Natural gas out of thin air…Now there’s a good idea
With front month Natural Gas closing at 3140 yesterday, its lowest price in over 2 years, you might be bracing yourself for my annual tirade about the flagrant abuse of customers by the energy cartel that operates in Britain. But you would be wrong.
Well sort of anyway. I can’t help myself from mentioning that in the same week that Nattie traded 3140, a whopping 80% decline from its 2005 peak of 15780, it was reported on the BBC news that this year alone the ever fleeced British consumer experienced a rise in energy bills of a staggering 25.4%. So much for free markets levelling the global playing fields!
Oh well at least the powers that be tell us there is no inflation to worry about, so I am sure we should behave as the reliable unquestioning citizens that we are expected to be and believe all of this utter rubbish.
But hey ho, I promised not to get on my soapbox today, so let’s turn to something a little more positive. I was joking with friends yesterday about how they will be giving away natural gas with cornflakes before long it is so darn cheap. Funnily enough that might almost be the case soon.
How about an unlimited supply of cheap, carbon neutral Natural Gas! Sounds impossible right?
Well think again. Like Steve Austin you will be relieved to know that we have the technology! Better still it is under construction right now. Natural Gas produced out of thin air that does not fill the environment with CO2. What a wild idea.
Here is a very short article I read this morning about powering cars and homes with this cheap, clean, energy.
Click here to download the PDF
Pretty cool stuff I am sure you would agree.
Of course by the time the poor old consumer has access to it, you can be sure it will be much more expensive. As domestic gas supplies continue to demonstrate there is no correlation at all between what we are charged and the true wholesale prices that prevail.
However unlike “Natural Natural Gas” this stuff looks to be available in virtually unlimited supply, so may well be a key component in powering our homes and cars as the impending energy crisis starts to materialise.
About 10 years ago I did drive an LPG car and as a confirmed petrol head I can say that it isn’t as good as the real stuff, but much closer to it than electric is. I am also sure that the technological improvements since then will have been very considerable. So my guess would be that in 2013 when these cars arrive, they will be pretty impressive. We’ll find out soon won’t we!
For the avoidance doubt…Thank you Audi for the use of your article and for letting me share it with my friends.
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Copyright © Simon Townshend Ltd 2011, all rights reserved
Someone’s hushing up the MF Global affair
…but the time bomb is ticking!
I am intrigued, as well as suspicious, at the lengths that “someone” is going to to suppress this news outside of the USA. How can the 5th (?) largest bankruptcy ever simply not make the news here in England? Yet someone in Sussex has lost a cat and that’s newsworthy? Hmmm.
Half the locals are currently out of business with their working capital frozen and we have all witnessed the collapse in liquidity this month. You can’t take out the biggest player in an industry and expect life to carry on as normal. The American futures industry is basically mothballed until those MFG funds are released and even then there will be no “getting back to normal”. This industry is fundamentally changed by this sorry affair.
Short term market risks
Personally I think the stakes here are far higher than most people realise. I doubt that anyone with accounts at MFG will lose a single cent at the end of the day. However if this takes more than a few more days for the funds to be released back into play in the markets, the potential exists for a massive collapse in the markets in my opinion.
The issue here is not the frozen money. That will sort itself out at the end of the day. The real issue is the principle of segregated funds being sacrosanct including, in particular, the BELIEF that they are so. The whole industry has segregated funds as its bedrock. If the CME drags its heels any further in sorting this out it is gambling not just with viability of the American futures industry but also the stock market and many other markets too.
The slightest hint that segregated funds might not be 100% secure could have the effect on the markets be like a pin meeting a balloon. In 2008 we experienced a run on several banks as scared investors pulled their money out. Imagine that same fear being applied not just to a few banks but to financial markets worldwide! Anyone with a segregated account containing stocks, bonds, commodities, currencies could simply say “to hell with this I’m cashing out!”.
Even spread betting accounts here in England are segregated these days and as far as I can see are the cornerstone of pretty well all investment accounts.
The CME had better be smart enough to realise that they are playing a game of chicken here not just with its own little world but also with pretty well every financial industry you can think of. Hmmmm could that be why this news is being suppressed so heavily? Well in the internet age you can only sit on these things for a limited time. Once it gets out and if it takes hold, be afraid, be very afraid. Man itself is irrelevant. But as a catalyst its potential is enormous.
The money temporarily locked up in MFG isn’t the issue at all. As usual the majority are looking in the wrong direction. If word gets out to the big wide world from this very small circle that we traders all move in, then batten down the hatches.
Longer term implications
So what about the future, after this sorry mess has actually been resolved? My guess is that in years to come we will all be looking back at this event as the time that everything all changed. How big, how fast and how far reaching these changes will be is anyone’s guess. If I was to take my best guess then the longer term implications I can envisage would include these…
- The loss of many brokerage firms who previously relied upon Man for clearing services. Every day these businesses continue to pay their staff and other overheads while their clients are unable to trade. Existing clients are unlikely to refund new accounts and the firms will struggle to find new clients. Every day that the CME fools around rather than just ponying up as it inevitably will have to, is a day closer to the end of the road for otherwise perfectly innocent firms stuck in the middle of this mess.
- The industry will have to get used to the idea that clients will no longer deposit cash with clearing firms who will have to accept unmargined accounts secured via complex structures allowing clients money to be safely housed in banks that the brokers cannot touch. In future the only cash that will pass through the hands of brokers will be amounts representing daily profits and losses sufficient to return the account balances back to zero again. Those who will benefit from this fiasco will be those firms who are first to roll out such mechanisms, already used by small numbers of more highly valued clients, to their whole client base. Those who are slow to adopt such mechanisms will rapidly go out of business.
- A mass exodus of volume away from the fundamentally broken, and never again to be trusted, American futures industry. The European exchanges are the ones likely to hoover up all of this business by developing a more progressive regulatory regime while also providing better proximity to the emerging markets, making them the obvious next step for the global centre of the industry in its natural progression from west to east. I would be very surprised indeed if European exchanges are not already planning mass marketing campaigns and big incentive schemes for next year, ready to take on the wounded beast that the CME will shortly be revealed to be. And let’s not forget that exchange fees in Europe are already a fraction of the extortionate rates charged by American exchanges, plus contract sizes are also much bigger. So putting together very enticing schemes to lure away that volume will neither be difficult nor costly!
- A loss of the hitherto distinct Asian, European and American trading sessions as a more normalised genuine 24 hour market evolves to cater for all timezones from a more natural geographic centre in Europe.
- Lots of new and exciting products to compliment the existing deep, but limited range of markets available in Europe, with lots of volume from very early on in the new products’ life.
- Ultimately the migration of large numbers of traders from the United States to Asia and the Far East, where they can enjoy substantial tax benefits as well as trading whichever of the old timezones that best suits their lifestyles and still operating accounts within the safety of the European regime as it evolves.
Is that all bad?
Absolutely not! There certainly will be short term pain, do doubt about that. But I believe that the short term inconvenience that we are all being put through will soon be surpassed by the benefits of the improvements that will come about as an antiquated industry wakes up and gets dragged into the 21st century triggered by this catalyst that is the Man Financial mess.
Will any of my hypothesis come into being? I have absolutely no idea. But I am sure that 2012 will prove to be a major pivotal moment in the history of this industry. I also believe that whoever it is that is, so far, being effective in burying this major news, knows it too. Well the lid won’t be kept on for very much longer, there is no going back to business as usual, so the next question is what the short term fall out is going to look like before the phoenix arises from the ashes.
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Copyright © Simon Townshend Ltd 2011, all rights reserved
This is what you asked me for…and its on its way!
For two and half years now I have been trading a strategy that has also been made available to a tiny group of professional traders. Many of these people have made big money in this time, where big means 6-figures for some of them – in addition to their own trading returns.
However, this has one particular limitation and that is the fact that the signals are taken off daily charts and actioned in the most part at the end of the day. This was deliberate as it made it ideal for more passive traders and investors who had lives outside of trading and who did not want to follow the markets during the day.
But daily charts by definition mean a relatively small number of trades and relatively large initial risk per trade. This is perfect for those more “passive types” but during this 2-3 year period many more active traders have asked me…
“Isn’t there a way to trade this intra-day, off smaller charts, with lower risk trades?”
There wasn’t.
A moment of madness!
But more and more people asked which got me thinking. Then one day, in the summer of 2010, I woke up one morning and decided to do something completely crazy. I decided to start trading the same strategy intra-day off much smaller charts.
What’s crazy about that you might ask? Well nothing in principle. The bit that was a bit off the wall was doing the whole thing before a live audience!
Yeah that’s right, no quiet development in the basement late at night. Just straight in at the deep end in the live market with my most loyal and closest clients watching every damn trade in real time!
OK, lets be honest, I didn’t take that leap of faith without a pretty good idea that it would work. But it wasn’t perfect. It took a bit of refining and developing as we went along.
A little help from my friends?
We have been quietly trundling along making about $7,000 a month with this. Then last month with the help of some of the gang also watching out for the sort of things I look for on my charts, we increased our number of trades and our profit on the month exploded to $15,248!
I should point out that we are not scalping for a handful of ticks here and there, but seeking 2 to 3 high probability trades per day each worth a decent chunk of cash. Oh and we only trade 2 to 3 days per week too, so this is about as low key laid back day trading as you can find!
Well a year down the road, with a tidy old profit under our belts and having really found the groove in our weekly activities, I have decided to admit just 10 new members to this exclusive group. This is the chance for those who have been asking for such a service to finally receive exactly what they have been looking for.
Work is underway finalizing everything and I hope to release those 10 new spaces in early October. So if this sounds like your kinda thing, watch this space and I’ll let you know the moment those places become available.
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Copyright © Simon Townshend Ltd 2011, all rights reserved
Great days ahead, but bide your time!
Did you watch the events of yesterday unfold in disbelief? Spectacular wasn’t it?
- Crude dropped almost $12 in one day to close back in double digits once again
- The Dollar Index made its biggest one day gain in months
- Silver extended its losses to close the week down a whopping 30%…
Dramatic moves, but this is wonderful news for traders as these events act as a stimulus to get things moving again, for new trends and new cycles of trade setup to develop. It is no secret that the start of 2011 has been marked by lots of chop and instant changes in sentiment. This is not uncommon at the end of trends and is a tricky environment to navigate.
But from this sort of action new trends can be born that provide new opportunities for many weeks and months to follow. So look forward to easier times ahead.
However, be careful for the next few days. We all have the urge to jump right in and want to make up for lost ground. It is difficult to be watching from the sidelines at these times. But there is no hurry! The opportunities will be abundant for a long time after the initial shock kick starts flaky markets. So there is no need to be in there fighting on day one.
The first 2 or 3 days after such an impulse can provide huge opportunity. But they are extremely difficult to navigate. New volatility levels have to be adjusted to and the markets always over react making short term sharp reversals likely. So the chances of getting into trouble are also much higher.
My advice is to let the dust settle before getting too actively involved. Play the long game. Make great use of the new cycle of clean swings that will unfold over the coming weeks and months and remember that Rome wasn’t built in a day! We have waited all year from some sort of impulse, so another day or two of playing it cautiously isnt going to hurt at all.
Then once the dust has settled that is the time to really set to work.
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Copyright © Simon Townshend Ltd 2011, all rights reserved
Combining Disparate Timeframes
A popular topic in trading circles is the use of multiple timeframes. Lots of traders like to use more than one timeframe to support their hypotheses and used properly such techniques can have considerable benefits.
However most proponents use relatively similar timeframes and in my opinion in doing so they are missing the true value of such an approach. I like to use truly disparate timeframes, ones that are radically different to each other.
Copper last week gave us a timely example of this, so let’s use a real life example to illustrate the power of this often misunderstood concept. We will start with a daily chart of copper…
Our strategy gave us a buy signal at 435 shown with the red arrow, which we duly entered and we are still holding the bulk of the open position. Actually our own buy signal was in fact supported by a more traditional technical feature on this same daily timeframe…
We can see an attempted downside break from the longer term chart formation a few weeks ago. A failed breakout can often lead to a much more impressive assault on the other side. So in this case the breakout to the upside which came the day after our buy signal could be expected to perform well.
So once we had a daily buy signal its next a case of trying to limbo in at the best possible price. To see this we drop down to an hourly chart, obviously a much smaller timeframe…
After the daily buy signal we actually entered overnight with a resting order as shown by the red arrow. What can we see here on this hourly chart? Here we have a simple little bull flag providing a nice lower timeframe entry into our main daily setup.
Sadly these things don’t set up perfectly as frequently as we would all like, but we are regularly talking in the chat room about looking for hourly entries into longer term positions. Why? Think about it from a Risk/Reward perspective. If you can occasionally combine the risk of an hourly trade with the reward of a daily trade – this is something to be played for any time such an opportunity shows its face!
Finally let’s look at the weekly copper chart…
Oooh! Now we have a weekly bull flag and with a little luck this may be ready to start kicking in for us. Only time will tell. But what I do know at this early stage is that an hourly entry into a daily set up with even the faintest possibility of capturing a weekly move – this is trading utopia and is the sort of thing that all professional traders should always be on the lookout for.
I know many traders like to use combinations of 5 minute and 15 minute charts, or hourly and 120 minute charts, etc. While there is nothing wrong with that per se, the real advantage of multiple timeframes is to be gained from the correct use of radically different timeframes.
We will be exploring the power of disparate timeframes at our seminar this summer. Are you ready to put a range of clear cut, logical and practical techniques to use in your trading? If so be sure to join me, George Kleinman and Jeff Quinto for this one time, one day event as we share the secrets gained from 100 years experience in the markets.
A maximum of 50 people worldwide may join our private clients at this exclusive event. If you are ready to take your trading to the next level, please reserve your place before this event is advertised to the general public. I hope you can join us for a truly revolutionary day… www.CenturyOfTrading.com
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Copyright © Simon Townshend Ltd 2011, all rights reserved
“Evolve or Die” – LBR webinar replay
I was swamped with feedback after the webinar I recently gave with Linda Raschke and have tried (!) to respond to everyone in the days since this took place. Thank you to everyone who took part and I’m delighted so many people found it so thought provoking.
If you missed the live event or would like to watch the replay, here is a link to the video archive. Just click on the picture below…
Enjoy it, let it percolate in your mind for a few days and see how you start to think differently about the markets and start to find ways to simplify what you yourself are doing each day!
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Copyright © Simon Townshend Ltd 2011, all rights reserved
A Century of Trading – June 25th
Jeff Quinto, George Kleinman and Simon Townshend together have over 100 years of experience in the markets! That’s somewhat alarming to them but great news for you.
Call upon a century of experience and learn 6 trading techniques and money management strategies that these 3 traders use in the markets today.
At this one time, one day seminar in Los Angeles, Jeff, George and Simon will teach you techniques that have stood the test of time and that they personally use today. These are all straight forward, based upon sound logic and a century of experience in the markets.
Each of these 6 individual techniques can be used on its own and each one is more than capable of boosting your bottom line. Better still use them together as a powerful solution to long term trading success.
The 6 techniques you will learn are as follows (full details on the other 3 pages of this website):
- George’s Secret Indicator (and a complete strategy for using it)
- Behind the Chart (basic & advanced use in trend following and reversal trading)
- Don’t be Afraid of the Money (how professionals handle their capital)
- The Power of Natural Numbers (a breakthrough strategy for capturing profits)
- The Keys to the Kingdom (the much overlooked power of trade sizing)
- Overcoming Fear and Programming Confidence (turning a new trader into a survivor)
Best of all you can take any or all of these and start using them yourself straightaway on Monday morning.
To find out more, please visit: www.CenturyOfTrading.com
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
“Greed is good”…except when is blows you out!
In Gordon Gekko’s universe greed may be good. Alas in my more modest little world greed is usually the end of many trading careers. Greed often manifests itself as trading with unrealistic size and that can be a time bomb!
One of the most frequent questions I get asked is “how much should I risk on each trade?” The irony here is that such an important question is one that I have to steer very clear of, as in my country that is a question I would need to be licenced to answer!!!
However that doesn’t stop me sharing my thoughts on the subject generally, nor does it prevent me revealing what I personally do, so let’s get on with it!
Mr 10%
First I want to tell you a quick story about a guy who has come to be known as “Mr 10%” among my circle of friends. I don’t know who he is, nor can I actually find him anymore. But Mr 10% was someone I found on the internet a few weeks ago who was urging traders “to risk no more than 10% of their capital on each trade”!
My guess is this is someone who has never traded in his life. Or if he has I am quite sure that just a few weeks on from seeing his ridiculous video, he is no longer trading. Risking 10% is an express ticket to the poor house and it is beyond my comprehension why anyone would be so foolish to even attempt such an idiotic thing.
Of course just to be clear throughout this article I am referring to trading capital and not just the balance in any particular brokerage account. Sure you can risk 10% of the $25k you have in an account if the other $250k of your trading capital is sitting the bank or in other accounts. I don’t have a problem with that at all. But if that $25k is your trading capital in its entirety…that is another matter altogether!
How about 0.1%?
At the other extreme, let’s say we are risking an incredibly small percentage of our capital on each trade, what then?
Well for most traders that would probably not be appropriate either as you are unlikely to make any money over the long run. So why bother?
There is however one situation where such a tiny stake would be the right answer and this is in a situation where the strategy being traded has a very low percentage of winning trades. This is not my scene at all, but I know of people who play for huge amounts on their successful trades at the expense of being paid regularly. Perhaps only 1 in 10 trades is a winner, but when they come around the winners are 20 or 30 times the size of the losers.
Even though I couldn’t live with those sorts of numbers, that is still a profitable strategy. But it will have huge losing runs! Huge! 50 to 100 losers on the trot are quite feasible in this scenario, so you would have to trade such an ugly system with tiny leverage in order to trade through the almost constant drawdowns.
The middle ground
Clearly in between these two fairly ludicrous extremes there lies a middle ground containing the right answer for most of us. What that right answer is depends on many different factors:
- Strategy winning percentage
- Relative size of average winners and average losers
- Capital preservation plan
- Personal risk tolerance
- Overall trading objectives
Every one of these factors varies between individuals, which is one of the reasons I cannot give a simple answer to this question I get asked so frequently, even if I was allowed to give personal advice.
Most of the professional traders I know regularly speak in terms of 0.5% to 2% being the “right” amount for them personally. Most of traders I know also work with similar sorts of statistics, i.e. 50%-75% winning trades and average winners being greater than or equal to average losers. So with a strategy with that sort of edge 0.5% to 2% seems to be a well-accepted order of magnitude.
Mr 1%
For me personally 1% is a comfortable place to be. I’ll never win trading competitions with this relatively conservative size, nor will I get blown out. It is a simple fact of life that if 2 out of 3 trades are winners and 1 out of 3 are losers, these will not materialise in a convenient win, win, lose, win, win, lose pattern. There will be long winning runs and clusters of losers. That is just how it is. So you have to be willing and able to trade through the drawdown periods. That means understanding the importance of your unit size and how dangerous greed in this area can be to your survival.
Any fool can make money during the easy times. But only those with commitment and sensible conservative leverage will survive the rough patches.
Yesterday I was doing some work with one of my partners on trade sizing. We have been slowly increasing our unit size and are still below this 1% level, but are homing in on that as the place we want to reach and then maintain.
We looked at the real time results since launch using a fixed but modest 1% risk per trade and a maximum loss per month capped at 5%. We can live with that and so can our investors. We can absorb a few losers here and there and not have to panic or worry about being blown out. This business is hard enough without having to endure stress that it completely avoidable.
At 1% risk this is the P/L since the strategy went live. You can see it still makes decent returns at this nice safe level of leverage:
Now let’s consider these other two extremes we discussed. At 0.1% risk we would be looking at a total return of 9.1% compared to the 136% we see above. At something less than 5% per year this is simply not enough to make the exercise worthwhile.
At 10% the numbers would be huge, too silly to quote. However even with a strategy this consistent those tiny little dips would have more than halved the capital – not quite a blowout but very close indeed and not something that many traders would live through.
Conclusion
I hope this illustrates the importance of finding an answer to this question that so many people ask, yet to which there is no “one size fits all” solution.
What I do know from my experience is that it is easy to start too low and slowly work upwards, whereas starting too high is likely to be fatal. In fact I strongly recommend to all of my clients that they start so low that they are paper trading. Only with some experience and confidence should they then venture to trading a single contract. Then over time slowly build up to whatever percentage of capital they have decided is right for them.
This way time is on your side and everyone who has followed that advice has ultimately thanked me for it and told me they have learned how to ride both the financial and emotional dips without ever risking being blow out before hardly starting. Every one of those that followed that advice remain with me today and their confidence levels remain resolutely high when handed a fistful of losers. Whereas sadly there have been others who are gone at the first little set back. I don’t know, but would be willing to bet that in every case these folk have been using too much leverage.
So if in doubt about the trade size you should be using – make the most balanced judgement you can and then halve it!
As a final thought on this topic – no trade should matter to you. It is just one of a long series.
As one of my friends likes to say “It is just one of 10,000 trades you will be taking. We are the house, we have the edge. Its just our job to keep taking the trades.” So if the next trade matters to you, or the next 2, or next 3…you know you are trading too big, so you need to work on this area of your trading plan.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Busy, busy, busy!
Well it has been a few weeks since I last had a chance to write any articles. My word I have been rushed off my feet these last few weeks, with so many exciting projects all going on at once.
But the main thing is that each of these represent progress in our trading business. All of a sudden technology has been THE focus, with revisions to websites, launching a new chat room and a planned iPhone app to name but three.
So that got me thinking that I should add some technology insights to my list of planned articles to share with you over the coming months. I get lots of people asking me about what charting and execution platforms to use, etc. As this is an ever changing landscape, I have made considerable changes to our own technology here this year. So this does seem like a timely topic. Watch out for the first one on charting platforms heading your way soon.
The end of an era
Of course tackling lots of additional projects is all well and good as long as the main business is doing well. For me there have been some fundamental revisions over the summer as a result of which we are in great shape in our trading. For more years than I care to remember the primary focus of our business has been short term scalping in the S&P, with a few other profitable but smaller scale strategies traded alongside this.
I am sure you don’t need me to tell you that S&P scalping is a business that has been in real decline over the last year or two. Over the summer we did some serious questioning of how our time is spent and the returns we get from that invested time. It became very clear that with relatively little time being spent trading other strategies that have had phenomenal returns over the the last couple of years, it was no longer possible to justify most of my time being spent glued to 1 minute S&P charts that have produced almost completely flat returns of late.
So my days (or is it decades?) as a short term scalper are now at an end! Or at least very much on hold until such a time as “freely traded markets” return to being freely traded and both volume and volatility make the the S&P scalping business a viable alternative once again. That might be next month of course, but after all this time I am not banking on a return to normality any time soon.
Today’s money is in the real moves not the noise
Stepping away from the short term noise is a great feeling once you get used to it. Even during the difficult market conditions we have been banking great regular profits with our longer term swing trades. October was our 20th month since going live with this strategy and our 19th profitable one.
Needless to say this is where much more of my time and capital is being focused now that scalping is off the cards. It was a difficult decision to make, but such a logical one. Longer term subscribers to this newsletter may recall that I have a small group of professional traders who also trade this strategy for their own accounts and who are also enjoying great success. Personally I am really enjoying the vibrant community that is growing among this group of traders who have all become great friends.
It is also a real bonus and a pleasure to have George Kleinman working with me and executing the trades for those members who want the returns but without the hassle of actually taking the trades themselves.
So all together, everything is progressing brilliantly and we are also having a great time.
Fancy joining this exclusive club?
It is about 6 months since I last took on anyone and have essentially kept the door tightly closed ever since then. But I have now decided to accept just a handful of new members as we run into the year end.
If you are serious about your trading success and would like to take a look at the most consistently profitable trading strategy I have ever seen in my near 30 years in the markets, then please pay us a visit at www.SeriousInvestmentReturns.com
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2010, all rights reserved
By the time you spot a bandwagon…
…it has probably already passed you by!
Those were the famous wise words of the rather flamboyant financier Sir James Goldsmith. Well this week the wheat market became one of those bandwagons. I know this is not a market that every reader of my articles will be following, but it provides such a good lesson in trader psychology that I want to spend a few minutes today discussing it.
Over the last few weeks this market has been having a spectacular bull run and in the last few days it went parabolic, as you can see in the chart below:
You may recall a similar thing happened in Sugar last year and I discussed that market at the time. Today’s story starts on Wednesday, 2 nights ago, when like many people I watched the evening news and heard all about the terrible fires and devastation in Russia. The loss of 25% of the wheat crop was a considerable chunk of the report. “OK time to take great care in Wheat” was the first thing that went through my mind. “The great unwashed will be going shopping tomorrow stoked up by the media reports” was the second thought that went through my mind.
True to form Thursday saw the wheat market close limit up as everyone scrambled to climb aboard the bandwagon. On Thursday night I mentioned to my closest friends that this market could run a lot higher still, but to be careful as such moves end just as spectacularly as they begin. You never want to consider continuation trades in a parabolic market and nor do you want to start fading them until after they have turned. In fact unless you have a lot of experience with these types of moves you just don’t want to touch them at all.
So today there was another huge run up in wheat as the last of the desperate buyers emptied the last of their available money into this market chasing the dream that it would continue climbing to the moon. What the less informed masses fail to grasp is that the move up is only sustainable for so long as they have money to drive it up themselves.
But the minute the buyers run out of money there is nothing left to drive it any further and inadvertently they then become the architects of their own demise. Sadly I was away today so missed all of this classic saga unfolding. But I found it telling that the market ran up again early today, almost to limit up, but not quite. It then traded sideways for many hours just a few cents below limit up. In other words there was no artificial limit placed on the buying today – the bulls were able to buy everything that they wanted. In fact they were able to buy so much that they finally exhausted their reserves. With no more money available to come into the market it duly turned down, put a top in and closed limit DOWN!
Every single person who bought in the last 2 days (i.e. after the big news report) is now not only holding a losing position, but trapped in a losing position. Once the market was locked limit there was absolutely no way for these people to sell back out. They were late to the party and are now locked in for the weekend, at least.
Do you think they’ll be sleeping well tonight? Do you think maybe there will be a pile of “sell market on open” orders being prepared over the weekend? The market closed at 726 after some poor soul paid as much as 841 just a few hours ago. Now that looks suspiciously like a brokerage statement that will shortly be framed and hung on the wall next to all the dotcom share certificates!
Lots of trapped new players, is often the recipe for a massive squeeze. Do you think they’ll get out at 726 when the market opens on Sunday night? Or does it seem more likely that there will be a huge gap? It’s going to be ugly for them either way, so the debate now is only one of magnitude.
For us it is just another reminder of some very important lessons:
- How and why markets actually turn
- How the majority will always be on the wrong side at significant turning points
- The media’s role in driving such events
- Why we never want to chase a market, nor touch a market that has gone parabolic (until after it turns)
[As a quick aside for those that use my Behind the Chart technique, take a look at the hourly wheat chart today – a picture perfect short just above 800, with no heat and a straight line move to limit down. As I said in the webinar the fade trades are always the best ones, they just aren’t as frequent as we would like.]
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