Traders Helping Traders Ezine and Paper trades

Simple Strategies for Short Funded Traders

Traders Helping Traders E-zine for the week 8-7-2006 - Test Drive Edition

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Shooting the Breeze

I hope I didn’t lay it on too thick last week with my sore back story. I got a few emails from you enquiring about my condition (thanks for asking) but I’m fine...really. I even managed to squeeze in 36 holes last weekend in spite of my injury. Funny thing is the golfing actually seemed to help loosen up my back. Yeah, I know, my wife didn’t believe me either, but it DID help.

Being the golf nut I am, I’ve played with injuries before. Surprisingly enough I can play pretty well when I’m hurt. Everything seems to slow down and I take a much easier, more relaxed swing, concentrating on keeping good posture and proper mechanics, and I end up hitting that little white ball as good as I ever could when I’m “well”. The trick is that now that my back is better I’ve got to try and play like I’m still hurt so I can continue to get the good results!

That’s true for a lot of things in life though, even trading. It seems that the harder we try the worse we do. I’m not saying you shouldn’t try with your trading, but what I am saying is that you should do what I did, slow down and pay attention to the proper mechanics of the trade.

So many people, especially new traders, jump from one trading system to another in search of that holy grail of trading. If there is such a thing out there I’ve never found it, and believe me, between Tom and I we’ve probably tried a sizeable chunk of the trading systems that are out there. The key to trading success is not so much which trading system you use, but how you use it.

Support and resistance trading suits me because it allows me to keep my risks to an acceptable level, that’s why I use it. Once I’m in a trade the rest becomes trade management, and that my friend is the true holy grail of trading – and when it comes to trade management nothing else comes close to support and resistance trading.

So if you want to get better at your trading, clear your mind and your desk of all that clutter and concentrate on what the market is doing. If you’re a position trader find a trending market and pick your resistance areas to get into and out of the trade. Decide on your trade management BEFORE you get into the trade (ie. are you going to let the trade run or use a profit target; are you going to add contracts and if so, where, etc?)

Go back to the fundamentals and take your time. Don’t rush and I think you’ll be pleased with the results.

Darn...just wasted a perfectly good lesson in the intro. ;-)

Enjoy this week's issue,

Erich
erich@tradershelpingtraders.net

Currencies

Currencies Market Overview for The Coming Week

The Currency markets were on fire last week! Well, not all of them, but most of the ones we were involved in, especially the British Pound which made some very nice gains for us. The best thing about trading the currencies is their trending ability. Once these markets settle on a direction they tend to stick to it. The bad news is that they are often very coy about telling you when they're trending, so trend related indicators like DMI aren't always a lot of help.

In spite of this obstacle we did find a couple of good trades last week and now that the complex seems to have picked its trend we can hopefully profit from it some more.

Australian Dollar

We are seeing a similar setup in the Aussie Dollar and the Japanese Yen; however the AD seems to have a stronger trend happening, so we'll concentrate on this market for the immediate future. DMI is showing the market in an uptrend and that the trend is trying to build. RSI also took a bounce off the testpoint last week bringing rates back to the strong resistance at 7670, where the Aussie Dollar failed to breakthrough last week.

We can continue to play this strong resistance line at 7670 this week, planning to buy a breakout higher. The only problem with buying the breakout is that we can't afford to risk too much on our stops. The ideal stop placement would be below Thursday's reactionary low at 7590, but that much risk will make it nearly impossible to structure a favourable trade – at least numbers-wise.

Alternatively we can use the intermediate support at 7630 – 7640 to cover the position. It's not ideal, so we'll need a strong breakout to avoid a whipsaw, but it will help keep risk to a minimum. The first profit target is weekly resistance at 7800; however we'll need to be cautious as rates approach the weekly resistance at the contract highs at 7750 -7760, which is also a long term resistance line.

BUY September Australian Dollar at 7677
Exit Order: 7637
Approximate Risk Exposure: $400 per contract
Profit Target: 7797
Approximate Potential Profit: $1200 per contract
RRR: 3:1
Degree of Risk: Moderate to HIGH

Australian Dollar Chart

British Pound

The British Pound was our home run trade last week as this market posted some incredible gains before the weekend! The Pound easily found our first profit target right after Friday's open. If you exited on target you pocketed a nice sum going into the weekend; however if you decided to let the trade ride you would have been treated to an exceptional rally!

Trade management now becomes key for this market. The ideal stop placement would either be below Thursday's low or the 189.00 support below Friday's low. While this is "ideal" for giving the market enough elbow room, it also leaves another $1300 in accumulated profits at risk! Remember that the longer the market moves in one direction the more likely a reversal becomes. After several strong days, it is looking very likely that the Pound will experience some sort of pullback this week.

If you are prepared to risk some of those $1300 in profit to give you a better chance at riding the market higher, then leave stops below 189.00. If you would rather keep as much profit as possible and try to re-enter the market after getting stopped out, then you could consider using the intraday support at 191.00. Next profit target appears to be long term resistance at 195.00.

CONTINUATION of Long September British Pound at 187.03
Exit Order: 188.97 (or 190.47)
Approximate Risk Exposure: $0 per contract
Profit Target: 194.89
Approximate Potential Profit: $4912 per contract
RRR: n/a
Degree of Risk: Moderate (to HIGH)

British Pound Chart

Euro FX

The EuroFX trade was a bit of a nail-biter when it started as rates continued to flounder after finding our order. By the weekend however we saw a very nice rally giving us a little breathing room for the trade. As with the British Pound trade, your management plan for the trade will determine what you want to do with your stops.

We have a little over $1200 in accumulated profits as of Friday's close. If you have a longer term outlook for the trade and are trying to ride it as far as possible, then you might consider leaving stops at breakeven for Monday. The first profit target is just above the market at 130.00, which is also very close to the contract highs. Being the contract highs we are likely to get a reaction here, so you could plan to exit on target to maximize the profits on this leg.

If you're trying to ride the market to the next level it looks as though the next probable profit target is long term resistance at 133.00 followed by resistance at 135.00 before we get into challenging the all time highs for this commodity.

RSI is showing the EC getting a touch overbought, and while this doesn't seem to bother this market all that much, it does reinforce the likelihood that we will see some sort of reaction off the contract highs. Therefore if breakeven doesn't turn your crank you might consider hefty intraday support at 129.00.

CONTINUATION of Long September EuroFX at 128.27
Exit Order: breakeven (or 128.97)
Approximate Risk Exposure: $0 per contract
Profit Target: 129.87
Approximate Potential Profit: $2000 per contract
RRR: n/a
Degree of Risk: Moderate

September Euro FX Chart

Mexican Peso

The Peso made a stab higher last Friday finding our buy order in the process. I was reluctant to buy the market below the 91500 resistance, but from the look of Friday's session we could have easily bought the market above Thursday's high. I'm a little disappointed with the lower closing price on Friday, especially since it is so close to the resistance line; however DMI shows the Peso's trend to be fairly strong, therefore we could expect the rally to continue for the short term.

Of course our first priority for any trade is to get to breakeven ASAP, but with the Peso closing so close to our entry it's probably best to leave stops alone for one more day. You could bring them below Friday's low at 91125, but that will bring you closer to the market's daily range and increase the likelihood of getting stopped out.

If we see one more higher session, which we should since the trend is good, then we should be able to tighten up the trade a bit and take some of the risk out of the trade.

CONTINUATION of Long September Mexican Peso from 91575
Exit Order: 90850
Approximate Risk Exposure: $362 per contract
Profit Target: 93975
Approximate Potential Profit: $1200 per contract
RRR: 3:1
Degree of Risk: Moderate

Mexican Peso Chart

Erich's Updates for Tuesday:
To Follow

Tom's Updates for Tuesday:
To Follow

Erich's Updates for Wednesday:
To Follow

Tom's Updates for Wednesday:
To Follow

Erich's Updates for Thursday:
To Follow

Tom's Update for Thursday:
To Follow

Erich's Update for Friday:
To Follow.

Tom's Update for Friday:
To Follow.

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.

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.

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 April 2006

Date	Pos.	Market	In	Out	Profit/Loss
April 3	Sell	June Mexican Peso	90.950	91.525	287 loss
April 4 – 6	Sell	May Bean Oil	2247	2260	78 loss
April 4 – 5	Sell	June Lean Hogs	6567	6445	490 profit
April 4	Sell	May Cotton	5245	5305	300 loss
April 4 – 10	Buy	May OJ	148.65	149.30	97 profit
April 5 – 10	Sell	June Mexican Peso	90.875	89.575	650 profit
April 5 – 7	April 5 – 7	Buy	May Heating Oil	186.80	186.80	0
April 6 – 10	Buy	July Corn	237 ¾	240 ¾	150 profit
April 6 – 11	Buy	May Silver	1185.0	1249.5	3225 profit
April 10 -11	Sell	May Soybeans	554 ¾	561 ¾	350 loss
April 10 – 12	Buy	May Wheat	357 ¼	363 ¼	300 profit
April 10 – 12	Sell	May Feeder Cattle	100.87	101.72	425 loss
April 10	Sell	May Coffee	106.85	108.05	450 loss
April 11 – 20	Buy	June British Pound	174.81	178.97	2600 profit
April 11 – 12	Buy	June EuroFX	121.87	121.47	500 loss
April 11 – 20	Buy	June Swiss Franc	7753	7900	1837 profit
April 11 – 12	Sell	June US Dollar Index	8917	8953	360 loss
April 13 – 17	Sell	June Mexican Peso	89.725	90.025	150 loss
April 13 – 17	Sell	December Eurodollar	84.665	94.705	100 loss
April 13 – 17	Sell	May Cocoa	1417	1443	260 loss
April 13 – 18	Buy	May OJ	142.30	140.30	300 loss
April 13 – 17	Sell	July Sugar	1679	1705	291 loss
April 17 – 20	Buy	June Heating Oil	200.10	207.00	2898 profit
April 17 – 20	Buy	June Crude	7165	7350	1850 profit
April 17 – 18	Sell	June mini-S&P	1287.50	1295.50	400 loss
April 18 – 20	Buy	June Canadian Dollar	877	8795	180 profit
April 18	Sell	June Lean Hogs	6417	6490	290 loss
April 19	Buy	July Corn	253 ¼	249 ¾	175 loss
April 20 – 27	Sell	July Cotton	5345	5160	925 profit
April 21 – 27	Sell	June Mexican Peso	89.875	89.525	175 profit
April 21 – 26	Sell	December Eurodollar	94.715	94.680	87 profit
April 21 – 26	Sell	May Feeder Cattle	102.95	100.80	1062 profit
April 21 – 26	Sell	June Live Cattle	7485	7390	380 profit
April 25 – May 4	Buy	June Canadian Dollar	8833	9017	1840 profit
April 26 – May 8	Buy	June Australian Dollar	7481	7677	1960 profit
April 27 – May 15	Buy	June British Pound	179.77	188.42	5406 profit
April 27 – May 2	Buy	June Japanese Yen	8809	8977	850 profit
April 27 – May 3	Buy	June Swiss Franc	7963	8107	1800 profit
April 27 – May 2	Buy	July Bean Oil	2553	2579	156 profit
April 27 – May 2	Buy	July OJ	144.10	149.00	735 profit
April 27 – 28	Buy	June mini-NAS	1731.50	1719.50	235 loss
April 28 – May 2	Buy	July Oats	187 ¼	192 ½	262 profit
April 28 – May 8	Buy	June Gold	646.5	675.5	2900 profit
			Gross Profit per contract: $32,815	Gross Loss per contract: $4951	Net profit per contract: $27,864 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.

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Homework

Last Week's Question:
What would you choose as a profit target for the following trade?

Homework Chart

Answer:
First off I want to extend a big “thank you” to all who took the time to give their opinions and feedback at the forum. I know that you all have busy lives and it takes some time to do this, but it’s nice to see input from a few other folks as well.

I found it interesting that everyone chose a lower price as a profit target. That, of course, is the prudent choice as that is the current market trend; however did you notice what levels we were trading at? Remember the hint, to look back further in your chart? Did you notice that we are/were trading off the contract lows?

Now I know some of you will think that I’m writing this with the benefit of hindsight, but I’m not (why do you think I avoided giving you any directional bias in the question?). We can normally expect a bounce off the contract lows and/or neckline of a rounded top formation. In the case of Coffee we have both. So while the “smart” play is to chose a lower price as a profit target, in this instance I wouldn’t have argued with you if you had planned on the pullback for a profit target.

Did you also notice that RSI was oversold and heading higher? While this isn’t always an indication that prices have to rally we did get some very short term divergence. Whenever you get a down tick on prices and an up tick on RSI (or vice versa) you need to pay attention because something is about to happen, and more often than not, RSI will show the “real” direction better than prices. That’s what happened in Coffee, and it happens numerous times in other markets as well.

So what would a pullback target be? Fibonacci levels come in handy for trying to narrow down our search. If you throw a Fib chart over the recent downtrend it highlights the single spike at 106.00 as a possible target off the retracement level. Trendlines are another useful tool and drawing a trendline from the contract highs across the April 25th peak also brings the 106.00 resistance into consideration.

Yes, if you chose a lower profit target you were correct in your assumption that it is the “better” target; however sometimes it is worth looking at all the options before making a decision. Remember last week’s EC/SF trades? At the time we took them they were countertrend, and therefore more risky; however we had our reasons for buying a market in a downtrend, and as it turns out it was a profitable decision.

Tricky? Yes, but that’s what the homework questions are for, aren’t they? :-)

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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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