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Pick A Market - Know When To Trade - And Know When Not To Trade

Wednesday  3 March 2010

 To succeed in trading futures, or any makret, one has to have some kind of
an edge.  We have stated how important it is to know the trend and trade
with it.  The is the first edge one can have, price momentum. What happens
when there is no price momentum?  Many who trade have a hard time
adjusting to non-trending markets and can get chopped up from swings that
turn with little direction, or just after it seems a direction is under way.

 We are showing a selection of charts to demonstrate how markets are
trending less and less over the past several months, and that increases
risk exposure.  Anytime you see a market in a trading range, your level of
knowledge is at its lowest level...price can go in either direction, much like
tossing a coin.  When your odds of trading successfully are at 50%, there
is no edge.  These charts reflect how price changes as a trend seems to
develop, but goes nowhere, or changes direction.

 A lack of an identifiable trend is an anathema for having a higher level of
knowledge about price direction, and it increases risk exposure for less
definable results.  The S&P had a labored rally for the last two months of
2009.  Daily trading ranges were smaller and overlapping in a grind higher. 
January appeared to show a change in trend as price move sharply lower
on wider ranges and increased volume.  Yet, there was no follow-through
after the 5 February low. 

 Usually, a market will have a counter-trend retest rally, and the early
February trading range stayed within a down trend.  There was a quick,
one day rally, and that led to another trading range.  There was no
reason to be long in a down trend, so buying into that rally did not make
sense.  The way to trade was to look for a selling opportunity.  What has
been happening is yet another failure to stop in a normal corrective rally,
and instead, price has been holding, working higher.  Right now, price is
at the level where selling entered the market, 21 January, a level or
resistance.  The daily trend is now marginally up, but there was no real
transition from down to up.

 

 S&P D 3 Mar 10

 Another example is the Euro.  This is a 240 minute chart, used by currency
traders.  A "pip" is used to denote a tic move, so 100 pips is the same as
100 tics, or 1 cent.  In a somewhat narrow 350 pip trading range over the
past month, there has been 2,450 pips in price swings, almost 8 times the
range.  Try finding a trend to trade in that kind of environment!

 In the currency markets, in general, many of the better moves occurred in 
overnight trade, and that only served to increase the risk factor during U.S.
trading hours.

 EUH 240m 3 Mar 10

The grains have not been any better.  The down trends stopped in
February, but price has been range-bound since mid-January.  It usually
takes some sideways trading to develop a base from which to launch a
new trend, and grains appear to be doing that, but there has been no
clear movement.  A lack of any trend direction puts the level of knowledge
for trading very low, and offers no edge.

 WH D 3 Mar 10

One of the strongest markets has been gold.  The swings have been larger
in dollar amounts, but you can see that there has been no sustainable
direction, and price is where is was at the beginning of last December.  The
risks in metals has been greater, dollar-wise, because of the higher metals
value, making the moves from day-to-day very expensive, and often erratic. 
No edge there, either.

  It is difficult to not trade, as most in the markets want to see activity, and
expect it.  We have reduced our trading as a consequence of this kind of
market environment.  It is not a popular position, but when market positions
offer risks equal to, or greater than a perceived reward, it is an inviation to
be in an environment to consistently lose money.

 Markets go through phases.  We are in a such a transitional phase.

 Caveat emptor.

GCJ D 3 Mar 10