Book Reviews, Trading

Book Review of Dragons and Bulls by Stanley Kroll

The full title of this book is Dragons and Bulls: Profitable Investment Strategies for Trading Stocks and Commodities by Stanley Kroll (1994).

I have an old book of Kroll’s (The Professional Commodity Trader, 1974) that I have been meaning to read for some time. When I came across this book, I figured it’ll be good to read this more recent one, considering that they are written 20 years apart. Another book by Kroll, Kroll on Futures Trading Strategy (1988), is recommended by Richard Dennis (of Turtle fame) on its back cover, who called it “… the best book I’ve ever read on futures trading.”.

According to the book, Kroll was an account executive at Merrill Lynch, started his career in 1960, and made millions from commodities trading. He had also owned a commodity brokerage for 8 years. He took a few years off to “retire” from the market, but subsequently he went to China and was a senior executive at a Chinese brokerage. A forum post noted that he passed away in 1999.

Kroll was a long-term trend-following position trader, who advocates Jesse Livermore’s approach of going for the big win. Entries are taken in the direction of the trend, either on breakouts or retracements. Stops are trailed and positions are held until stopped out. One thing I really like about the book is that example trading strategies were provided, complete with parameter values. Towards the end of the book there is one chapter that supposedly shows Kroll’s own trading strategy, but it turned out to be just an overview of his trading method without the details.

In the book, Kroll wrote about his friendship with Larry Hite, who wanted to get Kroll involved in the new business he was setting up at that time. There is a nice chapter in the book with quotes from Larry Hite about how Hite uses computers to find statistically significant events to trade and make the process unemotional.

All in all, it’s a good read on the methods and thoughts of a market legend.


Who Makes Money Consistently

  • Aside from the small number of professional operators, who scalp in large volume and pay only negligible commissions or clearing fees, the traders who make the big money on a consistent basis are the longer-term position traders. They tend to be trend followers.
  • I have been fortunate to have been on the right side of some big positions and big profits, some of them held for as long as eight or ten months and, as related later, one actually held long for five years.

Go For the Big Move, Even If You Know Most Moves Are Small

  • Every time you assume a market position in the direction of the major trend, you should premise that the market could have major profit potential and you should play your strategy accordingly. By doing so, you will be encouraged to hold the position and not look for short-term trades.
  • Your perception tells you to hold every with-the-trend position, looking for the big move. Your sense of reality tells you that most trades are not destined for the big move. But, since you don’t know in advance which trade will be wildly successful and since you know that some of them will be, the strategy of choice is to assume each with-the-trend trade can be the ‘big one’; and let your stops take you out of those trades which fizzle.
  • The annals of financial markets are replete with real time examples of markets that started most unimpressively, but then developed into full scale mega-moves. Meanwhile, most of the original participants who may have climbed on board at the very inception of the move, got out at the first profit opportunity and then watched as the market continued to move very substantially, but certainly without them.

Never Allow a Good Profit to Turn Into a Loss

  • Advance your stop (if long, raise the stop; if short, lower the stop) after each Friday’s close, by an amount equal to 50% of the week’s favorable move.
  • Eventually, the market will reverse and stop you out; but if you have enjoyed a good run, you will have advanced into a no-loss stop position and, ultimately, a profitable one.

Essence of a Basic Strategy

  • Direction
    • Participate only in those markets which are trending strongly or which are in the process of developing into a major trending formation.
    • Identify the major ongoing trend of each market and take positions only in the direction of this dominant trend, or else stand aside.
  • Entry
    • Initiate your position either on a significant breakout (such as a gap opening on high volume) from the previous or sideways trend, or on a measured reaction from the ongoing major trend.
    • In a major downtrend: sell on (i) minor trend rallies into overhead resistance or (ii) against a strong down trendline, or (iii) on a 45% to 55% rally (or the 3rd to 5th day of the rally) from the recent reaction bottom.
    • In a major uptrend: buy on (i) minor trend reactions into support or (ii) against a trend up trendline, or (iii) on a 45% to 55% reaction (or the 3rd to 5th day of the reaction) from the recent rally high.
  • Maintenance
    • Every with-the-trend position could result in the big move, resist the many temptations to trade for the minor swings, or to scalp against-the-trend trades. Once the position is going your way and the favourable trend has been confirmed by your technical analysis, you can add to the position (pyramid) under specific conditions.
    • Maintain your position until you are stopped out, and your trend analysis indicates that the trend has reversed.
  • Re-entry
    • If you exit a trending position, regardless of the reason, and on the close of the next 2 days the trend is still in the original direction, you should get back aboard. And it doesn’t matter materially if the price is higher or lower than where you exited.
    • You can place an order to re-enter the market US$200 on stop above the high of the day you exited (for a long position) or US$200 on stop below the low of the day you exited (for a short position).
    • Alternatively you can use a short-term entry strategy such as a Close versus 4-day versus 9-day SMA, which can also be effective for getting you back aboard a good trending position.

Illustrative Long-Term Trading Strategy

  • Trend identification
    • Uptrend: Close > 50-SMA
    • Downtrend: Close < 50-SMA
  • Entry and exit signals
    • Buy: Close > 9-SMA > 18-SMA > 50-SMA
    • Sell: Close < 9-SMA < 18-SMA < 50-SMA

Illustrative Strategy that Merges Short-Term and Long-Term Techniques

  • Trend identification
    • The trend is up if
      • The closing price is above the 50-day simple moving average; and
      • The slope of the moving average is up
    • The trend is down if
      • The closing price is below the 50-day simple moving average; and
      • The slope of the moving average is down
  • Trade direction
    • In an uptrend, carry long positions only, or else stand aside. No short positions.
    • In a downtrend, carry short positions only, or else stand aside. No long positions.
  • Long-term signals
    • Buy when Close > 10-day SMA > 20-day SMA > 50-day SMA
    • Sell when Close < 10-day SMA < 20-day SMA < 50-day SMA
  • Short-term signals
    • Buy when Close > 4-day SMA > 9-day SMA > 18-day SMA
    • Sell when Close < 4-day SMA < 9-day SMA < 18-day SMA
  • Rules
    • In an uptrend
      • Buy on the long-term buy signal.
      • Stop out the trade (liquidate only, do not go short) using the short-term sell signal.
      • If you are stopped out and the trend continues up (based on 50-day SMA), re-enter long on the short-term buy signal.
    • In a downtrend
      • Sell on the long-term sell signal.
      • Stop out the short position (liquidate only, do not go long) using the short-term buy signal.
      • If you are stopped out and the trend continues down, re-enter short on the short-term sell signal.
  • Stop size
    • Use an exit stop based on 70% of contract margin, in case the indicator-based reversal flip is slow in getting you out.

Price Inversion Can Point to a Bull Market

  • There is a tendency of many futures bull markets to experience a so-called price inversion, also called an inverted market, in which nearby futures gain in price relative to the distant months of the same commodity, and ultimately sell at premiums to the distant months. This could be due to a tightness, or to a perceived tightness, in spot (nearby) supplies.
  • Traders should watch these spread differences carefully, because an inversion of the normal relationship between nearby and distant futures (on a closing price basis) could help confirm a bull market.
  • In fact, I generally add an additional 25% to 50% to any long position I am carrying following such a price inversion.

Don’t Straddle Up to Avoid Taking a Loss

  • There is a tendency among some traders, particularly in currency or futures markets, to straddle up to avoid taking a loss. Assume for example, you are long May silver with a big loss on the position, and the market is trending down. Rather than take the loss by selling the May silver, some traders would sell July silver instead, effectively locking in the loss at that point.
  • This act doesn’t prevent the loss; it merely postpones it and the losing position still has to be dealt with in unwinding one of the ‘legs’ of the spread. A more logical strategy is to take the loss, by closing out the original position.


Long-Term System

  • Either
    • Close versus 5-day EMA versus 8-day EMA; or
    • Close versus 7-day SMA versus 50-day SMA
  • Buy signal: the first time that the Close + both MA’s line up positive, buy the next day on stop at high of today plus 3 ticks.
  • Sell signal: the first time that the Close + both MA’s line up negative, sell the next day on stop at low of today minus 3 ticks.
  • Use money management stop of $1,500.

Short-Term System

  • Use 60-minute bar charts.
  • Long entry: If Close > 7-SMA > 50-SMA, buy tomorrow on stop at high of today plus 3 ticks.
  • Short entry:If Close < 7-SMA < 50-SMA, sell tomorrow on stop at low of today minus 3 ticks.
  • Initial stop of $600. Advance stop by $300 when you have a $400 profit. Move stop to break even after $800 profit. Do not change this stop.


  • Style
    • Long-term mechanical systems trader
  • Timeframe
    • Tend to remain in profitable trades for at least 9 weeks
    • Tend to remain in adverse trades for less than 3 weeks
  • Diversification
    • 26 futures contracts.
    • Bellies, British Pound, Cocoa, Coffee, Copper, Corn, Cotton, Crude oil, Deutsche Mark, Euro-Dollar, Gold, Hogs, Heating oil, Japanese Yen, Silver, Soybeans, Sugar, Swiss Franc, T-Note 10-Year, U.S. Bond, Wheat, Hang Seng Index, Nikkei Index.
  • Account allocation
    • Not more than 30% of each account’s equity is utilized for margin trades, remaining 70% is invested in T-Bills and held in reserve.
    • Typically trade just 1 to 3 contracts of each market for accounts up to $100,000.
  • Risk control
    • Initial risk, or money management stop, is placed at less than US$1,500 per contract.
    • Stops are entered daily before the markets open and every position will have a stop in force each day.
    • Risks an average of 1% to 2% of the account’s equity (depending on size) on each market position.
    • Stops may be based on volatility, amount of profit in the trade and time in the trade.
    • In some markets, which have historically trended well, he may not trail his stops. In such markets, the trading models are deemed to have sufficient sensitivity to respond to trend changes in a timely manner.
  • Strategy
    • Generally takes every trade generated by the system. Does not try to pick tops and bottoms. Almost always in the market for most of the contracts.
    • Entry and exit signals are price based.
    • Signals are not optimized and the same indicators are utilized for all markets.
  • Re-entry
    • If stopped out prematurely and the following day, the market trend remains the same, get back aboard the market in the same trend direction using the objective entry strategies.


Avoid Overtrading

  • One should not use more than one-third of the capital in a speculative trading account to margin positions, keeping two-thirds in an interest-bearing reserve, as a cushion. My general rule is to utilize a maximum of one-third (for futures and currencies) or one-half (for securities) of the account capital to actually margin positions.
  • In trading stocks, it is recommended that you do not use more than, say, 35% of your capital to margin positions; and for futures, not more than 25%.

Diversify Across Markets

  • Furthermore, it is a good idea to diversify into about 10 markets, so that a miscalculation or a mishap in one market can be cushioned by the performance of the overall portfolio.
  • Dividing the amount you have available for margin by 10 (more, for a big account) different markets, gives an indication of how big a position to take.

Limit Risk on Each Position

  • As % of capital
    • Establish a maximum loss limit on each market to say, 1% to 3% of your capital, the precise amount depending on the size of the account.
    • For smaller accounts, it might not be practical to try to limit losses to 1%, as your stops would be so tight as to result in a string of losses due to whipsaw moves.
  • As % of contract margin
    • Equate the risk on each position to the respective exchange minimum margin, then limit risk to a percentage of such margin (e.g. 70% of contract margin).
    • As a rule of thumb, you should probably not risk more than 40% of margin on a stock trade, or 70% on a futures trade.
  • Based on volatility
    • Stock traders can limit speculative trading risks based on the value of the investment, but the precise amount would depend on the volatility of the stock, with a more volatile stock requiring somewhat looser stops. Such loss limits could be between 15% to 20% of the investment.

Close Losers When Meeting Margin Calls

  • When confronted with the request for additional (maintenance) margin, the appropriate strategy is to liquidate some positions to eliminate the margin call and to reduce your risk exposure.
  • Those positions which show the biggest paper losses when marked to the market, should be closed out especially if they are moving anti-trend. By maintaining the most profitable positions, which are trending in the direction of the dominant market trend and possibly even adding to those positions (pyramiding), you are maintaining your potential for profit.


Strike Fast!

  • When you are trading markets, whether you are a day trader or a position trader, and get an actionable signal from whatever timing indicators you are using, make the trade, and make it fast!
  • While others are waiting to find out why a particular move is occurring, you should be in there with your order entered, and ready to act on whatever strategy you are using.
  • This is a fast-paced game, and you must be bold and ready to move, whenever your signals ‘tell’ you to go. This is not the time to hesitate or be timid. Don’t worry about being wrong — your stops will protect you against big losses. But, nothing can protect you against being timid after you get a valid trade signal from a technical method that you believe in.

Reward Yourself

  • Whenever I am in a difficult, extended campaign, and I do something smart (or lucky), I usually reward myself with some tangible that provides satisfaction.
  • This might be a special dinner or, more recently, I bought a camera that I had been admiring, from the winnings of a very profitable trade.

Why Paper Portfolios Perform Better than Real Time Portfolios

  • In paper trading, there is only the desire to win. In real time trading, there is principally the fear of losing.


Be in the “Good Bets” Business

  • I consider myself to be in the good bets business. That is, through the use of a computer, we search for good bets and try to play only good bets. If the bet does not meet our standards, we throw it out, even if it is something that someone else might jump at. This is analogous to actuarial work.
  • Upon further reflection, he told me that a major part of his success was due to his ability to calculate the odds of winning in each position, and to place his bets (positions) accordingly. When he looks at trading opportunities, he doesn’t really see markets and positions. Instead, he sees probabilities, risks and rewards.

Trade for Profits, Not for Excitement

  • I began to devote my resources to developing an unemotional, risk averse quantitative approach to the markets. Price data was subjected to rigorous computer testing to determine if they were recurrent statistical events. If so, then the events were subjected to further testing using strict risk parameters to determine if such a disciplined methodology could be consistently profitable.
  • Essentially, what I did was to take a highly charged, exhilarating profession and turn it into an actuarial process. I de-emotionalized markets and trading and reduced them to a probability study.
  • I discovered that, yes, I could risk a very small part of the farm, and make above-average returns with reasonable consistency. Yes, I could totally avoid any interpretations of chart patterns or underlying supply and demand that impact a particular market and my returns would not suffer. And yes, I could diversify into many markets, remain extremely disciplined, and still show an appealing return on investment.

Use a Maximum Percentage Draw-Down Risk Parameter

  • Although we are sometimes involved in as many as 50 markets at any given time, we have a set risk parameter, or stop level, in every one of these 50 markets.
  • Beyond that, we use a maximum percentage draw-down, which relates risk on each position to total equity. That is, we limit the risk on each position in our portfolio to 1% of the account’s total equity, based on closing prices.
  • Anytime that the loss on any position, as of the close, equals 1% (or more) of total equity, we liquidate that position the following morning.


Moving Averages

  • Buy / (sell) when the faster average crosses above / (below) the slower average. This signals an up / (down) trend.

Directional Movement Index

  • Trade only those markets withanADXR above 25/30.
    • Trending market: ADXR > 25/30 or rising 3 points in 1 week.
    • Non-trending: ADXR < 25/30 and momentum is negative.
  • Signals
    • Buy = up index (+DI) crosses above the down index (-DI)
    • Sell = down index (-DI) crosses above the up index (+DI)
  • Stop out positions using the Extreme Point Rule
    • On the day that +DI and -DI cross, use the extreme point made that day, as the Reversal Point.
    • If you just went long, the reversal stop point is the low made on the day of the crossing.
    • If you just went short, the reversal stop point is the high made on the day of the crossing.
    • Continue to hold this position and the stop, until you are stopped out, even if the lines have crossed.
  • Trend change
    • In strong uptrending moves, the +DI and the ADXR turn up early and move higher, with the +DI generally holding above the ADXR.
    • A high probability signal that the uptrend has stalled or ended is generated when the ADXR line crosses above the +DI, and then turns down. This signal commonly occurs on the day of the trend change or slightly before.
    • It rarely takes more than a few days past a true trend shift to see the ADXR turn down. A warning that a top may be near is often signalled when the +DI stalls and turns down from a high level.


  • Watch for divergence between the %D line and the price
    • %D should be in the overbought zone (above 80) for a sell.
    • %D should be in the oversold zone (below 20) for a buy.
  • When divergence occurs, the trigger is %K crossing %D
    • Buy signal: When both lines decline into the 20-30 range (or lower) and then %K turns up and crosses above %D within that range.
    • Sell signal: When both lines advance into the 70-80 range (or higher) and then %K turns down and crosses below %D within that range.

Bollinger Bands

  • Sharp moves tend to occur after the bands tighten towards the moving average in the centre.
  • A price move outside the bands calls for a continuation of the trend, not an end to it.
  • A move originating in one band tends to go all the way to the other band.
  • One should start reducing positions when the price goes well beyond both bands.

Relative Strength Index (RSI)

  • Method 1
    • Buy when prices diverge lower and RSI is rising
    • Sell when prices diverge higher and RSI is falling
  • Method 2 (works best in trending markets)
    • Buy when RSI crosses above the 50% RSI line
    • Sell when RSI crosses below the 50% RSI line


  • SunTzu
    • Plan for what is difficult while it is easy, do what is great while it is still small. The most difficult things in the world must be done while they are still easy, the greatest things in the world must be done while they are still small.
  • Jesse Livermore
    • I know that if I tried to trade against my position by taking the counter-trend moves, 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.



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