Al Weiss – The Human Chart Encyclopedia

Al Weiss is a commodity trader who exclusively uses charting techniques. He is profiled in Jack Schwager’s book The New Market Wizards, where his chapter is called The Human Chart Encyclopedia.

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This article is part of our ‘Guru’ series – investor profiles of those who have succeeded in the markets, with takeaways for the private investor in the UK.

You can find the rest of the series here.

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Al Weiss

Al Weiss – I couldn’t find a photo – is a commodity trader who uses charting techniques to trade within his firm AZF Commodity Management.

Weiss generally kept a low profile and resisted Schwager’s attempts to interview him for many years.

• He would later state that he wanted a decade of superior returns before he felt able to claim that his methods worked.

He was also worried that publicity would attract the wrong sort of clients.

• He was eventually profiled in Schwager’s book “New Market Wizards” (1992), by which point he was no longer accepting new money in any case.

His chapter (one of the shortest in the book, and which Schwager describes as one of his most difficult) is called The Human Chart Encyclopedia.

Getting started

When he was in his twenties, Weiss invented the urethane skateboard wheel, which made him rich.

• He invested the profits in real estate, which was also very profitable.

Weiss then spent four years looking at thousands of chart patterns – dating back as far as the 1840s – before he ever traded for real.

Performance

Weiss had a great track record at the time of his interview with Schwager.

• Over the previous 10 years, he had averaged 52% pa, turning $1K into $53K.
• During that decade, he met only five of his clients face to face.

And these gains were made with low drawdowns – his largest loss was 17% during 1986.

• In the four years before the interview, his return was 29% pa, with a maximum drawdown of less than 5%.

Other traders

Weiss likes to invest his own money with other traders.

• He has reviewed the track records of 800 traders, choosing 20 to work with.

He tries to blend their styles to ensure both outperformance and low drawdowns.

• Over the four years preceding the interview this group averaged 19% pa, with average maximum drawdowns of less than 3% pa.

Trading style

Weiss is a technical trader, who looks for chart patterns.

• He trades the commodities markets via futures.

He doesn’t use fundamentals because:

The markets operate more on psychology than on fundamentals.

One of the keys in long-term chart analysis is realizing that markets behave differently in different economic cycles. Recognizing these long-term patterns requires lots of history.

Identifying where you are in an economic cycle -say, an inflationary phase versus a deflationary phase – is critical to interpreting the patterns.

Weiss attributes his better performance than similar technical traders to the fact that most traders only look at more recent charts (say the past 30 years).

• He also thinks that the fact he adds an economic cycle overlay to his interpretation of a pattern gives him an edge.
• And finally, he looks for combinations of patterns (what he calls “patterns within patterns within patterns”) rather than, say, a simple head and shoulders pattern.

He finds multi pattern combinations more reliable, but claims that:

A pattern that works 50 percent of the time can be quite profitable if you employ it with a good risk control plan.

Cycles

There are cycles in everything-the weather, ocean waves, and the markets. One of the most important long-term cycles is the cycle from inflation to deflation.

About every two generations – roughly every forty- seven to sixty years – there’s a deflationary market, which lasts between eight and twelve years.

Weiss identified the last commodities deflationary cycle as commencing in 1980, making it almost 12 years old at the time of the interview.

I think we’re very close to a major bottom in commodity prices.

In fact the bear market in commodities limped on until the far end of the 1990s, before a bull market in the 2000s (the China-driven “supercycle”).

Quotes

Markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations.

Cycle lengths vary greatly from market to market. Grains are heavily weather dependent and you may get bull markets five times every twenty years. In gold, a major bull cycle may occur only three to five times in a century.

Conclusions

There’s not too much for the UK private investor in this short chapter, other than the fact that some people seem to be able to make charting work independently of fundamentals.

Weiss’ insights into using chart pattern combinations rather than individual patterns – and his overlay of economic cycles – are interesting, but without specific examples they aren’t directly tradeable.

As Schwager notes, Weiss’ enormous levels of research and his own interpretation of his outperformance imply that to make money from charts, you need to approach Weiss’ level of skill.

• Which means that it won’t be easy.

Until next time.