Traders Helping Traders Ezine and Paper trades

Simple Strategies for Short Funded Traders

Traders Helping Traders E-zine for the week 11-6-2006 - Test Drive Edition

Question: Do you ONLY cover one or two markets??

Answer: NO!! We cover all markets in all sectors - wherever there's a good trade, we'll cover it!

This is only the TEST DRIVE Edition. Our Subscribers get the whole thing.

For a detailed analysis of ALL the markets Erich and Tom cover along with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html

Part One - Erich's Trades

Lesson du Jour

Do you have a favourite trading quote? Maybe "the trend is your friend until the end when it bends"? Or perhaps "a bull market knows no resistance and a bear market knows no support"? I have a favourite trading quote and while it does not originate from the trading world it has everything to do with how to manage your trades.

My favourite trading quote comes from the NASA space program. It was first uttered by Christopher Columbus Kraft (yes, that's his real name). Mr. Kraft was the director of the NASA space programs during its hey-day in the 1960's when America was racing the Soviets to the moon.

There were many rocket launches during this time; however as those of you old enough to remember will know, not all the space flights were successful. In fact some of the early attempts were downright disastrous. It was as a result of these errors (and sometimes the loss of life) that Mr. Kraft evoked a new, but unwritten, policy at NASA.

This policy was quite simple: "if you don't know what to do, don't do anything". So profound are these words of wisdom in the realm of trading that I even made them into a little sign that hangs in my office.

If you don't know what to do, don't do anything. How often as a trader have you been tempted to fidget with your position for no good reason? I would bet that if you looked back at some of your trades that did not work out, the answer would be "more often than not".

It's only human nature to want to "adjust" a trade that might not be working out. Sometimes you will be long a market and the trade will rally nicely for a few days before posting a very bearish looking day. This is usually when "fear" and "greed" set in and begin making your decisions for you. It is especially important at times like these to resist changing your trade if you do not have a good reason to do so.

Anyone who has been trading for any length of time knows that the markets rarely make a straight line to their targets. The markets will usually advance for a few days and then "reset" themselves before most likely continuing in their original direction. It is during these times, when the market pauses, that you must exercise a great deal of discipline and only alter your original trade if you have a good reason to do so.

This is vitally important. Many traders will change a position without having a good reason. The market moves against their position and they begin to panic. With the panic comes a feeling of having to "do something" to make it better. However, we have a tendency to forget that the markets are beyond our control. We can not do anything to change what the market will do, but we can change our position.

Herein lies the problem. In a desperate attempt to "fix" the trade, without having a good reason to do so, we end up changing something about or original plan which inevitably leads to less than satisfactory results.

"If you don't know what to do, don't do anything" can prevent you from "adjusting" yourself right out of your position. I can not begin to tell you the number of times this piece of advice has kept me from losing money. Yes, it can be uncomfortable to watch the market move against you; however unless you have a good reason to change something about your trade, don't.

The key then is to know what to do. This means understanding your trading system inside and out. You need to have the confidence to know that the decisions you are making are the right ones and that you are not merely making changes because you feel you have to.

Bear in mind that I am not saying that you should never adjust your trade. Far from it! There will be times when this is correct course of action; however you have to "know" what you are doing when you make the change. Do not change your trade without knowing why. Do not change your trade simply because you feel you have to do something!

Remember, "if you don't know what you're doing, don't do anything". This is an excellent piece of advice whether you are sending a man into space or trying to pick up a few dollars on a trade. By following this advice you may find that you keep yourself from doing something you will only regret later on.

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...

Currencies Market Overview

An interesting week in the currency markets this last week as most of the currencies found resistance/support and began their pullback phases. The pullback gives us a good opportunity to re-enter these markets from a better price and in a more predictable manner. Since we already know the direction of the trend we need to be on the alert for the renewed move in the trend direction and we do this by trailing an entry order.

Australian Dollar

The Australian Dollar finally showed us resistance after a very strong rally for a couple of week's prior. I'm not sure that the current pullback move is over yet, but the market does find itself sitting on strong support at 7660 – 7670 which might cause it to resume the uptrend this week. Normally when we see a market complete a rounded top formation, like the AD has, we can expect a larger retracement to the 38% or 50% Fib levels; however it doesn't hurt to place an order in anticipation of an early reversal.

Entering at this point is easier as well given the low closing price from Friday. This allows us to place an entry order to buy on a break above Friday's high at 7724. Notice that there is some resistance at 7750-ish which we could buy above as well, but as I mentioned with the lower closing price we can afford to try to buy the market sooner.

Exit stops will go just below the support at 7790 which is close enough to count the same as Friday's low. Well, almost. Even so we will have about $460 at risk, which is enough for me to spend on this market should the trade head south. Profit target is the long term resistance at 7900, but there is room for the market to move further to the upside if we get some momentum.

BUY December Australian Dollar at 7733
Exit Order: 7687
Approximate Risk Exposure: $460 per contract
Profit Target: 7897
Approximate Potential Profit: $1640 per contract
RRR: 3 1/2:1
Degree of Risk: Moderate to HIGH

Australian dollar chart

Grains Market Overview

What a week in the Grain complex! The major grains all managed a rally last week before topping out by the weekend. The gap 'n fade days that finished off the week shows considerable weakness in the market as prices seem to be grasping at higher prices. Whether this will lead to a reversal remains to be seen, but wheat is already trading in bear country. Wheat is considered by many to be a "leader" market, so if that holds true we could see something lower in corn and the bean complex as well.

Wheat

Wheat prices completed a traditional 123 topping formation last week when prices broke support at 499 – 500 (don't worry if you don't know what a 123 top is, it's not important). From here we saw the market continue lower to support at 477 – 478 which caused a bit of a reaction sending prices higher on Thursday. This reaction was short lived however, when prices fell off again on Friday. What's more interesting however, is the bounce, and subsequent re-hook in RSI. This is a very strong sell signal for this market and we can likely expect to see prices continue lower as a result.

While it is a little more risky, I will look to short the market on a move below Friday's low. Here is another instance where the higher closing price affords us the luxury of selling the market on a closer entry to the low. The exit stops have a little more resistance behind them and will go above the 494 high which has had at least 5 recent hits behind it. So the good news is that while the entry might be a little wishy-washy we have a very strong line to base the exit on.

The first profit target is support at the 62% retracement which we should easily find. We are likely to get a reaction here so I'll probably exit on target, but if it looks like we have good momentum I might try to ride the trend lower.

SELL December Wheat at 484 3/4
Exit Order: 494 1/4
Approximate Risk Exposure: $475 per contract
Profit Target: 453 3/4
Approximate Potential Profit: $1550 per contract
RRR: 3:1
Degree of Risk: Low

Wheat trade

[PS. While not shown here, you can do the same trade in the Kansas or Minneapolis Wheat contracts as well.]

The charts in this publication are all made using Gecko's Track 'n Trade charting software. You can get a demo for free here. The rest of the Markets in all sectors are covered in the Subscriber Edition.

This is only a small sample of the markets we cover!

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

If you have any questions at all about any of these chart lessons, please feel free to ask at the futures trading forum or click here to email us. You can also chat with Erich and Tom live every Wednesday evening at 9:30pm eastern in the HotComm webinar room. Click the link for details about the Support and Resistance Trading Webinars.

Erich's Updates for rest of the week - watch the blog:

Take care, and good trades to you for the coming week!

The Scorecard

The purpose of this section is to give you a feel for which markets might be worth trading and which you might pass on given your own set of circumstances. The figures quoted are based on the price levels outlined in the ezine, trading single contracts and do not accurately account for slippage, commissions or other trading related fees. The Score Card is updated monthly.

Summary for the Month of September 2006

Date	Pos.	Market	In	Out	Profit/Loss
September 5 – 15	Sell	November Unleaded Gas	172.85	162.05	4236 profit
September 5 – 18	Sell	November Heating Oil	199.95	179.15	8736 profit
September 5 – 18	Sell	November Crude	6975	6435	5400 profit
September 5 – 7	Sell	December Corn	243 ¾	243 ¾	0
September 6 – 8	Sell	December Bean Oil	2497	2513	96 loss
September 6	Sell	December Cocoa	1483	1501	180 loss
September 6 – 11	Sell	December Swiss Franc	8163	8129	425 profit
September 11 – 15	Sell	December Soy Meal	159.9	162.7	280 loss
September 11	Buy	December mini-Dow	11507	11427	400 loss
September 11 – 18	Sell	December Corn	243 ¾	244	12 loss
September 12 – 14	Buy	December mini-Dow	11507	11593	430 profit
September 12 – 13	Buy	October Lean Hogs	6770	6657	450 loss
September 15 – 18	Sell	December EuroFX	127.17	127.67	625 loss
September 15 – 19	Buy	Dec. US Dollar Index	8571	8533	380 loss
September 15 – 20	Sell	March Eurodollar	94.675	94.735	150 loss
September 18 – 19	Sell	December Japanese Yen	8569	8615	575 loss
September 19 – 26	Sell	December Mexican Peso	90.975	90.325	325 profit
September 19 – 22	Sell	November Heating Oil	156.85	154.05	1176 profit
September 20 – 25	Sell	October Live Cattle	8947	8052	420 loss
Sept. 22 – Oct. 3	Sell	Dec. Australian Dollar	7493	7457	360 profit
September 25 – 28	Buy	December mini-Dow	11653	11741	440 profit
Sept. 26 – Oct. 3	Sell	December Japanese Yen	8647	8577	875 profit
September 26 – 27	Buy	December Corn	258 ¼	254 ¼	200 loss
Sept. 26 – Oct. 3	Buy	December Wheat	424 ¼	456	1587 profit
Sept. 29 – Oct. 4	Sell	December Live Cattle	8932	9040	430 loss
			Gross Profit: $23,990 per contract	Gross Loss: $4198 per contract	Net Profit per contract: $19,792 before commissions and fees!

* NOTE!!! Trading commodities is RISKY!!!! These figures are estimates in the interests of tracking the trades. Erich may or may not have a real money position in any market covered at any given time. This Score Card does NOT apply to Tom's Trades. This is neither a solicitation to trade nor a recommendation of any strategy. Always consult your broker or advisor before attempting any trade. Commodity trading involves substantial risk of loss. See full disclaimers at the bottom of this email.

Homework

Question:

Take a look at the following chart. Forget for a moment that this is the Lumber market and traditionally one of the more risky markets to trade. Do you think the suggested trade is valid? Would you trade it? Why, or why not?

Answer:

Check out the forum for the answer!

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Pick of the Letter

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Futures Trading is Risky! Never trade with money you cannot afford to lose!

Nothing in this publication is either a solicitation to trade or a recommendation of any strategy. Always consult your broker or advisor before attempting any trade. Commodity trading involves substantial risk of loss.

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.

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