Created by Denny Lamson

The Lamson Grail Timing Indicator is an integral part of how we execute the Short Side Strategy highlighted in the book 'Discover the Upside of Down.Here's a look at that Grail Trading Discipline, starting with the Grail Indicator itself.

First, let's be clear that the Grail is an indicator and not a trading system. It is not a foolproof moneymaking machine, but rather one powerful component or tool to be used in executing a disciplined trading methodology.

The laws of the market (primarily commodities and secondarily stocks) are no different than the laws of nature. The Grail Indicator is structured with two laws in mind. The first is the law of 'regression to the mean' and the second is the law of 'inertia.'

Let's look at how the first law, 'regression to the mean,' applies to markets. If things are going much better than normal (the mean), then they tend to get worse. If they are much worse than normal, then they tend to get better.

Stocks and commodities normally trade in ranges. Those ranges are a great example of the law of 'regression to the mean.'

First, the market diverges (moves away) from the mean, then it returns to the mean only to diverge again either in the same or opposite direction, which is followed by yet another move back to the mean. The trick is to understand what constitutes the mean, and when a significant divergence away from the mean is achieved.

That brings us to the second law of 'inertia,' which is basically Newton's First Law of Motion. It may be stated as 'an object in motion tends to remain in motion, while an object at rest tends to remain at rest, unless acted upon by an external force.' So, how does this law apply to trading and managing money?

For the most part, prices in markets are in perpetual motion. Motion away from the mean eventually slows and then stalls when highs or lows are reached. Then a change in direction begins, attempting to 'return to the mean.' If we define motion as momentum (away from or toward the mean), then rest is defined as lack of motion or compression (oscillation in a tight band around the mean).

With these laws in mind, here is the list of the design goals for the Lamson Grail:

1. The Grail should work in any market (stock, bond, or commodity) using a single set of parameters. No tweaking of settings should be necessary within a market, and only minimal adjustments between major market types.
2. The Grail should work equally well in any timeframe, ranging from one minute to one month.
3. The Grail should correctly identify and signal the tops and bottoms of price swings.
4. The Grail should correctly identify and signal when a market is compressed and ready to move out of compression, either up or down.
5. The Grail should correctly identify and signal when a market moves into a high momentum state.
6. The Grail should correctly identify and signal when momentum starts to stall.

Ideally, the Grail should identify three critical moments in time:

• when a market is overbought (much higher than the mean)
• when a market is oversold (much lower than the mean)
• when a market is compressed (trading around the mean)

These three circumstances provide us with the most favorable risk/reward entry and exit points where the odds are the greatest of making a profit and minimizing our risk.

This is what the Lamson Grail Timing Indicator is designed to do. Now let's consider how it is used within the Grail Trading Discipline.

There are five specific rules we follow:

1. Diversification: The beauty of combining commodity markets with stocks is that it provides us with an environment where we have multiple non-correlated markets to trade. Nobel Prize winning studies have shown that when a portfolio includes non-correlated assets, there are two positive results.First, the volatility of the overall portfolio is generally reduced, and second, the overall return is generally enhanced. In the Grail Trading Discipline, our goal is a minimum of five and preferably ten low or non-correlated markets or market sectors within a portfolio. Of course, the size of an account can limit this number.
2. Limited Leverage: Here is the classic quote concerning leverage: 'Give me a place to stand and a lever long enough and I will move the world Archimedes, 220 BC. This may be true, but we are not trying to move the world here; our goal is to make a decent, steady return on our investment.Most of the horror stories a person may hear regarding commodity or stock account blowups, is due to excessive leverage/margin. This is generally caused either by ignorance of how leverage works, or by a foolish lack of discipline due to uncontrollable greed.In the Grail Trading Discipline, our goal is to carefully limit our leverage, while still having the flexibility to enhance returns when circumstances dictate. As a general rule, we use an extremely disciplined approach to leverage and margin.
3. Loss Limits: Taking losses is the hardest part of any trading discipline. There is something very psychologically challenging about admitting that a signal has failed, and that the right thing to do is lose money on a trade by taking a loss. The temptation is so strong to just ignore the fact the position is losing money, or to just hope that it will come back. To be successful over the long haul, a trader, or a trading system, must adhere to strict loss limits. In our Grail Discipline, we manage to a strategy that attempts to limit losses to no more than 1-3% of the account value should be lost on any one trade in the commodity accounts we manage and in The Questus fund, our private investment partnership. In our managed fee based accounts we (aim, or our goal is to, we plan on) limiting losses to 5-7% on any stock we take a position in. Of course markets sometimes have very dramatic moves that can produce losses beyond those amounts. To state the obvious, there are five types of trades. 1) Breakeven, 2) small gain, 3) large gain, 4) small loss, and 5) large loss. If our loss limit discipline can eliminate the large loss, we should make money over time..
4. Discipline: (make a plan, work the plan) or in this case, our plan since we have the Grail, is to work the Grail! This seems so obvious, yet it requires great discipline to resist the temptation to either ignore a signal (because you fundamentally disagree with it) or to take a trade without receiving a signal (because of a gut feel or whatever). In other words, 'No improvising!' Our plan is to implement the Short Side Strategy guided by the Grail Indicator and confirmed by detailed fundamental research. And that is what we intend to do.
5. Patience: is the final, essential component of our Grail Trading Discipline. It may take days or even weeks for a Grail buy or sell setup to occur, which can be a lot like watching paint dry. But overtrading is far worse than not trading at all. Chasing markets can be deadly, while the cost of sitting on the sidelines is merely frustration and boredom. Our goal is to have the patience required to take only the best buy, sell, and short signals for our managed portfolios.
Denny Lamson, Creator of the Grail

Disclaimer: It is important to state the following disclaimer. While we believe that we have a good 'card counting' system in the Lamson Grail Indicator, markets do what they will regardless of what we want them to do. Remember, past performance is never a guarantee of future results. There is always a risk of loss when trading stocks, futures, and even bonds ' but especially in the futures market.

Risk Disclosure: Futures and options involves substantial risk of loss, and is not suitable for all investors. Only risk capital should be used. Margins are subject to change. Past performance is not indicative of future results. An investor could potentially lose more than originally invested.

Options Disclosure: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options, Options Disclosure Supplement, April 2008, Options Disclosure Supplement, June 2008 and the Options Disclosure Supplement, September 2008. Besides being accessible via our Web site, copies of the ODD are available from your Vision sales representative, or by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.