Lee Gettess Focuses on Controlling Risk

By: Martin Chandra



Trader Lee Gettess focuses on risk control as a major factor in determining his success in the commodity markets. However, it wasn't always that way. Gettess received his introduction to the commodity futures markets via a telephone call from a broker. "He told me how Omar Sharif had made $50 million in the sugar market, with a $50,000 account," Gettess said. The broker said the same pattern that occurred in sugar and made Sharif that bundle was occurring again.

"So I gave him $10,000 and three weeks later, he gave me $3,000 back," Gettess said. "But I realized if I could lose the money that fast, I could make the money that fast," he added. He launched into a study of the futures markets.

At the time, Gettess had a computer background. "I tried to read everything I could get my hands on ... and the technical side was more appealing to me: I guess I'm more of a left-brain person," he explained.

He "dabbled" in trading in the mid-'80s, but didn't begin trading, from off the floor, full time until Oct. 12, 1987-just days before the stock market crashed. "The only thing I knew how to trade was the S&Ps," he said. However, Gettess escaped relatively unscathed from the crash. "I was on the wrong side of the market ... I lost $1,500 ... But, you can take a loss and be absolutely wrong and can congratulate yourself for doing the right thing," he said referring to getting out of the trade at the right rime and risk control. "I was able to take a $1,500 loss--that was a good trade," he added.

"Back then everyone told me commodities were too risky and the ones to definitely stay away from were the S&Ps and pork bellies ... so that's what I decided to trade. You want to be where the action is ... you want to be where the profit potential is ... but a trader's job is to control risk," he explained.

Gettess has used his computer background to develop over a hundred systems over the years, including one about 10 years ago called the Volpat Trading System, which was picked by Futures Truth as "one of the top 10 trading systems of all times." The acronym "Volpat" stands for volatility and pattern recognition. "Volatility-in that you need an active market. If a market isn't moving, you can't make any money," Gettess said.

The patterns are "short-term stuff .. that are objective enough that you can tell a computer to look for them ... you can test all kinds of combinations of things," he said. "One of the patterns-a big outside day, closing on the lows ... most market lore says this is very bearish. What I found is if the market starts up the next day you probably want to buy it. It was observational-this should be really ugly, but I'm looking at the market and it doesn't look so ugly," he explained as the thought process behind picking out par-term for computer testing.

Gettess typically puts on trades that last from one to three days and he favors markets with liquidity. "Lumber and orange juice don't interest me too much," he said referring to two thinly traded markets.

"My favorite market today is the bond market. It is so big and so liquid I can move any type of size with good execution," Gettess said. Also, "I can control risk better there than in the S&P pit," he added.

Everything comes back to risk for Gettess. "The only thing a trader can control is risk. If you go into a market and you say, 'I don't want to lose more than $1,000 on a trade'...there may be overnight gaps and slippage, but you can be pretty sure you won't lose more than $1,000 on a trade," he explained.

"I know how much I'm willing to risk, but I have no idea how much the market is willing to let me take out of it-if all the market is going to give you is $500, you have to take it," Gettess added.

"My whole focus is that you've got to control the risk ... that's what all the top traders do," he concluded. However, while Gettess uses protective stops for his position, he doesn't always have a stop-loss on a trade. "I follow the markets during the course of a day and in front of a news report I won't put my stop in-because the markets can go nuts for a brief period of time after the news ... and after that I can decide if I still want to be in," he said.

However, on the use of protective stops he cautioned, "Risk (control) doesn't mean using outrageously tight stops-a floor trader can sneeze and the market moves $100. My research indicates that you want to give the market a fair amount of room for higher chance of success."

In terms of advice for beginning traders, Gettess warns, "Don't have unrealistic expectations."

"People ask me what's the best way to trade-that's an impossible question. I can't tell you what's going to suit you," Gettess said, implying that each trader needs to find a trading method that fits his or her particular personality.

"It's the ultimate job as far as I'm concerned. When I was working for General Motors, they had a great benefit plan, and everyone told me this was a great, secure company to work for. But, then one morning, I woke up and I didn't work for them anymore even though they liked me and gave me good reviews. It made me realize that security is based on self- reliance," Gettess finished.