By Allen Sykora

The backbone of Mike Chalek's trading is the Dual Thrust system that he developed himself, which has been ranked highly by Futures Truth over the last decade. But, Chalek has learned along the way, there are factors just as important as a successful trading methodology, such as discipline and money-management skills.

Chalek is a Commodity Trading Adviser who advises a pool of money for One World Capital Management and achieved a 48 percent return for the year 2000. If Chalek keeps up the current pace in 2001, he should have an even better year. He is also a computer modeling expert and systems developer in the stock and futures markets who does consulting work for others on money management and methodologies, as well as custom research.

He came to the markets after an earlier career in electrical engineering. Over the years, he has been associated with a number of well-known traders in the industry, including Larry Williams, Bruce Babcock, Joe DiNapoli, Walter Bressert and Howard Abell.

Chalek works from an office at his home near Estes Park, Colo., the gateway to Rocky Mountain National Park.

Dual Thrust is a stop-and-reversal system that can be used by traders who are not able to watch the market throughout the day because of other jobs. However, Chalek also uses other methods to take his profits more quickly when certain profit targets are met, rather than giving back a portion of the open profit before a signal triggers the stop-and-reversal.

Dual Thrust is a function of dynamic volatility and a unique price-structured pattern, explained Chalek. When used collectively, it gives inherent support and resistance levels in the market. We are looking for a breakout with either of these points and treat the signals as a stop-and-reversal methodology. The system appears to work rather well on the S&P intraday charts using time periods of 30 minutes or greater.

A pit trader could use it if he had a computer on the side, possibly using one- to two-minute bars. This would only be good for a fast scalp. Not much could be said for a fundamental trader because this is mathematical methodology.

When Chalek developed Dual Thrust, he needed a stop-and-reversal system where he wouldn't have to watch the market all day long, since he also had a full-time job at the time with Bell Laboratories (AT&T).

Right after the markets open, an individual gives a stop to a broker and walks away, he said. You don't even have to watch the markets for the rest of the afternoon.

Dual Thrust helps Chalek find certain levels which, if broken, means there likely will be a short-term move in that direction for a couple of days to a week.

But while Dual Thrust is the backbone of his trading, Chalek does not always wait until stop-and-reversal points are hit before he will capture a profit. As is the case with many methodologies, he explained, once there is a large profit, a sell or buy signal to capture the profit is not triggered until a certain amount of the open profit is given back. So often, Chalek use other money-management techniques to go ahead and capture profits at certain profit target levels. In particular, he cited John Sweeney's Maximum Adverse Excursion and Maximum Favorable Excursion for getting out of the markets at strategic price levels.

This technique emphasizes the study of momentum during a specific trade, explained. Chalek. Just about any open trade experiences different momentum cycles during the trade.

Chalek has been able to quantify when to add on additional contracts during the course of the specific trade. Depending upon the system that the trader uses, there are noted specific times that a trader will add to the trade, he explained. Momentum can have differing speeds during the trade, sometimes not detected until several days later during the trade.

Currently Chalek is exploring another new technique to quantify a way to use different volatility price bands.

If the price action during the last 'x' days demonstrates shrinking volatility, then we determine that action in mathematical terms and increase the stop appropriately. Due to this new technique, our net profit analysis in the Nasdaq 100 market has more than doubled while the drawdown was cut by 30%.

Money management is a critical part of any trader's repertoire, related Chalek.

Money management is always half of your methodology. Anyone can always hop into the market, but it takes a smart man to know when to get out.

I've seen a lot of guys with mathematical models that are nice models, but if you don't have the money-management module layed over your model, you can get hurt. Drawdown is what knocks people out of this game. If you don't have a money-management strategy, you're on thin ice.

Chalek related that he has been studied several money-management methodologies and concluded not all of the concepts work. He has been working with Leo Zamansky and David Stendahl, of Rina Systems, Inc., to develop strategies that can be adapted to various trading systems.

Discipline is also vital to trading, particularly when using a system, related Chalek. He recounted that in the mid-1980s, he and a dentist friend who had helped him develop Dual Thrust, Allen Ko, each began trading with the system. Between 1984 and 1987, Ko parlayed $25,000 into more than $2 million. Chalek's account grew to around $500,000.

The difference in growth between the men's accounts was due to Ko's discipline, continued Chalek. At the time, he continued, Dual Thrust was still a crude model without money-management guidelines, which sometimes meant big drawdowns.

He would stand there and wait them out, said Chalek. Then he would come back up and make money. My discipline in trading was not as good as his. Sticking to a system was extremely hard, especially during the drawdown periods.

In fact, Chalek added that often it can be advantageous for traders to avoid watching a market too closely so they do not make decisions based on their emotions. If you're a 'newbie,' it's probably the worst thing you can ever do.

He recounted that an S&P trader once told him about a time he took out a position, then was severely injured in a car accident. Lying in a hospital bed, the trader could not get out of his position for six days and was oblivious to what was happening during that time. Yet, that ended up being his most profitable single trade ever.

Continued Chalek: I honestly don't know anyone who can watch the market real-time and actually make money. I'm not saying they don't exist. But I just don't know anybody.

Chalek encouraged novice traders to do their homework and make their own decisions, rather than relying on the advice of brokers. He advised them to study the markets and wait to trade for at least a year, adding that there is so much material for them to digest nowadays that there is really an information overload.

Chalek first began trading in the stock market shortly after graduating from the University of Illinois with an electrical engineering degree in 1973. (He later got a master's.)

At the time I did not know what a bear market was or that we were in one, he said. My unskilled experience led to some very gut-wrenching experiences with several stocks. I knew nothing of 'selling short;' just buying stocks. I accumulated shares in Teleprompter, Combustion Engineering, Pizza Hut, Williams Co. and a few others along with an inept stock broker. Within six months I lost my entire savings of $5,000. It was time to hit the books.

My first encounter was Nicholas Darvas' 'How I Made $2,000,000 in the Stock Market.' It was actually the best book to start with. Both sides of the trading equation (technical and fundamental) were touched. It didn't take me long with my engineering background to go with the underlying principle of technical analysis for possible trading success.

Chalek then read other technical-analysis books such as Technical Analysis of Stocks and Commodities and Joe Granville's A Strategy of Daily Stock Market Timing. Chalek later met Granville and ended up doing research for him, determining that if somebody had used his On Balance Volume theory back in 1929, they would have dumped all of their stocks in August, ahead of the infamous October 1929 crash.

Chalek wrote his own newsletter during 1980 while working at AT&T as a development engineer.

I came up with a proprietary pattern of volume and price to detect trends within the overall market, he continued. One of my clients introduced me to a Ed Walter at Bear Stearns, who in turn knew and traded for Larry Williams. Larry at the time was looking for a computer analyst and someone with a market background. For the next several years, I did research work for Larry and found the experience to be a significant stepping stone in my life in pursing the technical nature of markets. I quickly found that trading commodities was the way to go, if any serious money was to be made at all. I began trading the futures markets with consistent success when I adopted a mechanical approach.

Chalek eventually came up with Dual Thrust. Over the years, Futures Truth ranked Dual Thrust among the top 10 systems and on several occasions the No. 1 trading system. During most of 1998, Futures Truth ranked it the No. 1 S&P system and in the top 10 when trading a basket of commodities. Chalek personally traded an account for a close friend, turning $90,000 into $325,000 in nine months during 1998, despite not taking all of the signals.

Chalek began to manage money for One World Capital Management when his broker offered to raise capital. He is currently working with Thomas DeMark, a highly regarded trader, in an effort to combine some of DeMark's indicators into Dual Thrust.

When Chalek takes a break from the markets, he enjoys his surroundings just outside Rocky Mountain National Park. He recounted an incident in his backyard in which he watched an eight-point elk intimidate a smaller bull into leaving, so the larger bull would have a small harem to himself.

Chalek also spends much of his spare time as a political activist working to have adoption records opened in every state. He was adopted himself. In December 1999, he became the first person in U.S. history to have his adoption annulled, and his original birth certificate was simultaneously amended to add his birth mother's true name.

He had felt tormented by unfulfilled questions about his birth and biological parents. "I wondered every single day who I really was," he said.

In 1981, he found a document that named the hospital where he was born. But it took 18 years before a judge granted him access to his confidential records. He eventually learned that his young mother had sold him for $200 after a baby broker coerced her into giving up her son under an assumed name. His mother tried to get him back but was told she'd signed the papers, according to the story.

The mother, now in her 70s, and son have been reunited. Although Chalek's adoptive parents and the baby broker are dead, Chalek filed his lawsuit in Florida, where he was born, making legal history by seeking to annul his adoption and get a new birth certificate.

As a part of his efforts to help other adoptees, Chalek has set up a web site at www.adoption-fraud.com.

As for trading, Chalek commented that there is no Holy Grail, but that he looks for techniques that produce more winners than losers. He outlined some of his approaches and ideas on trading:

"I use candlesticks, cycles, trendlines and some Fibonacci analysis to determine trend, direction, as well as support and resistance. I do not use those everyday price patterns such as head and shoulders. They tend to fail more often than not. At times I will even employ some seasonal analysis.

"I like to use a 47-period exponential moving average on all of my time frames. You will be able to identify the trend. Let's say I am day trading the S&P 500. I use two different time frames, the 30-minute chart that gives a good intermediate time frame and a 3- to 5-minute chart as a short-term trend to determine entry and exit signals.

"I try to look for Fibonacci retracement patterns to qualify as a preliminary entry or exit signal. They are very powerful and do occur often. For example, I look for a strong rally of some sort on a 30-minute bar chart with at least 8 to 10 rising candlesticks.

"We will label this rally as from Point A to Point B. Next I look for a retracement of about 38.2% from the high of Point B. Prices usually retrace 38% after a strong rally or 62% after a weaker rally. The slope of the rally therefore is somewhat subjective. When prices come down to the expected retracement area, Point C, I then look for a candlestick pattern to determine a buy point. The most effective candlestick and most reliable tends to be what is known as a 'hammer' formation. This has a body (open to close) that is formed at the top of the candlestick and is no larger than 50% of the entire range for that bar. This type of price pattern actually brings about another price pattern known as the 'measured move.' In other words, the distance between Point A and Point B. is added to the bottom of the retracement move (Point C) to get a objective target (Point D) to tell us where the move will probably end. This will also give us a good place to take our profits."

Chalek also likes to look for support and resistance with the application of mutual Fibonacci retracement levels. He called this probably the most reliable point for any entry or exit technique that he knows of, then gave an example.

Let's say there is price action in which prices moved in an upward 5 wave pattern. Prices moved from Point A to Point B, then retraced somewhat to Point C. Prices then resumed the rally from Point C to Point D, where prices begin a retreat to Point E. Finally, prices resume the rally from Point E to Point F.

"We then do a retracement analysis from A to F and record the levels. We do the same thing from Point C to Point F and Point E to Point F. Each calculation will have three numbers that we work with (38.2%, 50% and 61.8%). We look for buy retracements that coincide with other buy retracements. These types of levels provide very strong support levels and should provide good buying opportunities."

For example, let's say that the retracement levels from Point A to Point F provides a 38.2% level that is coincident with the 61.8% retracement level from Point E to Point F.

"We would be buyers at that level. The same analysis can be applied for downward price action. The retracement levels you would calculate are now resistance levels instead of support levels for any selling opportunities.

"You are also able to apply mutual retracement levels on different time frames. In other words, a 38.2% buy retracement level on a 30-minute chart could be somewhat similar to a 61.8% buy retracement on a 5-minute chart. All of this is somewhat subjective, but with a little practice, it should all fall into place. In real time, when I calculate my retracement levels, I prefer the price swings to be at least 250 points. I try to use these mutual levels and not individual Fib levels for my buy and sell points. You will get fewer trades, but the trade off will be more quality trades.

"I use the 47-minute exponential moving average to determine the trading range. If prices are trading in an upward trend on the 30-minute chart, then the moving average should confirm this by having an upward slope. The same holds for a downward price pattern. What if the 5-minute chart is in a trading range with the moving average remaining relatively flat? I normally combat this with an indicator known as the Keltner Channel. I look for sells when the top of the channel is reached and I look for buys when the bottom of the channel is reached. The Keltner Channel forms an envelope around the moving average. It is somewhat like the Bollinger Band concept.

"Another ingredient to my trading style is the usage of Stochastics. The masses use it to buy or sell depending when the 'K' and the 'D' cross one another. This indicator is used for confirmation purposes only when entering or exiting a trade with the Fib level techniques I just discussed. I use this on both the 30-minute and 5-minute charts. One of the best uses of this indicator is when you have divergence with price. If prices are going up at the same time the Stochastic is making lower highs, you have an overbought condition. The opposite is true for prices going down; you are looking for an oversold condition. For that matter, other types of oscillators such as RSI and MACD are just as valid. I try to filter out the divergences by using a triple as opposed to a double divergence. This usually gives more quality to the trade.

Another type of indicator to which he is partial is the Ultimate Oscillator, which he co-developed with Larry Williams back in the early 1980s. Chalek considers it good for longer time frames such as end-of-day.

"I also use longer-term position trading with daily and weekly charts. I use services with a 7 Bar ADX Line and 14 Bar Slow Stochastics charted under the weekly price action. I initially look for the DMI to cross above the 45% area while the Stochastics are in oversold territory. These two conditions seem to prove that a major buying opportunity is right around the corner.

"My entry technique involves using a 3-bar pattern. I first find the lowest low seen thus far. I then count back three bars including the lowest low bar. The buy stop would be the high of that third bar back. The same principles apply for sell signals. When the DMI increases by crossing above the 45% area, I look for Stochastics to enter into an overbought region. I then look for the 3-bar pattern. I find the highest high made thus far. I count back three bars including the highest high bar. The sell-stop entry point would be low of that third bar. You will see these types of patterns proliferating on several weekly charts. This type of trading technique will get you on board and stay with the trend a lot longer."

Chalek noted that choosing software to trade is a very tricky task, then offered his suggestions.

"Do not rely solely on such third-party reviews as Futures Truth. They are only part of the equation. The user should ask the software provider where he got his data source from when he back tested the software model. This would also imply such things as whether the developer used actual contract data as opposed to continuous generated contract data. I have found vast differences when applying the two approaches. My software has a rollover feature that painstakingly applies actual contract data and will ask the user when to roll over into the expiration month. TradeStation does not provide that kind of option. Watch out!

"The aspect of drawdown can mean different things to different people. I have found some software developers to actually use closed-position drawdown and not mark-to-market open drawdown, which simulates a real-life situation. A good software package will provide an ASCII data option, since most data vendors allow you to convert their particular format into ASCII data. This is a universally accepted data format that can be readily imported into any text editor.

"The developer should provide full disclosure of his methodology. This will give a higher comfort level to the end-user. Otherwise, you simply can't trust the software. If he had errors in the software, you would have no means to cross check his results.

"It would be important to know how many parameters the system is using. Anyone can take a methodology and curve fit it to his liking by using an over abundance of variables. I have found personally over the years that if a system has more than five variables, it falls apart soon after its release. Just peruse the Future Truth rankings and see for yourself.

"Dual Thrust uses a total of four variables and I consider that a limit. As an extension to this argument, ask the developer to provide a three-dimensional profit curve for a wide range selection of his variables. This is a good way to visually see if you have a good robust model or just some isolated area of profit surrounded by an abyss of losses. In the February/March 1998 issue of Futures Truth, Dual Thrust was put to the real test. They applied it to over 60 domestic and foreign markets. On top of that, they chose only one parameter set for all of the markets and found it to be a very robust system by performing in almost all of the markets.

"The real test would be for the purchaser of the software to ask the developer for any real-time results of anybody using the model. That should flush out about 90% of the noise factor. Unfortunately, with the advent of TradeStation, there has been a proliferation of software developers that has exponentially risen over the years. TradeStation has several bugs in it which have not been resolved to date. There is some Monday-morning quarterbacking going on in that some unscrupulous developers have been taking advantage of this weakness. Supposedly this is being taken care of in Version 5.0. Therefore, the platform for developing the software model is very important to consider.

"Another facet to the software model would be the amount of markets that it can trade. There are too many systems out there that only trade one market. A more robust system will trade several markets. That could be considered by many to be a form of over-optimization."

Optimization and curve fitting are really two different things, added Chalek.

"I have seen a lot of vendors submit their systems with a set of selected parameters to Futures Truth only to see their rankings fall apart a short time later," he explained. "This is because the model was not correctly tested for robustness. Often times, the vendor will give them the best selected parameters based on net profit. If the markets change somewhat over time, then the model will be adversely affected. By displaying a 3D surface graph to the optimized model, you can quickly attain a visual feel for the most stable region. That way, you are minimizing the problem of falling into the trap of curve-fitting."

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. RESULTS ARE NOT ADJUSTED FOR COMMISSION AND SLIPPAGE.

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR ("CTA"). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTERESTTRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS BREIF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR ON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT. OTHER DISCLOSURE STATEMENTS ARE REQUIRED TO BE PROVIDED TO YOU BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU. PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT STATEMENT.

PLEASE NOTE: Past results are not necessarily indicative of future results. You can lose money trading futures. In fact about 95% of all future traders lose money.