Trading Seminars

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Featured Trading Article: Playing the Corners

A well-known saying with successful stock market, options, futures and forex traders is to never over-trade. You must show patience in the financial trading markets. I would suggest that theme be taken further to say that only the best trade set-ups be considered for your trading capital. If the market is not unfolding exactly according to your pre-determined trade criteria, then let it go. The markets are a painful teacher in correcting "almost" or "close enough" trade selection. Once an ideal setup has been identified, a critical decision must be made . . . what is the proper investment device for this trade.

This is really the point of this information. I'll share with you the benefits of this hardest learned lesson. If asked my profession, I'm quick to respond that I am a commodity futures trader. If further asked as to my principle methods, I'd probably respond as most traders would --"I'm a trend follower." Sounds OK so far. In my experience, which spans 20-yrs off-and-on, most "trend followers" are really "trend faders" or "bottom pickers" or whatever else you want to call someone who tries to enter a "trend" at the very beginning, i.e. the exact top or bottom.

It is those of you who cannot resist the thrill of pin-pointing futures market turns that I am primarily addressing. If you wish to take advantage of probable market turning points, such as Seasonal trends in grains, or extremes of some nature, save yourself some money and sleeping time.

Use a commodities futures-trading derivative market - futures bull or bear spreads, commodity options, or option spreads, a straddle, or whatever. What I call "playing the corners" in futures is extremely risky, and usually very costly. The futures markets just do not seem to have a sense of your timing! However, if your chosen traders vehicle of market participation is a spread or an option, then your "adversity" exposure is much more manageable. Your timing can be off while your theme is correct, and you can enjoy tremendous returns on your trading account equity.

Let me give you some recent examples, sharing my trading theme, setup and method of trade participation. First, let's look at the CBOT corn market. As all market watchers were well-aware of, last year we had a huge crop of corn. Corn was resultantly knocked down to the common lows of the past six years in July (weekly price approximately $2.10-2.20/bushel). As we progressed into December, I developed a trading theme that I felt would take advantage of what I considered a perfect trade setup.

The trade theme was basically this: the bad (bearish) news was out in corn and fully priced into the market. Corn was holding in a weekly trading range of $2.10-2.28/bushel. My experience and historical chart review acknowledged that almost without fail, speculators would run-up old crop corn as the new year planting season approached on sheer anticipation (hope) of some weather phenomena. It doesn't seem to matter whether there is a catastrophe or not -- speculators like to be there just in case. Fine with me.

My commodity trading strategy was to take advantage of this consistent tendency, if the trade setup was perfect. The trading range pattern and parameters had held-up for 21-weeks; long enough to establish a tradeable base (envelope) breakout. When corn broke to the upside, defeating the five month old parameters, I felt very confident that they'd (speculators) run-up July corn values well over the (at the time) price just under $2.40/bushel. To take advantage of this, and not get caught-up in real breakout, false breakout stress, I decided to buy some July corn 240 calls. They were reasonably priced at 10 ($500.00) due to low volatility (the base), and I had many months for my trade expectation, which was to at least double my money, to work out.

Experience had taught me that adverse moves contrary to my deferred month (distant), options would be minimized by my time-value inherent in the call, and that I could easily ride out the all-too-common whipsawing around the breakout. As of this writing, my trade expectation has been met, with my protective stop-loss order now at double my money. My greatest draw down was I believe 1/4 of a point - not too stressful!

A recent example of how to play extremes is perfectly illustrated in examining the cotton market. In this case, my investment method was a very simple (bear) spread technique. Again, the setup is something I perceived as an ideal situation, especially made for a "play the corners" technique. Spot cotton was trading at (high) price levels not seen since the civil war, and the deferred (new crop) months were trading at a very substantial discount to spot. Add to this, a history in which cotton typically comes sharply off spike peaks. All I needed for implementation of my trading plan, which was to buy new crop (Dec.), sell old crop (May) cotton, was a message delivered by the market itself that it was time to play the corner. That was received clearly on March 17 and 20 in spot cotton closing down limit both days (in a row).

I know from history and experience that limit days are surpassed in the direction of the limit move approximately 80% of the time. On the following day, March 21, the market gave me a wide trading range to put on the (bear) spread. From that point, I had a very viable coverage of cotton's history to fallout, and limited exposure to one of those inevitable market swings against me. As it turned out, and as of this writing, this spread has been a tremendous performer, and is very safely protected by another double of my capital exposure. I slept like a rock during those five successive limit-down days.

So, if you want to be more relaxed and a focused futures (trend following) virtual trader, play the market corners with futures derivatives. What you'll like best about using these trading strategies - the relative ease of pain when you are wrong, as most any commodity trade can eventually be wrong and lose money!

Risk Management

How much money am I going to make? I am asked that repeatedly. I can always tell how much experience a trader has by that question. It is not what you make that is important, but what one does not lose. After I have a nice trade profit of so many commodities price tics in futures day trading, the most important ingredient to my trading takes place, the break-even stop placement to guard against a trade loss. I have not read any books giving much attention to this good traders concept. What a stress less feeling it is after I am at break-even trade status!

I know you just called the broker with your stop-loss placement order and 45-seconds later you must "cancel and replace" that order, but whose money is it anyway? After a while, the commodity broker may know your trading style, at least mine knows. When I call my commodities broker he has written out my order ahead of time, and I just acknowledge the order and it's done. Also, if you can get on a one-on-one basis with an order taker at your brokerage, send them a token of your appreciation, most order takers make little income. To me, a break-even trade is as good as a profitable trade.

I believe anyone can successfully design and implement a profitable futures trading commodity trading system, as long as the trader understands market principles, what goes up, must come down faster. Twice as long to go up and half as much time to come down. That is because markets normally drop at a much faster speed than they tend to go up. So what does that have to do with trade risk management? Think about it. Do we need to use the same amount of trading risk on buying as as we risk when selling?

I believe that if I am short the market, I need to trail my stop-loss tighter to lock-in profit than when I am in a long position. As far as my original stop-loss, all my systems risk the same amount - small. I use to believe that the 3% rule was nonsense with a $10K account. But in the S&P and currencies, I day trade with less than 2%, I simply cannot get wiped out that way and my profits are at least twice as much the trade risk in the S&P when trading one contract.

Although, it has taken me a long time to figure out who I am and sometimes I wonder, trading is easier when you are not your own worse enemy. Concentrate on repeating every process of your trading steps over and over again, then one can make profits.

reprinted with permission of webtrading.com