Category: Commodity trading

Retail traders stay out!

What a week, and, no, we didn’t make a killing on the pound but nor did we lose anything.

Retail traders (people who trade their own money) were advised – and correctly so – not to trade the early morning of the vote results. Here’s why:

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Firstly, a trade we took late morning of the day before the vote results, the 23rd.

When you see a chart after the event, you wonder how you didn’t realise that it wasn’t going to go up. We went short (to say the price was going to go down) at the green arrow. One of our strategies is to short at the top of a ‘trading range’. The green arrow was the top of a broad trading range.

The price, however, broke out long. Our stop, as per our strategy, was equal to the height of the trading range which was over 65 pips. The break-out long went over 50 pips before it pulled back, very suddenly, to give us a break-even out.

I mention this to put things into perspective. Usually, in GBP USD, our stops are between 20 and 40 pips away. Even early on the 23rd, we were up at over a 60 pip stop. Not only that, margins change so that the leverage that you get to know is now different which means if you get it wrong your whole trade can be cashed out very quickly by your broker. Spreads (we mentioned these a couple of blogs back) go through the roof and, most importantly, we have the significant probability of slippage where simply put, you can ‘lose your shirt’.

We do not trade the monthly FOMC report because price can bounce 150 pips one way and, often, immediately reverse over 150 pips the other. The early hours of the 24th the market moved over 1,700 pips with over 500 pips of a pullback.

Trading is a ‘zero-sum game’ which means that one person’s gain is another person’s loss. Institutions lost many billions the other night, and retail traders trading could have blown out their accounts and more. If you use a retail trader that made money through the big move down, then get rid of them as they are gambling and next time might not be so pretty.

In the chart below, to put things into context, the red box was the time of the bars shown in the chart above.

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Gold

For the next few weeks, due to the expansion of our family business coming online, I’m only trading between 8 am and 1 pm; this allows me time to trade the currency pairing GBP USD only. For the time being, I’m monitoring the commodities. Gold moved up to an exact measured move of the previous leg. Something James had spotted – and I’d relayed the possibility of, a few blogs back – and thus providing an excellent short opportunity. Over the next few days, we may get a second (and therefore more secure) chance to short gold. But I need more evidence that the price will not go up further.

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Control the losses

To lose only as much as we win is a good thing.

Not being able to control losses is one of the reasons many traders have a reducing account; it’s all about managing losses.

We’ve day traded a single currency pair (GBP USD) this week. We traded well all week but took a loss yesterday afternoon. We allowed emotion rather than a strategy to influence us. There are lessons and reasons why we let the feeling happen, but the important thing is that the loss was measured. That is, it was in proportion to our gains.

All too often with inexperienced traders losses are disproportionate to the benefits. Constant awareness of probability, risk, reward and therefore the trader’s equation is the most vital skill in the trader’s tool bag.

Why just trade the one market? It is possible to day-trade multiple markets, but by doing so, the trader can only employ a limited number of trading strategies. We are not computers, and therefore we need to compromise.

Personally, we prefer to day-trade a single market with multiple strategies. This, on average provides us with 4 or 5 trades per day. Within those trades, we will take a swing or scalp trade depending on market cycle and context. (A swing is a trade on our chosen chart that allows for a pull-back. A scalp, once the trade has taken, will not allow a pullback).

(I have left the commodities for the time being to work on day-trading GBP USD. As an aside: gold and silver have done what we said. I would not trade the interim climb in gold and silver as it goes against the principal direction of the COT report.)

Our issue with day trading the fund is “spread” relative to the size of the trade. The spread, the difference between the ‘buy’ and the ‘sell’ price, becomes an issue with day traded larger accounts. Let me explain from a trade we took yesterday morning.

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Above is a 2-minute chart for clarity. We entered the trade (long) at the green arrow. We exited the trade a few minutes later on a scalp at the red arrow. Okay, here’s the issue. We mentioned last week about spreads. When we bought at the green arrow, the spread was one pip. And our green arrow 0.5 pips higher than our ‘buy’ position. When we sold, at the red arrow, the spread was two pips, so we got an exit price that was one pip below our actual exit. The real trade was 21.5 pips to us. The spread accounted for 1.5 pips leaving us with 20 pips of profit.

At £6 a pip the trade gave us £120 worth of profit. Our broker took the 1.5 pips difference (or £9 in this instance) for themselves. Coincidently, this trade provided a one to one reward. Our risk was £120 or 20 pips; this is the minimum scalp that we can take to make the trader’s equation work about the broker’s spread size.

Only taking swings, and therefore aiming for a higher number of pips, proportionally helps the spread dilemma. However, with our fund size we need to build our risk and to do so makes the spread even more so of a consideration. Let’s take a full trading risk per trade of say £480. In this instance, with the same trade above, the broker’s spread fee would have reduced our profit by £36. And that is expensive.

For the more significant account, financial spread betting is not ideal. However, balanced against the leverage, flexibility and the tax (being free) benefits it is still the best trading vehicle for us.

How to improve our lot? As our risk size increases (and probably not until after the Brexit vote) we will change brokers to a pro account; this involves moving to a different chart set-up which will need time for familiarisation. However, the spread benefits are worth it. In the £480 risk example above. In the pro account that we are considering the trade could have cost us £16 for the spread, plus £4.50 for each trade, making a total cost of £20.5. Still not cheap, but better than we presently have.

The pro account only benefits the higher volume trades.

 

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Brexit, are we going to trade it?

Before Brexit here’s gold and silver last week.

You will recall that we are only looking for short positions in gold and silver. We took profits in both nearly 2-weeks ago and have been looking for an opportunity to make a short since then. Although both gold and silver crept down and tempted everyone to jump on board, this would have been hopefulness.

Here’s silver: silver provided a short signal which I missed, and mentioned last week. That would have given us a profitable move down and exit at the blue arrow. However, without a clear ‘short’ context the danger was always the sharp pullback, which happened yesterday, and that is why it was correct not to hold our original short too long. The pullback may just be to the moving average, shown by the blue line, or a move to equal the previous high at 1,800; or, significantly higher with a measured movement of the last leg. We will need more information before acting.

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Gold below shows the short that we exited on 19th May. I was somewhat quick as the second leg down would have doubled our profit. However, the move up yesterday (similar to silver) has brought the price back to our ‘buy back’ position on the 19th. As the climb yesterday has closed above the moving average I’d expect more upwards movement next week before providing a short opportunity.

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How will Brexit affect our trading? As an aside, one issue we have with trading gold and silver, particularly with a reasonably sized fund, is the size of the average bars (potential movement of price on average over a specified period) in respect to spread. SIPP charges are anything from £5 to £14 per trade. That is why you need to buy a certain amount of shares otherwise your broker’s fee represents too high a percentage of you. The same is true in reverse with spread betting.

Silver, for example, has a spread of 3 pips. That is, for your buy/sell you will pay three pips at whatever price per pip you trade. If you trade £1 per pip, then, from the broker’s perspective, you are charged £3. (Not actually £3, you will notice that your entry line on your chart is 1.5 pips to the negative as will be your eventual exit line – with both together equalling three pips). That’s fine at £1 per pip, and a good deal. However, you aren’t going to retire soon on £1 per pip in silver. Our fund trades more in the region of £10 to £20 per pip, and that represents a high broker’s fee if the trade goes against us.

Far more representative of average bar size – when compared to spread, and also compared to the amount we wish to trade – is the currency pairings GBP USD and GBP JPY. The spread on these is about two pips and three pips respectively (I say ‘about’ because they do fluctuate, particularly in times of high volatility). However, typical corresponding bar sizes of the above currency pairings (GBP JPY being the biggest) are 10 to 20 times bigger than say gold or silver. And that is why we need to move most of our fund trades to the currency pairings.

That brings me to the initial question, how will Brexit affect our trading? We all know that it will be a time of high volatility in GBP and anything in association with GBP. To that end, the spread will increase significantly. But spread increase is okay if average bar size rises in unison. Brexit could provide a lot of barbed wire (bars that bounce up and down but close reasonably tight and don’t go anywhere) or, of course, it could set-up a significant trend. My thought is that it is going to be a bit of both and we need to read the movement well to take advantage. So are we going to trade during Brexit? Probably not on the 23rd June, but for the run-up, yes we will.

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Profitable gold and silver – missed USD CAD

A good week with profitable trades in gold and silver. The week did come with a small loss and missed an opportunity in the currency pairing USD CAD. Also, we were out of the money for much of the week in crude oil only to grab a brief break-even buyback. Overall, a good week.

Silver daily chart: each bar represents one day’s worth of trading. A black bar means the price closed lower than the open. Each candle shows the open and close price and the wick (either top or bottom) shows how high or how low the price went between the open and close times.

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We shorted silver at the red arrow, and we bought back that short at the green arrow. Just over 80 pips of profit for us; a pip is the smallest upwards or downwards movement. (In stocks and shares it is called a tick.)

Gold daily chart:

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We went short at the red arrow and for a profit at the green arrow. Gold trades less than silver per ounce and therefore our gold movement this week represented only 30 pips. Offset, however, by the trader’s equation: based on probability, our profit target, how far away our stop is and the representative amount we’re prepared to lose.

USD CAD daily chart:

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Over the last few weeks we went long at the larger green arrow and took our profits at the larger red arrow.  We went long again a few days later at the smaller green arrow only to be stopped out of the trade (within a couple of pips!) at the smaller red arrow for a small loss. I then missed the subsequent move up. That is trading. Did I set my exit stop at the wrong place? Maybe. Hindsight is a wonderful thing, and a few more pips below the moving average would have been sensible. But my overall judgement was correct, in that the price was going to go up – and I take confidence from that.

Crude oil daily chart:

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My best trade of the week without making any profit. Let me explain. We entered short at the red arrow and were out of the money all week to the tune of 200 pips at one point. We bought back our short at break-even price at the green arrow. Best trade because although we were out of the money we did not reach our stop position and we managed a break-even price. Ready for the next one!

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gold and silver – are prices ready to drop?

Copper – An uneventful week for the commodities. All except copper which moved down without us and with enthusiasm. Copper, however, had an unclear read on the COT (often the case with copper) and a vague read on the daily charts. Therefore we are correct to be out – as to stay in would have been to rely too heavily on hope.

Crude oil and USD CAD – We hold a small position on crude oil short. But a 200 pip climb is likely and at which point we may add to our shorts. USD CAD, which often reflects a delayed but exact opposite price movement to crude oil, shows a clearer picture. Too much reliance on the difference between these two charts (crude oil and USD CAD) is, however, a ‘chicken and the egg’ question.

Gold – Having taken some profits (short) from gold last week we continue to hold a small position short. Expecting to add to shorts anytime this week. The net position of the commercials remains at a 5-year low; this will provide excellent momentum to a drop in the price of gold if the price per ounce falls to the $1,200 region.

Silver – Similarly with silver. We took some profit last week and continue to hold a small position short. Looking for a price climb to $1,730 before adding to shorts. Silver, however, has an even more dramatic picture on the COT as the net position of commercials is at a 10-year low. As with gold, any significant reduction in the price of silver will probably result in an exaggerated acceleration short.

Intraday strategy – As an aside, much work has been done this week developing our short-term momentum strategy (namely using GBP USD intraday charts) on trading range breakouts and subsequent channels. I know this doesn’t make a lot of sense to the investor, but to a trader, it is a high probability strategy with measurable risk and reward. And possibly the most lucrative of intraday strategies.

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We take some profit from gold, crude oil and USD/CAD

Until now we have traded the commodities: gold, silver, copper, crude oil and USD/CAD on a weekly basis. That is referring to weekly charts and a weekly COT report. We also have, as discussed last week, considered introducing the fund to intraday trading.

Each of which (weekly and intraday) are somewhat on the extreme. On the one hand, we have the overly slow weekly chart market, and on the other, the demanding intraday market.

The balance for the fund is daily charts. Why? Weekly charts are emotionally tricky as we see profit generated only for that profit to disappear as we remain invested to reach our target. There is no compromise here because to take profit before a target, unless our premise changes, does not provide a traders equation (that is: the trade had more risk than reward).  Over the longer term, this would be a losing strategy.

Gold and silver have emphasised this over the last few weeks where they dropped in price to provide us with profit potential, only to extend higher than I considered.

Daily charts, rather than weekly charts, usually means tighter stop positions and therefore lower risk, but in contrast, our targets are shorter. Timing wise we are in trades for a week or three rather than several months.

The COT suits the weekly charts but often goes against my daily chart readings; this, of course, happens at all levels of the chart, for example, the difference between the daily and the 4-hour chart or between the  5-minute and the one-minute chart. However, I report weekly and to have a profit at the end of one week only to know that profit will go away as we wait for the more significant (targeted) profit seems emotionally foolish.

With moving to daily charts, our targets are closer, and therefore we can take profit more regularly (if available) and wait for the next entry; this means that we will occasionally miss the big move – but trading is rarely perfect.

This week we took profit from our short in gold as it sank from its high of the previous week – and before Friday’s monthly non-farm payroll brought it up again. Also, we took profit from a short in crude oil as it came down over the week and from our long in USD/CAD as, conversely, it climbed nicely over the week.

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Gold and Silver finish week on a high

Silver finished the week with a strong move up. Silver is at, or slightly above, a three-year trend line. The COT shows the net position of commercials at multiple year lows; meaning the majority of commercials (the big buyers and sellers) have short positions on silver. As do we. Difficult to hold through, but that is the strategy.

Gold provides, as it so often does, a similar picture to Silver.

Crude oil ventures up towards the position suggested on my charts last week. A possible short on crude may present itself this coming week.

USD CAD had little movement in weekly chart terms.

Copper dipped early in the week and gave us a reasonable out position. Copper reversed back up by the end of the week as anticipated.

The strategy on commodities is to go long or short reasonably early based primarily on commitments of traders (COT) information and supported by analysis of weekly charts. We use weekly charts as that corresponds to the weekly COT release. The COT is released UK time late Friday evening and is based on the previous Tuesdays collation of information by the CFTC.

This strategy often calls for a significant period, several weeks or even months, where the trade is out of the money. Treat the COT as turning a giant tanker ship analogy – it isn’t quick!

To balance this ‘slow’ strategy we’ve decided to include a portion of the Slow Trader fund in our intraday trading. In our case 1, 2, 15 and 60-minute charts.

In this instance, we take as many as 9 to 15 trades a day and regularly complete all trades before the end of the day. I’ll discuss our strategies for intraday trading in next week’s blog.

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Weekly Diary – Slow Trader Fund

A week of lessons and some missed trades.

A few areas that I’ve traded this week have been disappointing. Not by judging the trade correctly, far from it, that has been good, but by being stopped out too soon. A novice trading error possibly. It’s a great lesson to take forward.

Here are the trades in question:

Silver. We had a good ‘short’ signal for silver – both on the chart and the COT. The COT was a little early, so I set what I considered to be a good size stop. A stop is the exit point, the point at which we get out and accept our loss if all goes wrong. Notice on the chart below how the price climbed to almost the exact position of my stop. A stop twice this distance with a reduced trade amount was the answer. We may have a second chance if price retraces as I’ve indicated with the blue arrow.

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Notice the COT below for silver. It is at a 3-year low shown by the blue line. Once this turns up, and remember that the COT is big picture only, this will support a short for silver. Gold has also come down with a similar, although not quite so pronounced, COT picture.

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EUR USD. The currency pairing of EUR USD is one that I trade day-to-day. Notice how volatile this currency has been of late. I have provided the 1-hour chart to illustrate this by showing several recent spikes up.

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The spikes may not look like much, but to a day trader (trading an intraday chart) they are a challenge. Again a significant stop distance (about 40 pips) is necessary. However, this makes for difficulty achieving a traders equation of 2:1 on a 40% probability trade, which is the minimum requirement for most swing trades.

Crude Oil. A wide trading range has developed for WTI. The Price of WTI moved down to coincide with the top of the first daily breakout. An expected phenomenon. The (buy) signal, although bearish on the daily chart, was right in hindsight; however, I will look for a second entry opportunity to go long if price retraces back to the lower trend line and again provides a good buy signal. After that, I’d expect the price to climb to the top of the channel that I’ve drawn with a 40% or 60% probability of ascending or descending respectively.

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We remain in Ashtead Group PLC with a target shown by the blue arrow below.

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Finally, A reminder that Slow Trader values provided every first Saturday of the month.

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Weekly Diary – Slow Trader Fund

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Ashtead Group PLC (AHT) was a good buy for us, so far. The purchase was at the bottom of a trading range, as we can see above. A 60% probability of climbing to, or near, the top of the range indicated by the target arrow. Of course, there is a 40% probability that the price will break higher from the trading range top. However, we have taken this for a ‘scalp’ rather than a ‘swing’. A swing would be where we would allow the price to retrace before going (hopefully) up higher. A scalp, on the other hand, is a movement from one extreme of a range to another without a retrace.

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The picture for crude oil, WTI, has changed slightly from my suggestion last week. The COT, shown above, only works with some degree of sureness when it is in harmony with the trend. The little turn-up that we can see at the very end of the blue chart line above represents a downturn in the price. That small turn up represents about two weeks of price movement. I like to keep the COT on a 3-year chart as I find this best for perspective. COT, we may recall, is big picture stuff only. And, again, is only to be trusted when in unison with the trend. Which, in this case, it is not.

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Above, is the daily chart for crude oil. My thought, is a move upwards soon, as indicated by the blue arrow, to provide a broad trading range. The price tried to turn upwards last week but failed. For another turn up we will need some price action confirmation supported by the COT.

Other activities include an introduction of swing day trades on the FX market in EUR USD. In day trading I find it benefits significantly to concentrate on one market. I scalp and swing in my fond on day trades. Slow Trader, for the time being, will be swings only in day trading respects. Swings tend to be lower probability trades, about 40%, but have more significant reward potential. They are also less intense to scalps. We will see how this progresses for the fund and, of course, I will keep you posted.

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Slow Trader Diary – week 39

We remain just above even. We have taken no trades this week.

The week was spent trading small amounts with my fund (£1 per point in the currency pairings).

Providing a chance to work through, and live trade, many of the lessons from the holiday modules with small risk.

Trading is like any other demanding job; we need to work our way back in after a break.

Slow Trader is daily charts and therefore not day trading; however, the day trading techniques I use in my account are the same for the slow trader with the daily charts. What I do in one day with day trading takes a week or so using daily charts.

Due to the China situation, both the S&P and the FTSE have seen a significant drop since August. That will reflect on individual stocks and shares of course. I am watching the S&P for a turn.

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Commodities to keep an eye on:

Coffee price is at a ten year low. The COT report supports an increase in Coffee, but it’s early days. As coffee price increases we can look to see what effect this has on coffee companies such as Green Mountain.

Gold is at the same price that it was in 2009. Gold price remains uncertain. The COT is a buy and gold shot up yesterday in reaction to the US nonfarm payroll monthly report. From our point of view, however, gold is now a wait and see.

Crude oil is, as we all know, at a significant low. The COT is at a minor buy stage. However, the trend down for crude is so strong we would need to see an established move up before considering buying. Most amateurs will buy crude thinking it can only go up, not sure about that one. I certainly would need to see evidence first before committing. Okay, we miss the very bottom and therefore maximum gain, but to try to find the base is a foolish strategy.

Currencies:

Those not thinking that we live in a global economy should have watched the nonfarm payroll at precisely 1.30 pm yesterday. The results were not favourable to the US and most major currencies (including the S&P) moved, simultaneously, the price difference of a big trading day in less than a few seconds. Eye-watering stuff.

As a trader, the above shows the importance of knowing the significant event news item times. I do not trade the news, for me the probability of getting it right is too low.

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