Simple Strategies for Short Funded Traders
Simple Strategies for Short Funded Traders
|
Q&A/Lesson There is an interesting discussion going on at the forum regarding the “best” way to make money trading. It is such an important subject that I thought I would address it in this week’s Lesson Section. I suppose that one of the reasons commodity trading is such a difficult venture is because there are so many variables involved. Not only do you have to find a promising trade, but the market you choose to trade can be a big determinate in your success as well. Furthermore, if you are lucky enough find the right trade and the right market you need to have good management skills to bring the trade to fruition. To make matters worse, all these variables are constantly changing and dependent on the trader’s own personality and risk tolerances. No wonder trading is tough! If you boil it down, there are essentially two schools of thought when it comes to trading. The first school suggests that you concentrate on a particular formation/setup and then search the various markets looking for that setup to trade. The second school of thought is that you pick a market, or small group of markets, and just trade those markets. For many years I used to be of the “formation” train of thought, but more recently have moved to the “market” way of thinking. When I first began trading I was very formation oriented. I would spend hours scouring the charts looking for particular formations to trade. As my trading skills became more refined I used different techniques for executing trades (ie. support and resistance versus 123 formations) but my focus was still on finding particular setups among the myriad of markets available to trade. More recently however, I have shifted from formation hunting to focusing on a core group of markets and trading them exclusively. When my group of markets are moving, then I’m trading and when they are ranging, then I’m flat. I believe the chief advantage the second system, the one where you continuously follow a group of markets, is that you are never faced with the chore of having to choose one trade over the other. The weighing of multiple trading options can be very difficult and a major problem with the formation trading strategy. For example, I can open up almost any chart and formulate a trade based on the support and resistance on the chart. I normally try to concentrate on the stronger support and resistance areas as this usually gives us a higher quality trade, but the fact remains that I can still come up with many more trades than I have money to take and this forces me to choose from a multitude of possible trades. If you’re like most traders you are all too familiar with the sinking feeling that comes from having to choose one market from among many trading options, committing money to the trade and then seeing the market you did NOT trade move like a rocket while the trade you did take stalls, or worse, results in a loss. This can be maddening to say the least and is hard on your account as well as your confidence as a trader. Compare this with the strategy of following 3 – 6 markets consistently. Using this method you will rarely be faced with having to choose from more than one or two options. Worst case scenario, if all the markets present trades at the same time, you’ll have to choose from among 6 trades instead of a dozen or more! When you think about it, it is not really necessary to follow every single market to find good opportunities. The vast majority of commodity markets move together in some form or fashion. Corn, Oats, Wheat and Soybeans all have a tendency to move together. If you get a trade in one, you’ll likely see the same trade in the others. Likewise the British Pound, Swiss Franc and EuroFX all have an inverse relationship with the US Dollar Index. If the Index is rising then the others are falling, and vice versa. Feeders and Live Cattle mirror each other as do Bellies and Hogs. All the major energy markets move together as do the financials. With the odd exception all the Stock Indices move together as well. Perhaps the only markets that aren’t intertwined are the Softs, but even here we often will see Cocoa and Sugar have similar moves (sometimes referred to as the Chocolate complex). So when the dust settles we are left with a couple of Softs and a few Currencies that fall outside the usual “follow-the-leader” type of markets. The question now becomes, which mix of markets do you trade? This is a very important question to ask and will require some deliberation to find the mix that is right for you. First off you need to find a market with reasonable profit potential. This is a very important consideration and should not be taken lightly. While it would seem that all markets offer profit potential, not all markets will be worth trading. For example, during last week’s webinar I was attempting to demonstrate the principle of trading a small mix of markets with the Canola market – bad choice. While Canola in itself is not a bad market, the profitability of the moves is very small. You need a very big move in Canola to generate a profit of more than a few hundred dollars. On the upside, Canola’s risk is also proportionately small and it does trend well; however after moving through six months of trading on the chart, we had very little to show for our efforts in spite of the fact that many of the trades were profitable, our losses were small, and we used multiple contracts – everything you would think you were supposed to do in order to make money trading – but at the end of the experiment we were essentially still at breakeven. I believe the problem stemmed from the small profit moves in Canola (the single largest run was $180 per contract) coupled with the cost of commissions, sent an inordinate amount of our earnings to the broker. This small profit problem was compounded as we had to pay commissions on winning and losing trades and the winners weren’t big enough to offset the losses (even though they were small) and the extra commissions. Trading multiple contracts helped boost the profitability versus commission ratio a bit, but when we had a losing trade the ratio became lopsided again and dug into our bottom line. This is exactly the same problem traders have when they attempt to trade mini-Corn or mini-Wheat contracts – the profits aren’t enough to offset the commissions (which are usually the same as trading the full contract) and in the end they don’t make any money, even if they have been successful with their trades. Now to be fair I did have the commission rate set too high for Canola which is an electronically traded market. A lower commission would have allowed us a smallish profit, but exercise clearly showed that if you are going to follow a lower profit market, it is imperative that you keep the commissions as low as possible in order to be able to trade multiple contracts to give yourself a chance at profit. The other market that was suggested during the webinar was Silver. While Canola makes small, non-threatening ranges, Silver is often an out-of-control-$1000-a-day-trade-day-and-night market. This can make Silver a very scary market to trade. Silver is the polar opposite of Canola. After the webinar I ran through the Silver chart and the results were much different than they had been for Canola. I was careful to do everything the same as I did with the Canola market, but the Silver experiment yielded a $12,000 profit at the end of the six months whereas Canola had no real profit to speak of! Does this mean that you should be trading the most volatile markets in order to have a chance at profit? No, not necessarily. But one thing that became clear is that there is a relationship between the market volatility and profitability. Trading Silver will routinely risk 5 – 10x/per contract more than Canola and this might not be suited to everyone. Finding the right mix of markets is something that you will have to ultimately decide for yourself, but if you are going to err, you might consider doing so on the side of volatility. Below is a quick breakdown of pros/cons of some of the markets: Currencies British Pound/Swiss Franc/EuroFX/US Dollar Index – The Pound and EuroFX are gappy but trend well. The Dollar Index also trends well and is a good choice but has less volume than the Swiss Franc which has good ranges, fewer gaps and good market participation. Aussie Dollar/Canadian Dollar/Mexican Peso/Japanese Yen – Move semi-independent of the US Dollar but will still react to it somewhat. The Aussie Dollar and Japanese Yen trend well but can have big opening gaps. The Canadian Dollar can trend well but will often take its time doing so. The Peso trends very well and is usually predictable, but has less market participation than the others. If you’re picking one of these it’s dealer’s choice. Energy Unleaded/Heating Oil/Crude – All three are big movers and all have good participation. Unleaded is probably the most volatile and Heating Oil the least. They all have a tendency to move together so you really only need to follow one if you want to include it in the mix. Crude is the biggest and tamest and leads the others, so I’d probably choose it. It usually has a good option market as well, but check with your broker to be sure. Natural Gas – I don’t have much experience with trading Natural Gas; however the ranges are huge and while this can lead to good profit, the market also seems a touch aimless and therefore it could be difficult to hang on to a position until the trend kicks in. Financials/Indices Eurodollar – If you’re a position trader this is probably your best bet in this segment. Look at further out markets to get bigger ranges. Market participation is never an issue with this market. T-Bonds/10 Notes – These follow the ED and are essentially day trading markets as the daily ranges are difficult for the small spec trader to ride out. mini-Dow/Nas/Russell/S&P/etc – Essentially these are all day trading markets and the exception to the mini-rule. If I were position trading them I would stick to the Dow and NAS as their ranges seem to be tighter and more respectful of support and resistance than their cousins. Grains Corn/Oats/Wheat/Soybeans/Bean Oil/Bean Meal – Intuitively you would think that the grains are good markets to trade, and for the most part they are; however you can get big ranges in all the markets and they can be choppy as well. Wheat is probably the biggest offender in this area making it difficult to manage stops. Oats is the little brother market of the complex offering smaller risk and profit amounts for similar moves in the others. Soybeans is a good market to trade, but will demand more risk from you as well. Soy Meal mirrors the big Bean market whereas Bean Oil can be a little more independent, sometimes even leading the rest of the complex. All three offer good profitability with the big Beans topping the list. It’s no coincidence that there are more than a few “he made his fortune in Soybeans” stories out there. Meats Feeders/Live Cattle/Pork Bellies/Hogs – Feeders and Live Cattle usually move together and while Feeders offer up the bigger moves, they are also thinner and maybe a touch too volatile. Same deal with Bellies and Hogs. They move together, but for the most part the moves in Hogs are plenty big enough that you don’t need to be bothered with the much thinner Bellies market. Metals Copper/Gold/Silver – Copper can be an exceptional trending market but the ranges and risk are huge, even by commodity standards. While the profit potential is very tempting, it’s probably not a market for the small spec. I’ve never explored the option market in this sector and it might be worth discussing with your broker. Gold and Silver move together although Gold is more political and Silver more industrial. This industrial base usually means that silver is slower on the way down, but not always. Whenever geo-political times are tough (and when are they not?) Gold presents itself as a safe buy. All the metals have a tendency to trend well, but given their heavy commercial involvement, can turn on a dime. Softs Cocoa – decent ranges for decent risk, but can be unpredictable and disrespectful of support and resistance. The worst losing gaps I’ve had have all come from Cocoa. Coffee – a very tempting market given the ranges, but a “squirrelly” market at the same time. If you’re lucky enough to catch a decent move you can make a lot of money very quickly. If you decide to add this one to the mix you’d better get used to $1000+ risk positions. Cotton – I have a love/hate relationship with Cotton. At times it trends like it’s on a mission and then other times it seems like it couldn’t find a trend with both hands. For the most part I like it, but it didn’t get a bad reputation among the trading world for nothing. Lumber – A touch too exotic for me but this market provides very good ranges and very good trends; however at the same time it can make Coffee look like a little old lady market. OJ – When I first started trading I had some bad experiences with OJ, but more recently I’ve come to like this market again. The ranges are usually very good and when it picks a trend it will stick with it for a long time; however it can be a touch on the thin side and those big ranges aren’t so much fun when they’re moving against you. Still it’s one to consider. Sugar – This can be a tough market to trade as it spends a lot of time chopping around, but if you’re not too quick with the stops you can usually ride the trend for a long time – when it trends that is. Sugar also has the “millionaire maker” reputation, but I’m not sure if it’s justified. One season it will make you money like nobody’s business and the next it will be up and down like Ben Affleck’s career. There you have it, a quick overview of the markets available. The best thing to do is paper trade a few and choose the ones that are to your liking. Remember, nothing is written in stone and just because you start with a particular mix doesn’t mean you have to stick with it forever. I would suggest keeping the mix as small as possible, and see if you can’t make a go of it with 3 – 6 markets, but as I said, experimentation is the key for finding what will work best for you. For the archive of hundreds of priceless homework articles and Lessons du Jour, please join us at http://www.supportandresistance.com/subscribe.html Got a question that
needs answering like an itch you can't scratch? Send it along to me at
Erich@tradershelpingtraders.net
and I'll be happy to try and clear things up for
you. |
|
|
A Sampling of the Markets we're covering this week... |
|
|
Metals Market Overview
Gold
The charts in this publication are
all made using Gecko's Track 'n Trade charting software. You can get a
demo for free here.
This is only a For a detailed analysis of ALL the markets, with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html
Take
care, and good trades to you for the coming week! |
|
|
Homework |
|
|
Question: I made a basic boo-boo in my Bean Oil trade last week which resulted in a whipsaw. I should have known better but my emotions got the better of me and I did the trade anyway. Can you tell me what I did wrong? Here was the trade: BUY December Bean Oil at 2821 Exit Stop: 2770 Approximate Risk: $306 per contract Profit Target: 2997 Potential Profit: $1056 per contract RRR: 3:1 Degree of Risk: Moderate to HIGH What could I have done better? There are at least two things I'm looking for. Answer: Check out the forum for the answer!
For the archive of hundreds of priceless homework articles and
Lessons du Jour, please join us at
http://www.supportandresistance.com/subscribe.html |
|
|
|
|
Futures Trading is Risky! Never trade with money you cannot afford to lose! |
THE DATA CONTAINED HERE IN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY OR COMPLETENESS; AND AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. TRADERS HELPING TRADERS AND IT'S ASSOCIATES WILL NOT BE RESPONSIBLE FOR ANYTHING WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HEREIN. DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES POSITION. 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. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. 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 TO 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. Traders Helping Traders Publications, including this one, are all copyright Traders Helping Traders, all rights reserved. |
You'll
receive Erich's highly regarded eBook on Support and
Resistance Trading and you'll also have access to a
wealth of helpful information and charts in the
Members Area.