The Striker Report - gold standard for objective trading research

Chuck LeBeau

Founder of System Traders Club

Interviewed by John F. Gallwas, Founder of Striker Securities, Inc.

Chuck LeBeau (66) co-author of "Computer Analysis of the Future Market", also founded the System Traders Club in 1998, which provides its more than 13,000 members with educational material and guidance relating to the design and testing of trading systems. Mr. LeBeau, recently donated his extensive personal library on trading to the Cornerstone Investors Network (Southern California) reference library before moving from California to Arizona and semi-retirement.

John Gallwas: Now that you are settled in Arizona, with your background and experience as a broker, system vendor, CTA, educator, and author, what areas do you plan to focus on in semi-retirement?

Chuck LeBeau: I'm still unpacking and the new house is keeping me busy. Once I have more time I would like to catch up on my writing. I have two books that have been started and need to be finished. I also need to spend more time working on my TraderClub.com web site. It's been neglected and it is badly in need of a makeover. I'm trying to learn some basic web programming so I can maintain the site myself and keep in closer touch with our 13,000 members.

The new house is on the ninth fairway of a nice golf course near Sedona so I also want to spend some time working on my golf game.

John Gallwas: After California State and a tour with the U.S. Army, you started as a broker with E. F. Hutton in 1967. Briefly tell our readers your background and how it lead you to the development of the System Traders Club

Chuck LeBeau: Well, I got involved in testing systems way back before the there were any personal computers. I was the commodity broker at the E. F. Hutton office in Torrance, California and our office was surrounded by big aerospace corporations like TRW, Northrop, and Hughes. These companies had billion dollar contracts with the government and they all had big main-frame computers that took up several air conditioned rooms and had to be tended 24 hours a day by a staff of computer technicians.

I was fortunate that those computer technicians were my clients and they were allowed to use the computers while they were working. The computer guys would come to me for trading ideas to program and test. I had about six programmers that would test various ideas and then we all would get together on Saturday mornings and discuss the test results. The ideas that we tested were very simple and there weren't really that many strategies to test at that time. Most of the stuff was basic trend following using moving averages and various types of breakout strategies.

Most of what we tested did not work very well. You might be interested to know that in this early testing work the strategy that produced the best results was something known as Dunnigan's One-way Formula. It was a simple ABC pattern or "W" pattern that was later promoted extensively by Ken Roberts who made the system very well known under a different name. I know of successful traders who are still using this basic pattern but now it's referred to as a "fractal" and part of Chaos Theory because there are small "W" patterns within bigger "Ws" within bigger "Ws". The secret to success seems to be in using the correct time frame to identify the pattern.

As you can see I got started in this system testing and development at a very early stage. This was many years before personal computers and fifteen and twenty years before the introduction of programs like "System Writer" which eventually evolved into TradeStation � and the formation of the Systems Trader Club.

John Gallwas: In you opinion, what were the major developments that caused significant changes in the way markets perform since 1967?

Chuck LeBeau: I think that the opening of world trade in the 70s has brought about the biggest change in the agricultural markets. Commodity pricing has always been about forecasting "supply" and "demand". This trade expansion changed the pricing of commodities from supply driven markets into markets that were priced based on the demand for the commodity. For example the all-time high for Soybeans was $12.90 in July of 1973. Very few traders will recall that this was the largest Soybean crop in history at the time so everyone was betting that the prices would drop and overlooked the importance of the demand created by opening up our markets to world trade. In the new era of world trade rather than focusing on the size of the crops we had to focus on how much China and Russia intended to buy. Forecasting supply is easy �it's more or less like counting or taking an inventory. But forecasting demand is always much more difficult � we don't have any way to measure how much of a commodity someone will want. Fortunately for those of us trading during this period the demand-driven markets resulted in much bigger trends so the 70s became the golden era of trend following. Huge fortunes were made on the simplest trend-following systems imaginable. You just had to have the guts to step up and buy the highest prices in history and hold on. It might sound easy but believe me without the advantages of hindsight buying historically high prices was not that easy and holding on was even more difficult.

The second factor that has changed trading over the years was the introduction of financial futures. In my mind the fundamental price forecasting of stock indexes and interest rates is much more complex than forecasting agricultural markets. As the financial futures grew in popularity I think that reliance on technical analysis has replaced much of the previous reliance on old-fashioned fundamental analysis. As technical analysis has become more widely accepted it has lead to the popularity of systems based on computer analysis of technical indicators.

John Gallwas: How can a trading system based on technical data keep pace with these changes in the marketplaces?

Chuck LeBeau: I think that system developers have to work harder on developing systems that can adapt to changing market conditions. We need to use tools like Average True Range (ATR) to set stops and profit targets instead of using a set amount of dollars or a specific number of points. Systems based on ATR can adapt to changes in volatility so that the stop points and profit targets will stay in line with current market conditions and will adapt when those conditions change again.

Even with the use of ATR tools I think we must always be prudent and assume that all systems will eventually fail. We need to do a better job of monitoring our systems and look for signs of failure before we lose too much money. Unfortunately I think that we are still in the dark ages as far as monitoring systems. The industry only seems to recognize failure after we have lost 50% or more, which doesn't make much sense to me.

John Gallwas: Your many fans who read this interview, will want to know: What's new with Chuck" and we want to give you the opportunity to respond.

Chuck LeBeau: I am presently working on developing systems that control other systems. Most systems don't make money at a steady pace. Systems have "hot steaks" and "cold streaks" based on the underlying market conditions. I think that it is possible to objectively quantify the conditions in the market that determine the success or failure of particular systems. The "control system" would look at the big picture and monitor the general market conditions in order to switch the sub-systems "On" or "Off" as the market conditions dictate. If the control system works as intended the sub-systems would be operating only during favorable market environments. With lots of sub-systems being monitored and switched "On" and "Off" appropriately we might be able to make money all the time. Now wouldn't that be nice!

Thanks for thinking of me as someone worthy of an interview. I don't know nearly as much about systems as I would like and I'm still trying to learn more - even in my retirement. Fortunately I enjoy the work and the challenge. It's quite a bit like playing golf.

This interview is for informational purposes only and is not intended to be a solicitation of any kind. Trade only with risk capital. The risk of trading can be substantial and each investor and/or trader must consider whether trading systems are a suitable investment.