Louis Mendelsohn Interviewed Live on Tiger Financial News Network

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President and CEO of Market Technologies Interviewed Live on Tiger Financial News Network

Tuesday, January 23, 2001

TFNN: We’ve got a very special guest today. I want to welcome Louis Mendelsohn. He just wrote a nice book; it’s Trend Forecasting with Technical Analysis, and I want to thank him and his son for actually coming. He’s from Tampa and they’re right in the office right now. Hi Lou, how are you doing?

Mendelsohn: I’m doing great Tom.

Thanks for coming by. So tell us a little about this book. Tell us exactly what’s in this book and what the trade secrets are.

Well the book deals with the subject of intermarket analysis, which is essentially looking at the relationships that markets have to one another and how they influence each other. I’ve been involved in the financial markets for close to 25 to 30 years. Back in the mid-80’s I began looking at the globalization of the markets and how they were affecting each other and I started to develop software that would take those relationships into consideration. That whole arena started to materialize more in the ‘90’s. John Murphy who wrote the Forward to this book, he himself had written a book in the early ‘90s on intermarket analysis. It’s just an area that I feel is extremely important. Traders are still looking only at single markets by themselves focusing only on the internals of a market. I’m not suggesting that they should stop doing that. It’s certainly something worth doing; but it has to be augmented by looking at how markets affect each other. To get a broader picture, a bigger picture. And that’s really what I’ve been doing for the last fifteen years or so.

You know what’s interesting is that John Murphy we have him on many times and he actually did a workshop with us and it was a fabulous workshop on intermarket analysis. And the fact of the matter is it seems like this day and age, and in fact I saw this in your book, about globalization, you better make sure you’re into it because no matter where something happens, it does affect the economy, it’s going to affect us.

And it’s not going away, it’s only going to accelerate and become more globalized and the traders I feel who are not paying attention to this are just going to be left in the dust. So that’s my focus. That’s what I have been really paying attention to, and developing software and using quantitative ways of finding those relationships and finding the hidden patterns between the markets and then using that to be able to make forecasts of market direction.

Leading forecasts right?

Developing leading indicators that can forecast trend direction.

Let me ask you. Neural networks. I’m looking at neural networks. Can you tell our listeners exactly what that means?

Well, it’s a mathematical tool that finds hidden patterns in data. And that’s basically it. It looks at large amounts of data. We look at volume very much so. We pay particular attention to the futures markets, looking at open interest and volume as well as price data. We do that on ten markets simultaneously all focused on one target market. So if we’re looking at treasury bonds, we’re looking at treasury bonds plus nine other markets and putting all of that information into the computer and having it find relations between those related markets, those intermarkets, and the treasury bond market and that allows us to make predictions of the treasury bond market. We make very short term predictions. We’re not looking ahead six months or a year. We’re actually only looking ahead as much as four days.

What types of futures do you do? You like the futures and the commodities markets?

Mendelsohn: Well, that’s what I’ve been involved with since the ‘70s. I was involved in equities and stock options in the early ‘70s and mid-‘70s, but I got involved in futures in the late ‘70s. You and I were just talking about that.

How I got taken to the cleaners on my first futures trade, folks. Three thousand down the tubes in about 35 seconds.

Well, it’s very serious business because of the leverage involved and the fact that you’re using margin money in a very fast paced arena and so you need good tools and you really need to have your head screwed on right and know what you’re doing. It’s not to be played with. And we were talking about futures on individual equities. When that comes about that opens up a whole new arena for equity traders and they’re going to need to pay serious attention to not only the futures markets and how they operate and function and so on, but also again the intermarket relationships between futures and equities and between the stock indexes and the individual futures on stocks that they might be trading.

Let me ask you this. Do you deal with cocoa?

Mendelsohn: No more. Now I did make money in sugar. I never lost any money on orange juice. No, my focus is on the financial futures.

Oh nice, because they’re really liquid too. That makes sense.

: Well they’re very liquid, and it’s my interest. I’m in a position where I can pick and choose what I want to do with my research and development efforts. Cocoa is not high on my list nor are feeder cattle or live cattle. I focus on the interest rate complex, stock index complex, energy futures, and foreign currencies. And that’s plenty.

So like if we deal with the Yen, the yen and the dollar. What are the relationships between some of the foreign currencies or whatever intermarket relationships you’d like to bring up.

Like I said, we would look at ten markets that might affect the Yen. It’s all run through the neural networks and that’s what allows us to make the predictions. So what we do is we’re predicting a number of things. We’re predicting the next day’s high and low. We are predicting moving averages. I happen to like moving averages. It’s something that I’ve used for several decades now. But the problem that I’ve found with them, and it’s an obvious problem, is they tend to lag the market. And over the years traders and technical analysts have made great efforts to try to minimize that lag effect, with exponential moving averages and all different types and variations. My thinking is that if we can forecast moving averages, by looking at the intermarket relationships between these related markets and make predictions of moving averages that are highly accurate which we have been able to do, then moving averages are no longer a lagging indicator. They become a leading indicator. That’s really beautiful because they are excellent at identifying the current trend. And if you can turn them into a leading indicator and have them be forecasted for a couple of days out into the future, you’re in a position to use them to make very precise decisions about when to get in and get out, but you’re doing it as the market is making the turns, as it’s making a top or a bottom, not three days later. You get in late and get out late and give back profits and that’s what traditionally has happened to people who use trend following technical indicators. But if you’re developing leading indicators and making forecasts, you’re able to catch a much bigger chunk of the move.

What happens here folks, as Lou is speaking about trends and how you’re catching them, the fact of the matter is that every trader and especially if you’re trading everyday, intraday, you’re looking for that move because you know as soon as the cross over takes place what will happen is that there are many computer programs that are going to fire it off and there are plenty of people sitting there that are going to fire it off and the fact of the matter is that’s where all the gravy is in the trade. There’s no two ways about that. Folks Lou has a website you can take look at. It’s ProfitTaker.com. Lou, let me ask you. What do you think about how all this equity trading has just taken off. Last year you could have thrown a dart and every one makes money and now the carnage in the market. In the futures market you see that type of devastation, but in the equities market, this is a little bit different.

I talk about that a little bit in my book actually. Bull markets make everybody sound like they’re a genius. And what it tends to do is people become over confident, they get sloppy, they don’t do their homework and then they have their head handed to them. I was involved in the stock market back in ‘74 and that was real. When the DOW goes down nearly 50%, think about it. That would take the DOW down to around 5,000 and change. Just imagine how people would be feeling right now tonight if the DOW was at 6,000. That’s what ‘74 was like. I think the pace of trading in the equities market last year and in the last couple of years it parallels futures trading. I mean it’s showing that there is a convergence of futures and equities. It’s really the same animal. It doesn’t matter what name you put on the market. There’s a chart, there’s movement, that’s it. You still have to be able to analyze it, and it really doesn’t matter if it’s Intel or if it’s treasury bonds.

Right. I want to thank Lou Mendelsohn for coming in today. He just wrote a book Trend Forecasting with Technical Analysis. You can go to his website. It’s www.vantagepointsoftware.com. Lou, thanks for coming in. We’ll have you on again for sure.