Archive for the ‘Trading’ Category
…When reached by phone, one liberal filmmaker said “They ARE doing God’s work,” sniffing between tears. “I think I am in love with these capitalists after all.”
You know you won’t see such a headline tomorrow so I wrote it. This is not a blog post about the horror that occurred this weekend in Japan as much as it is an indictment on the MSM and how much more American media could go to educate Americans in financial literacy. Of course, they are not concerned with anything but their ad rates.
If copper was up 10 cents, you can figure for yourselves what headline they’d make up to sell “papers.” I guess in the end, not even sensational headlines can help a sh*tty newspaper prop up their sh*tty stock.
Since the public will probably never see an unbiased media write about commodities and the roles of traders and investors, this would be a good time to explain to everyone one of the two functions of the commodity markets and the collective actions of its participants: price discovery.
Despite the horrific catastrophe in Japan that puts the human loss at about 2.5 to 3x that of 9/11, the copper market is open for business. It is telling everyone who cares that there is so much copper out there, that despite the sizable rebuild that Japan will need to undergo, prices are between 4 and 6 cents cheaper than from those of Friday’s close.
How valuable is information when you need it most?Read More
You are capable of controlling your whipsaws to some degree by monitoring you position size and adjusting it accordingly. This is true whether you run a computerized system or are a discretionary trader.
As volatility increases for the contracts you are long or short, you’re likely to see your equity get whipped around more. That can be trying on your nerves. If you don’t have a friendly, neighborhood Trading Tribe ™ to go visit in order to uncover what those nervous feelings are trying to teach you and where you may be feeling them in your body, you can read a little about them here.
If you are a systems trader, you are likely to be long several commodities listed in the chart. The “% Change ATR” column represents what has happened to the 20-Day ATR since February 1 through the 28th. If you are fully-loaded with cotton or crude oil, for example, you may find that your account equity is getting whipped especially due to either of these contracts. What to do?
Cut the position down to better keep a lid on your daily change in equity. You can do this by hand or you can program it to take effect once the ATR has increased by a specific percentage.
Did you say daily equity ? Yes, if you are going to approach an allocator, they will almost certainly ask to see your daily equity run. If it’s more that 0.50% you are considered very aggressive. It’s not bad, but it’s not likely to help you get an allocation. When I speak about his in the Mentoring Program, eyes start popping out of people’s heads. Allocators don’t need you to drive volatility: they can get that on their own without you and your fees. Low vol is an asset to an allocator as much as your alpha and small drawdowns.
If you are a discretionary trader, you are likely trading around core positions or swing trading. Seeing gigantic swings in your equity might be what trading is all about for you. Just keep in mind that if you see a one or a two-range day in the direction of your liking, you can absolutely see a two to four-range day against you. I have had them happen to me. Use your protective stops all you want, but when you wake up and the contract is off 2 big numbers, there’s not much you can do. Your first loss is your best loss at that point.
Regardless of your approach to risk management (what everyone else calls trading), the result and the shape of your equity curve that you garner can be controlled to some degree if you learn to “prune your hedges” and keep a position size on that if it goes against you, can’t kill you.Read More
[The Trader Mentoring Program starts March 1.]
So now that the trade is on, let’s see how the market moves in the respective contracts affect your trading equity. Here’s a chart of the spread through Wednesday’s close courtesy of FutureSource.com.
Short May Cotton
Long December Cotton
You can see how the May and December contracts traded on their own in the calendar strip above. One was up, the other was down. In this case, both moved in a favorable direction as far as the spread is concerned, but it doesn’t always work out that way…so don’t get your hopes up that this happens all the time because it does not.
You can derive the same spread chart at FutureSource, which I advise you learn to do.
Go to “Get A Chart” and enter the following syntax where it says “Symbol or Contract.” Then click the green button “Get Chart.” (There’s a graph below that shows you what to put where.)
= (‘CT Z1′ – ‘CT K1′)
There are spaces between the contract symbol and the expiration months in the equation above.
CT = Cotton
Z1 = December 2011
K1 = May 2011
It should look like this:
The spread widened approximately 5 points (3.70 + 1.36) which equates to $2,500 per spread. The margin for the spread is $2,800. I wouldn’t get hung up on making the big gains. I would, however, focus on how much the margin and the volatility mean to your account. You get paid to manage your downside and play good defense.
I need to get writing. Apparently I have a book coming out.Read More
Yesterday we looked at the spread and how it cut volatility in an otherwise very strong directional market. The spread itself was flat when all the contracts were off about 7 points.
Today, we’ll look at how to trade that spread courtesy of my friends at Moore Research Center, Inc (MRCI).
Long Dec Cotton (CTZ1)
Short May Cotton (CTK1)
Jerry Toepke at MRCI has done some backtesting and showed that over the last 15 years, had you bought December and sold May, you would have made money in 14 of those years. This is a two month spread trade from February 22 and you take it off on April 22. It is saying that the chart I put up yesterday is at it’s narrowest seasonally, and it will widen.
Here’s a look at the chart:
(click for larger and clearer chart)
A few other salient points to make:
The worst drawdown per single spread was $2,090 back in 2005, which was the only losing year. This spread model has the unique characteristic of being accurate and having positive mathematical expectation. The average profit from this spread over the last 15 years has been $971 per spread.
Looking at the entry prices, it doesn’t seem to matter whether cotton was a carry-charge market or one that was in backwardation in order for this spread to be profitable.
You can see in the graph that the solid black line is the current market. This is the same chart I put up yesterday.
Keep in mind that you are not trading the direction of cotton, but the direction of the differences between the two contract months. This is a relative value trade.
Can you count how many way you can win if you need the spread to increase (widen) in order to be profitable?
Chart and data used with permission courtesy of Moore Research Center, Inc. (MRCI).
Trade futures and spreads at your own risk. You can lose money trading spreads. Although it’s never happened to me, both legs of the spread can go against you.Read More
March Corn (click for larger picture)
Didn’t the US Government pay farmers to NOT grow corn? That was quite a gamble, especially since they don’t allow for sugar ethanol. Now the food companies and the ethanol producers are jamming up the prices on American consumers.
Had they hedged, they could have passed the savings on to consumers, just like Southwest Airlines did from their effective fuel hedges during peak oil. By not hedging, food companies are in effect gambling that prices for their raw materials will stay within a range. But when scarcity hits the tape, they can blame speculators (whatever that means anymore) and push the costs off on consumers in order to protect their profits. They can do this by increasing prices, or by decreasing the size of the containers they sell the food in and keep the prices the same. You get less food for the same price, hence an increase in food prices.
What the food companies do is gamble that their competitors won’t hedge either, an extremely reckless way to run a business. If the prices go up, none will look so bad as all the firms will have to raise prices. In the meantime, the large space under the curve when things are “normal,” food companies can jack their earnings higher by saving the insurance money they would have used to hedge.
When your compensation is in stock, you’ll whore out your balance sheet and income statement to get the stock price as high as possible. I believe that they are gambling their company for the sake of their Executive Compensation plan. Myopia, USA.
An article in Agrimoney.com stated that “corn and cotton are to win this spring’s battle for acres on US farms, enjoying hefty increases in sowings, US officials said in a report forecasting crop prices would stay “historically high” for at least a decade.”
March Cotton (click for larger picture)
Hmm, more forecasts…I love it. High prices for the next decade. I guess that means for all the new plantings, there will still be insufficient crop surplus to drop the prices of at least corn and cotton. The unnamed US officials must have a line on the US dollar then…that must be the cause for high commodity prices going forward the next ten years. These people are f’n talented man…people of vision. Sir Richard Branson should be looking to recruit his successor from this lot for their vision.
Farmers rush to plant crops of the highest price commodities so that they can potentially earn more $$$ from their farmland. But it’s not a science per se, they have to account for the fact that every crop has its own unique costs.
If the farmers over-correct and create a bumper-crop…a giant surplus…the prices of the commodity drop very fast. Therefore, it is said, that high prices are the cure for high prices. Farmers can use futures or options on futures to lock in the higher sell prices long before the crop is ready for harvest. Food companies can use the same tools to lock in lower purchasing costs.
American CEOs who don’t hedge are the real gamblers in the commodity markets. Not having an effective hedge on is still a position in the market.Read More