Slow Trader Fund, We’re Ready for Action

Thank you for your patience while I’ve performed a complete overhaul of my short-term trading strategy. Readers will notice the amount of work involved in the ‘how I trade’ page; this has been a great exercise, and one of which I’m confident will be well worth the wait.

A reason for taking so long is that our strategy, I believe, can only indeed be devised under live trading conditions. The way we react to probability trades under live conditions is significantly different to what back-testing states would provide.

To that end, I’ve traded and worked on the strategy these last few months with my own account and traded small. The fund has remained in waiting.

Now I’m at the other end of the strategy development; we will see a gradual build-up to normal fund trade amounts.

My thoughts on how I see the fund going forward from today:

Slow Trader allows investors the opportunity to access a short-term trading fund.

Why an opportunity, and why short-term trading is not possible for most people:

  • Firstly, short-term traded funds are not readily available. Moreover, expert (and hopefully successful) short-term traders charge a lot – up to 50% of profits and substantial participation fees.
  • Secondly,  short-term trading is a difficult skill to master. It takes several years for a trader to graduate from the ‘beginner’ level, through ‘intermediate’, to ‘expert’. And, an expert takes all the capitalised reward. In other words, short-term trading, in contradiction to its name, takes a long time to learn.
  • Finally, learning the short-term trading skill is often, through the beginner and intermediate stages, financially penalising.

From the 4-hour chart the fund trades:

  1. Nick’s qualifying UK shares – long only.
  2. Currency pairings GBP/USD, EUR/USD, AUD/USD, USD/JPY – long and short.
  3. Commodities Gold and Oil – long and short.

For each of these I’m looking for an edge:

  1. Nick’s qualifying UK shares already have the fundamentals. And, although fundamentals usually are not a factor for a trade of less than 9-months duration, we nevertheless have them on our side. The principal trading advantages that I use, however, are probability, context and price action.
  2. In our currency pairings, we again bring probability, context and price action to the fore.
  3. Commodities also use probability, context and price action but are also traded inline with the COT report.

The 4-hour chart is used in preference as this provides at least two trading opportunities per day; this means that trades can be open for several hours to several days.

The page ‘how I trade’ is written with the 5-minute chart in mind but applies equally to the 4-hour chart and is the essence of how I approach probability, context and price action. Nick’s qualifying UK shares are published quarterly through this blog and guidance on the COT will also be given as the COT occasion provides – the COT cycle for each commodity coming round independently a few times a year.

I provide a detailed annual report on the fund and a semi-annual ‘how goes it’ review.

The goals of the fund are:

  1. Not to lose money (and this defines our risk level)
  2. Increase the fund by 30% (as a minimum year on year)
  3. Compound the fund year on year

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.

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.

Copper, Gold, Silver, Crude Oil and USD/CAD this week

Copper has had an intense week and finished high. Silver, in particular, has spiked up. Gold also increased but ended the week more or less even. Crude oil has finished the week reasonably strong. USD/CAD is still some way from turning up and will need careful management.

Here they are in slightly more detail:

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My premise on Copper has changed. Copper, I feel, is some way from a big turn down. I would consider a small increase in price before a drop to our low two weeks previously – and then a possible climb. We will look for the best price to exit our copper trade.

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Silver has had a dramatic couple of weeks. Two strong weekly moves up taking silver from the one-year trend line to the, higher, 10-year trend line; indeed, the price of silver bounced precisely off this line – marked with a circle. Always challenging to short when everyone else is long. But that is what we did. Of importance, and supporting our case, the COT for silver shows commercials at an 8-year record with the number of shorts compared to longs. Hold onto your hat!

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Gold has not been as dramatic as silver. Up in price all week, gold finished low for the week supporting our prediction of gold progressing further down in price over the coming weeks.

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I’m a supporter of a drop in price again in crude oil, but it may take its time. Price was possibly getting to somewhere marked by the red circle. For now, we remain on the sidelines.

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USD/CAD price mirrors that of crude oil. Therefore, a trade on both is double the risk and significant consideration. As with crude oil short, it is early days to consider USD/CAD long. A turn somewhere in the green box, however, is a good probability. But risk-reward is excellent when we catch a trade early. Probability is the other major player in the trader’s equation; moreover, proper management of early trades is essential.

Slow Trader Trades

In our fund (Slow Trader) we recently invested short – that is to say, we want the price to go down – in Gold, Silver and Copper. (This strategy is a one to three-month trade, but varies slightly for each commodity). 

Fund exposure is currently £70,738 (leveraged)

Silver stop risk is £1,953 – between 4 trades.

Silver target is £4,633 – between 4 trades.

Gold stop risk is £1,252 – on one trade. (A limit order is in place to short more if gold price rises).

Gold target £2,518 – on one trade.

Copper stop risk is £1,929 – between 2 trades.

Copper target £2,918 – between 2 trades.

We use the Commitments of Traders (COT) report to give us a small edge. The COT is, other than cyclical analysis, probably the only indicator that is not price based. And, therefore, an independent viewpoint. We combine the COT with our technical analysis of each commodity.

Here is an example of the COT released last night. The same information is available for each of our commodities. My attention is on what Commercial is doing.

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The importance of getting the technical analysis right is due to the COT being in lag by nearly 2-weeks. Which, based on our strategy, is between a half and a quarter of the expected trade duration. In other words, we need to use a right amount of interpretation (and rely on technical analysis) for a significant chunk of the trade time.

More specifically, COT figures are from each Tuesday but are not available until late evening (UK time) on the following Friday (i.e. ten days). As the markets close until Sunday night (UK time), it puts the COT information nearly two weeks old. But even with that considered it’s still the best, broad, indicative information we have – other than our technical analysis.

Do fundamental and technical analysis mix?

Of my fifteen years of trading, the first ten years spent on reading fundamentals. I don’t regret this one bit. Fundamentals are what drive the price of a stock over the more extended period, and I do mean more extended period. Fundamentals to me are great if we’re talking more than 20 years, and I prefer 30 years plus.

However, for clarity over the near term (presumably from my thought above, near-term is anything less than 20 years) technical traders hold the key. That is a bold statement as every magazine, or commercial pundit tells us its fundamentals all the way.

Can we combine both technical and fundamental? Yes, of course, and some traders report to be doing this successfully. To some degree, I do this with the Slow Trader Fund when I trade from daily charts. In this case, I will take commodity trades when the COT report is in agreement with the trade. However, the fundamentals of stock do not mix well with technical analysis over the shorter period. One confuses the other, and that is never a good basis for a successful trade.

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.

Slow Trader Diary – week 35

Gold, we’re in long. Broker charges for the week were a credit of £9.48.

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Our target is in the region of 1212; this is in-line with the COT, and if the present bull continues it will nicely form a trend long. However, as we have seen this week, the market remains volatile.

Of the other trades we considered earlier in the week:

Silver moved down lower than expected, did not provide a price at a level I could determine. So no trade.

NZDUSD remains a possibility to go long briefly. But it is presently stable below its low of recent weeks.

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GBPUSD, having been quite stable through the initial turmoil of the week, just blew down. It may turn at the 15350 regions or continue down to as low as 15190. I’m less convinced of this trade. It has, for now, become choppy which always makes for a difficult read. The COT is still a buy but is weakening, we do not have a recent trend, although the intermediate trend remains long. Only excellent (daily) price will convince me to take GBPUSD at the moment.

EURUSD is approaching our predicted bounce point. However, the COT is about to turn, and we are all aware of the volatility presently associated with the EUR. My thought is that the bounce could happen, but briefly. Price may turn down again before the previous high thus continuing the trend short.

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WTI, or crude oil, bounced off its lower stop this week. This move has the support of the COT, but nothing dramatic for the time being. Too early to decide, but it is on the watch list.

Finally, the S&P and FTSE have moved up slightly, but the roller coaster might not be over yet.

As I’m away for a few weeks, the next diary will be 26th September.

Wonderful opportunities

Difficult times in the trading business for the longer-term investor.

Excellent opportunities for short-term swing traders, if we get it right.

I sat on the sidelines as the markets slipped recently. Unable to take advantage of shorts (trading the market to go down) as it all happened so suddenly. The large dips in FX (foreign exchange pairings) occurred, in those, I monitor, within a minute.

There are aftershocks, so timing any recovery is unusual. Those that I will consider are:

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At some point soon Silver will rally. However, the recent bear trend means we wait for a clear signal.

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NZDUSD is firmly down on the long trend. The COT is a buy, but we have to be careful with the COT signals when the COT is going against the longer trend; the COT, in this instance, still often works but can be short-lived. There is a possible buy opportunity here.

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I’m looking for a buy in gold at about 1125 price with a good buy signal. Catching the signal with the correct buy: on-market, on-limit or on-stop is vital.

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GBPUSD has been relatively stable over the last few days. A retrace to the 21-day moving average (MA) is worthy of consideration. It may happen quickly, if at all.

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EUR might strengthen again soon against the USD. Unless I get daily, or, at a pinch, 4-hour price action at a support level, I will not take this until about the 1120 level.

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Finally, the S&P 500. Difficult to judge. With the recent dip, the S&P could provide a useful gain on a bounce. A buy in the region of 1836, but could go down further to the 1770 area. Good price action, or whatever is your chosen price criteria, is essential here.

Lower trade values and full stop positions are considerations when volatility is high.

Slow Trader Diary – week 34

Here are the ups and downs of this week:

Pace PLC loses £294. AUD/JPY lose £770. Silver gain £363. USD/JPY gain £115. EUR/GBP gain £523. Broker cost was a gain of £18 (the increase was interest earned as we were up with USD/JPY for several days).

Net for the week was a loss of £45.

The (unexpected) last minute strength of JPY took away a potential two grand gain for this week. That is how it stood financially. In ‘how well we traded’ terms I was pleased with this week. We called the market correctly in everything but a late dip against JPY. That is the nature of the business.

The central area for improvement is the risk/reward amounts. We didn’t manage better than 1 to 1. To make money consistently, this needs to improve to an average of 1 to 3. That is winning need to be, on average, three times bigger than the losses.

Take AUD/JPY above for example. Our stop was 110 points (often called pips) away. That means I felt that the trade had the possibility of going up at least 330 pips. Three times the risk. Or, 3R. If I didn’t, I more than likely would not have taken the trade. It’s a necessary filter to keep the risk-reward balanced in our favour.

The critical reason for this is simple. At 3R we can lose some 60% of the time and still make a profit. Okay, it will make it hard work, but a profit none the less. We aim to have the statistic the other way round and win 60% of the time. Importantly, however, if we are not achieving an average win of 3R – we lose long term.

So keep an eye out in future for the ‘R’ which I will post after each actual win/loss. If you see 1R consistently on the wins, you will know that we are not cracking it.

From this week’s charts:

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We know from the COT (commitment of traders) report that gold and silver were ready to buy. We had to be careful however of the long-term trend against both of these commodities. Therefore we waited until, in this instance, silver went long and retraced to provide a long opportunity in the direction of the COT.

Very nicely done. I came out – correctly – at only 1R because the overall trend was still too strong on Silver. We may get another opportunity to buy this coming week.

Gold, on the other hand, did not retrace and I was left watching it go up – even though I knew it was going up. There are strategies to jump onto the train and, influenced possibly by Silvers retracement and thinking gold will do the same; I missed one.

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There are positive buy signals above. And signs to jump on board. Hindsight remains wonderful!

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Sometimes we can do better. I’m pleased with that EUR GBP to buy above. It was an excellent call; if I say so myself, however, I came out way too early. At only 1R. You get the picture. Why did I come out at 1R when the market for EURGBP was going so strong? That, as we have already mentioned, is the area for improvement.

I had a buy order in place with EURUSD and missed a great buy by only a few pips, the chart then zoomed up. But I’m happy with that as the trade (although missed marginally) was correct.

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USDJPY above, was this sell instinct? I bought USDJPY on a retrace, from a recent Up, on the one hour chart (chart above is the daily chart to show the week). I was looking for a 3R with this one, and we sat at 1R all week. I noticed the move down (unexpected strengthening of JPY) and sold with a small gain of £115 (all week the profit had been £600).

The interesting thing about trading is the necessity to detach yourself from profit. Regarding ‘pips’ is better. If we’re emotionally attached to money amounts – up and down – we cannot trade emotionally detached or to the best of our abilities, consistently, over the more extended period.

Worth a mention about S&P below and FTSE.

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For those in traditional funds, they would have taken a battering this week. The FTSE is a similar picture. I realise that those in managed funds, for the long term, then this is only a 20% blip downwards. However, I would like to take the 20% back up, without having suffered the down bit.