This course is a broad overview and discussion of the salient subject areas that one will need to navigate to fully understand the commodity space.
Students will be introduced to what makes each of the commodity sectors tick from an international economic standpoint.
This course sets the record straight about what is a predictive indicator and what is a lagging indicator in the commodity markets.
This course investigates why certain traders become great and why others blow up. Be prepared to journal extensively and learn about your strengths and weaknesses.
Gold: Down trend has been broken
I noticed that there were a few headlines about gold today. Prop traders without a plan, might sit up and take notice. Those of you who who have a daily plan are most likely non-plused.
A few thoughts of my thoughts on gold for some perspective:
- Gold has been in a downtrend, until tonight’s session
- The price move was $12 during the day, and another $14 overnight
- The price move is a little more than 2%
- The 20 day ATR is $22 or about 2%
You have a normal day volatility-wise, yet the $26 move will likely get more headlines than the down trend being broken. It is entirely possible that gold and the stock markets will be correlated in the near term, but that doesn’t mean you can’t make money and eventually trade the divergence.
Gold can get much more cheap – a trend follower might have entered the market short off the rally to the trend-line (in red) if the PRICE reversed. But it didn’t – it rallied through the trend line and the recent down trend has been broken. That does not mean that gold cannot go back down, but it does mean that if you are short, you better have an idea about what your next move is.
A trend follower will be willing to purchase gold (long) at much higher prices if it resumes an uptrend, and not have regrets about how much cheaper it was several days or weeks ago (at today’s prices for example). No one has an idea on the absolute upside, but the odds are with you when you buy as it’s making higher prices.
Marc Rich would only buy if he had another buyer lined up.
Victor Sperandeo would most likely have been short on the reversal at the trend-line.
Jim Rogers may be long and very early, but small enough to not get killed. He would add later.
We will look at the odds and probabilities of such trades in futures posts.
Read MoreBob Prechter is the President of Elliot Wave International. He predicted the crash in 1987 so naturally, when things are looking bleak, he is often a guest on TV.
Prechter believes that “nowhere is safe” in the impending drop that he predicts (except for the US dollar). I disagree with him, but it’s always healthy to listen to dissenting opinions in order to learn.
Maybe Prechter is right, maybe my neighbors-girlfriend’s-brother’s-second-cousin-once-removed is right. If you are an investor or trader, you can put in protective stop orders on your positions so that if there is a strong downward draft in any of the markets, you’ll preserve your equity – which is always the first order of business.
By putting the orders in and leaving them there, you might feel some relief from much of the negative press.
If you are so inclined, you can learn to sell short. By doing so, any downtrend can be profitable, not just market moves to sidestep.
Read MoreThere are 4 things that new and aspiring prop traders should focus on as they develop their trading models and their feel for the market. These are the same whether you want to trade stocks or commodities. Incorporate these 4 things into your daily routine, and you will have a much easier time managing risk.
1. Trend
You need to know the slope of the trendline. If it’s positive or upward sloping, you’ll be biased Long. If it’s negative or downward sloping, you’ll be biased Short. Don’t be cute early on – trade long in uptrends and be short in downtrends.
As important as the slope of the trendline is how you draw the line itself. As defined by Victor Sperandeo in Methods of a Wall Street Master, for an uptrend, draw a line from the lowest low, up to the highest minor low point preceding the highest high so that the line does not pass through prices in between the two low points. See the chart below from Methods of A Wall Street Master.
Drawing the correct trend line (Click to enlarge)
2. Volatility
Volatility, to me, is the personality type of the security. Every security has its own temperament if you will, and you should have an idea if there’s a drunk uncle coming over for dinner or not. Many professional traders measure a security’s volatility by using the Average True Range (ATR) – for starters, so should you.
Like any moving average measurement, you can set the duration of the average to what feels best for you. Shorter periods, like 20 days will respond faster to sharp price moves in the short term than longer periods such as 55 days. The 20-period ATR for Google (GOOG) is $11.88 on average in either direction. ATR is not a directional volatility measurement. So you can reasonably expect GOOG to move almost $12 every day in either direction.
It’s important to understand what the volatility measurement is telling you. The 20-period ATR for Google (GOOG) being $11.88 might seem high, but it is 2.24% of the price of GOOG which is $536 at today’s close.
The 20-period ATR for March NYMEX Crude Oil is $2.22 and since each contract is 1,000 barrels, that equates to $2,220 per contract up or down every day. Given today’s March settlement of $74.76 that would make the volatility for crude oil at 2.97% in terms of daily price swings – and that would be considered normal behavior for the contract.
So although GOOG is over 5 times more volatile than Crude Oil on a price basis, it is actually less volatile on a percent basis, and having too much of the more volatile security can cause for sleepless nights – in Seattle or otherwise.
If you look at several different technical indicators for owning one position, and several other technical indicators for owning the second and so forth, you probably are either a fundamental trader, or you haven’t lost enough money yet with this ethos to know that it’s what NOT to do.
Anyone want to tell me why? Email me what you think.
3. Position Size
You then use the volatility to calculate position size. The more volatile, the fewer shares or contracts in your account. Likewise, the less volatile the security, the more of it you can have in your account – subject to the volume. (If you trade Oats, you know what I mean.)
What you don’t want to end up with is a portfolio of 30 stocks each with 3.33% allocation like the fee-only asset management plans have or own 10 stocks in your portfolio, each with 500 shares. That is a huge rookie mistake that even famous managers make.
You want to own/short fewer shares/contracts to the more volatile names in the portfolio. It’s an inverse relationship.
4. Exit
As the volatility increases, you can cut the size down to mitigate the risk or stay with what you have, but absolutely enter a protective Stop Order to offset all or part of the position if the volatility suddenly jumps.
Final Thoughts
Admittedly, each of these four can be broken down into courses themselves. Trading in line with the trend will keep you trading with the forces of nature at your back and direct you to profitable trades more times than not. But more importantly, it will focus you on playing great defense, and the traders with more than 20 years of experience who are still trading because the focused on great defense and protecting their capital whether they traded stocks or commodities or both.
Read MoreSir Richard Branson is predicting that there will be an oil crunch far worse than the credit crunch and it will happen by 2015. “The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well.” Branson’s Virgin Group is sensitive to higher prices in energy because they need the fuel.
Sir Richard can use the time well to hedge his exposure. Since his firm Virgin Group needs the fuel, they would be buying hedgers (they are short the physical commodity they need, hence they would buy it synthetically in the futures market – short physical/long futures = hedged postion). They will be enthusiastically grateful to find investors/speculators in the market to take the other side of the trade and to assume the risk. What a hedger gains, the speculator/investor loses.
You can trade crude oil futures all the way out to 2018 on the NYMEX. Right now, the price for Feb 2015 is $86.84. Looking at the spreads, the prices from one contract expiration to the next, you can see that Crude Oil is in what is called a Carry-Charge market – aka a market in contango. Each successive month is slightly more expensive that the next to reflect the cost of carry – costs for storage, shipping, and insurance, for example.
Crude Oil is a Carry Charge Market (click to enlarge)
Markets in contango tell us that there is ample supply and that anything produced beyond current consumption can be put into storage. You can watch the spreads – they will tell you what is going on in the market like leading indicators. Right now, they are not predicting tightness in crude oil for 2015 as is Sir Richard. To his credit, he is undoubtedly a visionary and he may see things that the rest of us cannot.
My humble guess is he is saber-rattling for the sake of raising awareness for the need for a better global energy policy (especially in the US). I don’t think there is anything wrong with that. But watch the spreads…they will tell you when to trade on Sir Richard’s clairvoyance. And in all seriousness, he may be as good a market prognosticator as anyone else.
Last week, I wrote about the Oil Barges Coming Ashore. In that post, I noted that the crude oil spreads had tightened to the point where there was no substantial upside anymore to holding the physical crude. Therefore, the owners brought crude to market and either delivered against their futures contracts or sold the crude in the spot market. Crude was in contango then too.
Contrast that with the Sugar #11 market which I wrote about recently in the article entitled Prop Traders Can Sit On Their Hands. Sugar #11 is said to be in backwardation: the spot and front months are higher than successive months. Those spreads are telling you that high demand/tight supply are driving the market and that whatever physical you have, bring it to the market immediately. Do not store it.
Sugar #11 is a market in backwardation (click to enlarge)
Not to be out-saber-rattled, the Saudis said in Davos last week “that the situation was overblown.” Former CIA Operative Robert Baer wrote a great paper called The Fall of The House of Saud in the May 2003 The Atlantic Monthly which scared the living contango out of me…and I trade the crude!
The spreads will tell you when and if there is tightness in the supply horizon before most seers can. Spreads will tighten and markets can invert: they can go from carry-charge markets to backwarded markets. Ultimately, you should trust in the price – it tells you everything you need to know.
Read More
Jim Rogers makes a very bullish call on the US Dollar on CNBC December 10, 2009. The March US Dollar index future contract settled at 7641 that day. Today’s settlement is 7999. So much for bad market timing James.
One of PTJ’s strengths was that he had no emotional need to defend what he did 10 minutes ago.
The financial overhaul is just a speed bump, and a low one at that.
Budgets have to be reined in by cuts, not by raising taxes.
Podcast interview with Mebane Faber, author of The Ivy Portfolio and blogger at World Beta.
Does having financial broadcast media on during the day while you trade affect the number of transactions or types of trades a trader puts on?
Excessive leverage is at the heart of every meltdown.
July 20 2010
The world runs on individuals pursuing their separate interests.
May 16 2010
When really bullish news hits the tape and the market shrugs it off, you have a great low-risk short entry point.
May 11 2010
On one hand you have the “letter of the law” and on the other you have “the spirit of the law.” You better know which side your on. Goldman Sachs did not.
April 29 2010
Germany should not set the precedent of funding the PIIGS.
April 27 2010
