hire Vince. Larry used the Kelly criteria during the start of this 1987 contest. The problem with that is it assumes that the win/loss ratio of the trades is constant, which is not the case. This event led to Vince inventing the optimal “f” system of money management, which was a quantum leap moment in trading. Larry brings the best out in you.
In his own words
Here the protégé gets to ask his mentor questions based on several decades of collaboration and knowledge of his contributions to trading.
Murray Ruggiero: Larry, you first wrote about seasonal relationships in 1970— the first book ever on seasonals — what made you study this?
Larry Williams: The genesis of the idea to do seasonal studies was because of the influence Yale Hirsch had on me. The stock trader’s almanac had some seasonal studies in it about when markets are most apt to rally. There were no definitive seasonal studies done on what I traded — commodities like pork bellies, wheat [and] corn — and there was no definitive study of seasonal factors beyond trading around holidays. Of course, I had read Edgar Lawrence Smith and was aware of the decennial pattern so what I wanted to do was try to wrap all of the stuff up. And that’s what I did, running seasonal studies on virtually all actively traded commodities. It wasn’t until many years later that I worked with trading day of the month, trading day of the week, etc., studies.
MR: How has your use of seasonals changed over the years?
LW: The big change is that almost everyone built seasonal indexes, which used all of this historical data, so the seasonal patterns looked better than they were because they benefited from hindsight. The most important thing is the use of what I call the true seasonal, which uses only the recent year’s data to make trades for this year. This allows users to see how the seasonal pattern has changed over time and gives a valid backtest for seasonal trading. It eliminates the cheating most everybody does with seasonal studies (see “Seasoning seasonals,” below).
MR: Do seasonal studies still have a place in trading today?
LW: This continues to be one of the really helpful tools to isolate the potential for a trade. There’s certainly no guarantee that this year’s seasonal patterns will work, but the relationship between price and the seasonal can often be quite illuminating. When the market breaks patterns with seasonality, we often have major moves.
MR: Tell me the history of your Commitments of Traders (COT) work?
LW: Bill Meehan is the individual who opened my eyes to the COT report data. Bill had been a former member of the Chicago Board of Trade and was just trading. Chet Conrad and Keith Campbell, who’ve gone on to their own fame, suggested Bill and I should get together because I was good at timing, while Bill was good at knowing what markets would move but did not have a handle on timing. Bill explained to me how the COT report information could help us find trades.
MR: How do you use COT data in trading?
LW: I still use the COT data in the same theoretical model; when they get extreme in their position, we’re going to have an up or down move. It is not a timing tool, it is a setup tool and I’ve used it in the same way since 1973.
MR: Do you apply differently to different markets?
LW: I don’t think there’s much difference in any of the markets when it comes to using the COT report, except for stock indexes. That’s an entirely different ballgame because of the hedging between different stock indexes throughout the world. Other than that, it’s all the same; the commercials are the driving force behind the market to set up important moves. Small speculators are usually wrong, especially at market extremes, and the large traders are the driving force of momentum. There are some subtle differences from market to market, and the greatest comes from realizing there are two types of futures: those from natural resources (gold, wheat, etc.) and man-made ones (financials). The point many miss is that commercials are not speculating, they are hedging, so it is the level of their positions versus price that is most predictive. The best signals come from when they are doing what they usually don’t do.
MR: What made you start testing simple trading patterns? How did you get your idea for these patterns?
LW: The reason I began testing simple trading patterns is probably because whatever I had wasn’t working. Necessity is the mother of invention. Tom DeMark showed me a couple of patterns and that really got me excited, so I started doing more work on my own.
MR: Talk about your early work in intermarket analysis. What drew you to it?
LW: My initial work with intermarket relationships was strictly the relationship between bonds and stocks. However, I did notice other relationships; some quite spurious. In the 1970s, there’s a great relationship between pork bellies and silver. It just didn’t hold up. We, as traders, are always looking for advantages in the game; it took me awhile to realize that correlation is not causation.
What I’m looking for is why one market would be related to another market. Stock indexes often correlate quite well to energy prices. What I’ve learned is that there is no locked-in automatic, [intermarket relationships] change as the economies of the world change.
MR: How do you think intermarket relationships as a trading tool will be used in the future?
LW: I’m certain, thanks to the power of computers, people far smarter than I am will find even better relationships between markets. What I think they will also find is that these relationships come and go. The relationship between gold and silver is far different when interest rates are high than when interest rates are low. You have to look at the total picture.
MR: One of your most powerful filters is: Close<Open Buy Day; Close>Open Sell Day. What is the history of this filter and why does it continues to hold up?
LW: By and large, as the market closes below the opening price of the same day, there is a tendency to rally. The opposite is equally true when the market closes above opening. But, that’s just a starting place; there are so many other questions to ask. As an example, say you have a close that is lower than the prior day’s opening but is it above the prior day’s close. Also, it’s had three consecutive down days. Are you at the seasonal low or is it a time when you expect seasonal decline? As mentioned earlier, it’s a broad picture that I think we have to study.
MR: There is talk you have a yearly S&P 500 forecasting model, which combines fundamentals, seasonals and cycles. Can you share it?
LW: I have never fully [shared] my forecasting models, nor will I. They are not based on seasonals. I do have models that forecast based strictly on fundamentals, but those are forecasting the overall trend, not market swings. Because this work is ongoing and I do not feel I have mastered it, I have not divulged how I arrive at the yearly forecasts. Perhaps someday I will, but it is still a work in progress. I do believe patterns in price from the past can be helpful if you find a series of analogs of prices that appear to be similar to what it’s doing now. You can then logically extend what happened in the past into the future. But that is just one aspect.
It is difficult to try and boil down 50 years of work into one four-page article. We’ve attempted to provide not only a glimpse into a legendary market technician but also the man. Larry has been studying the markets for more than 50 years and is responsible for developments in many areas of market analysis that he does not get credit for. He shows how a broad knowledge in the markets — blending both the history of market analysis and newer methodologies — can lead to a true understanding of how markets work.
Larry also gives credit to all those that have come before him. No matter the field of research you are in, you have not done it alone. It’s always built on the top of what others have done. Larry will be a link between the golden age of technical analysis, before computers and today’s computer base analysis, and his legacy is that we will never forget where we came from, because without that knowledge we cannot truly see the future.