Simple Strategies for Short Funded Traders
Simple Strategies for Short Funded Traders
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Traders Helping Traders E-zine for the week 8-28-2006 - Test Drive Edition |
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Lesson du Jour |
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Whipsaws! "Whipsaw" is a word that strikes fear into the heart of every trader. The smaller your account the more afraid of being whipsawed you are likely to be. Whipsawing is when the market fills your entry order and your stop loss exit order in the same session, effectively stopping you out for a loss. The summer months are especially bad for whipsaw trades. Since many of the commodity markets are crop markets they are extremely sensitive to any changes in market or crop conditions, and will react quickly to a change in either. This quick "about face" has the potential to whipsaw you out of a seemingly good trade. One other reason that whipsaw trades are more likely to occur during the summer months is that many traders are on summer vacation, this is especially true the last few weeks of August as families try to squeeze in a couple of weeks away before the children have to go back to school. The absence of some of these traders leads to a slightly thinner marketplace, which in turn can lead to larger daily ranges and the resulting whipsaw trade. So what can be done? Is there anything the small trader can do to avoid getting whipsawed? While there is no foolproof way to avoid getting whipsawed there are a couple of things you can do to make it less likely. The most important thing you can do as a small trader is to use only the strongest support and resistance levels to base your trades on. Using the stronger resistance will normally keep you on the right side of the market and "make the market come to you" before entering the trade. If the risk vs. reward ratio allows it, I normally like to see the market break a secondary support or resistance level before entering the trade. Sometimes this means giving up some potential profit, but in return you will usually get into a trending market instead of one that is just chopping about. The second benefit of waiting for the market to breach a secondary resistance level is that you can use the stronger support or resistance area to cover your trade, which should enable you to keep risk to a reasonably small amount. It is also important that you continue to try and trade with the trend as much as possible, especially at this time of the year. Do your best to avoid countertrend trades unless you have a very good reason for taking one, and if you do take a countertrend trade keep your exit stop close and use a profit taking target to maximize your potential profit. Bear in mind that because the markets tend to be choppier at this time of the year, you should avoid placing too much emphasis on any single daily range – unless it is a large range of course. Because of the added choppiness it is more important than ever to be patient with the markets. Be prepared to see the markets look bullish one day and bearish the next. Don't get caught up in trading the daily changes however, keep your eye on the bigger picture. Step back and take an overall view of your charts in order to keep your perspective if you find yourself concentrating too much on the last few bars of the chart. If necessary consult a weekly chart which will normally show the predominant market trend more clearly than the daily. Lastly realize that whipsaws are a part of trading. Regardless of how well you search out your support and resistance lines and monitor your opening ranges, whipsaws can still occur. Fortunately for us support and resistance technicians, we can usually keep the losses small enough that they do not adversely affect our accounts; although our egos can be a different story. As unpleasant as whipsaws are, try not to let them affect you too much emotionally. Avoid the desire of trying to "get even" with the market. This rarely works and will usually only make matters worse, likely resulting in yet more whipsaw trades. After all, we are dealing with an uncertain future. Sometimes the market will behave as it is supposed to, and other times it will not. It is important that at those times when the market is not behaving as anticipated, you exit the trade with as little damage to your account as possible. Take solace in managing your account well, even if it is a losing trade. This is what differentiates traders from fortune tellers. Whipsaw season will pass soon; just make sure you have enough of an account left that you can still trade when it is over. Sometimes the best course of action is just to wait the market out for a few weeks until things begin to look a little more settled. Remember, no one says you "have to" trade at this time of the year. 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. |
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Markets for this week... |
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A pretty quiet week for the Financials and Index markets as much of the week was spent in consolidation. The March Eurodollar made some very tight ranges before Friday's breakout higher, which almost found our buy order near the high. The resistance is still in tact, and while it does appear that we should be getting another rally it isn't confirmed until we get above the 94700 resistance. The index markets spent most of the week in pullback mode after the rally from the week before. Unlike most markets that merely pullback for a few days before the next rally, the indices can spend days, or sometimes even weeks consolidating a pulling back before the next move. We're trading off some good support levels however, so we might be seeing a more "normal" progression this week. Eurodollar Everyone knows that my personal directional bias for the Eurodollar is down as I believe that has the greater long term potential; however in spite of what I think the market should do, the Eurodollar continues to exhibit a strong uptrend and keeps on posting higher rates. This is what happened last Friday. The ED spent much of last week consolidating and putting in some pretty small ranges before Friday's move higher. The market came close to breaking the 94700 resistance area and is technically sitting right on the line and early next week we should finally have an indication of whether we are back in a trend, or not. DMI is showing the ED in an uptrend and gaining strength. The 94700 was the proven resistance we chose to buy above, but rates are still below here. In hindsight we could have made the trade much tighter and framed Thursday's session for breakout; however my concern was the bigger downtrend line and its affect on a possible rally. But now that we're clear of the trendline, it's all systems go for buying. The plan is pretty straightforward and is a simple buy a break through 94700 and cover the trade below the 94660 support. Both these resistance areas have been tested several times, so hopefully if we get a breakout it will be a solid one. The first profit target is technically the 50% retracement level at 94880, and while this will be a line to keep an eye on, the profit target I'm using is the resistance at 95000, which also happens to be the 62% retracement line. When/if rates trade this high, it will be extremely likely that a big bounce will be the result. SELL March Eurodollar at 94715 Exit Order: 94655 Approximate Risk Exposure: $150 per contract Profit Target: 94990 Approximate Potential Profit: $687 per contract RRR: 4 1/2:1 Degree of Risk: Moderate
Grains Market
Overview
Soybeans
This is only a small sample of the markets we cover! For a detailed analysis of ALL of 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 Tuesday - watch the blog:
Tom's Updates for Tuesday
- watch the blog:
Erich's Updates for Wednesday -
watch the blog:
Tom's Updates for Wednesday - watch the blog:
Erich's Updates for Thursday -
watch the blog: Tom's Update for Thursday - watch
the blog:
Erich's Update for Friday -
watch the blog:
Tom's Update for Friday -
watch the blog: For a detailed analysis of ALL of 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!
The charts in this
publication are all made using Gecko's Track 'n Trade charting software. You
can get a demo for free
here. |
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The Scorecard |
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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 June 2006
* 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.
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Homework |
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Question: As you know, I consider the simple trendline to be an invaluable trading tool in our search for the most important support and resistance numbers; however drawing a trendline correctly can be a challenge. Take a look at the current December Cotton chart. How would you draw the trendline here?
Post your answers at the trading forum!
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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! |
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. -
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