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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Copyright © Simon Townshend Ltd 2010, all rights reserved
Rip-Off Britain – Chapter 2
I feel its time again to have another moan about my gas bills. If you were reading my articles a little over a year ago you will probably remember my last rant on this subject. At the time the wholesale price of Natural Gas had been in long term decline and was actually at its lowest price for 7 years, having FALLEN by over 75%. Yet mysteriously we, the consumers, were facing bills escalating wildly out of control over these same years. I wasn’t happy about it.
If you missed that article but these astounding facts interest you, here is the link: http://simon-townshend.com/2009/05/rip-off-britain
I heard on the news a few days ago that the gas prices we consumers have witnessed more recently are due to the weakness of the Pound. So the excuse seems to have evolved rather over the last year – maybe a few people with more influence than me started taking an interest in this market that so few people ever look at?
Needless to say when you compare the price of a Dollar (the currency in which Natural Gas trades) today to its price a year ago you notice something else that’s rather intriguing…A year ago a Pound bought you 1.5 Dollars. Today it buys you errr 1.5 Dollars! In the period in between the Pound has been STRONGER, not weaker, actually maintaining 1.6 to 1.7 for the majority of that time. So that was a pretty feeble excuse then. But maybe it served its purpose and diverted unwelcome attention away from the true wholesale gas price.
What will they think of next? Actually I have a sneaking suspicion that the next excuse will in fact revert back to the “terrible rises in the wholesale gas price”. The fact that these rises , if they do in fact happen, will come from an unbelievably low base will no doubt be overlooked as the con unfolds.
Why do I think this? Well over that last few weeks the Natural Gas market has actually bottomed and is now starting a very pretty well behaved new uptrend. How far it will rise is anyone’s guess but when you see just how far it fell over recent years, a very substantial rise is by no means out of the question:
The real question on my mind is if my own gas bills were able to rise during the biggest fall in real gas prices in recent history, what the heck will happen to them now? I fear we already know the answer to that!
On a slightly more positive note – my fund members and SIR subscribers have been long this market for the last few weeks and we plan to not only hold onto the existing position but to add to it at every opportunity if this new uptrend develops as it has the potential to. So “They” may have really shafted us on the way down, but at least we are somewhat hedged against the next round of shenanigans that no doubt will start to become newsworthy over the coming months. 
I dont know about you, but I am getting more than a little bored of being treated like a mushroom by the powers that be.
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Copyright © Simon Townshend Ltd 2010, all rights reserved
Think longer-term
Well as I said last time, things will come back to life all of a sudden. It now seems like they already have, which is wonderful news.
Aside from bringing the shorter-term S&P business back to providing much better and more frequent opportunities than we have seen for many months, there is another factor we need to be aware of right now.
I also mentioned a few weeks ago that I felt we were close to significant inflection points across a whole range of markets. I still stand by that view and believe we have now seen longer-term tops and bottoms put in across a wide range of markets; commodities, currencies, equities, energies, metals. A quick look at the daily charts will give you good feel for which markets are showing new directions and which are still just slopping around. The only market group that I am less convinced about are bonds, where I don’t really have any good insight at present.
I think many markets are in the process of starting new longer-term trends. In fact I have no less than 17 markets on my watch list for next week, for possible early entries into new trends. That is a lot of markets. Of course they won’t all set up suitable low risk, high probability entries which we look for. But with or without us on board I am looking for new trends to develop. Some markets such as the Dollar and the Euro are already well ahead of the rest having established new trends some weeks ago.
If I am correct (!) this provides one of those relatively rare opportunities to think longer-term. I don’t mean holding onto individual positions for longer necessarily, but changing perspective slightly to take advantage of a relatively unique situation. These opportunities only show up every couple of years or so, but here is how I believe we should capitalise on them when we are able to.
- Trade absolutely as normal – use the same entry setups, trade management and exits as you always do.
- However where you are able to, keep a small piece on, rather than exiting the whole trade each time. Tuck these small positions away with a breakeven, or close to breakeven stop.
- Forget about them! Don’t fiddle around or micro-manage. Think in terms of weeks, not hours or days. If you get some runners you will need to handle contract rollovers and in the future you can tighten up and start trailing stops.
- As the new trends progress and new trades setup – repeat the process, leave another tiny piece on. Keep repeating for as long as new opportunities present themselves.
- When adding to an existing position use a breakeven stop based upon the average entry price of both (or all) small positions. This gives the market plenty of room to work, but without risking any of your own capital.
- Aside from any necessary rollovers, give these speculative trades a few months (yes months!) to work and see what happens. Some will work and some will not. If you catch major moves on just 2 or 3 markets that could be a heck of a big bonus this summer. If you don’t get lucky the cost should be minimal, if anything at all.
I’ll leave you to play with the concept and see if your own trading style and approach can adopt a little add-on of this nature to take advantage of this particular situation.
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Copyright © Simon Townshend Ltd 2010, all rights reserved
At last there is life!
I had an email from a newsletter subscriber a few days ago, asking me where I am and what I am up to? “I haven’t heard from you in several weeks”, he wrote. “Is everything OK?”
Well yes I am just fine and yes I have been quieter than usual recently. The reason is simple – there hasn’t been anything much to say. As I said when I started this service, I’m not in the business of writing for the sake of it. When there’s a lot going on I’ll happily put out a newsletter several times a month, but when things are quiet there is no point wasting my time writing or your time reading. It is not everyone’s philosophy I know, but it is mine.
Over the last few weeks most markets have been on their summer holidays it seems. In fact September was the quietest time I can remember for ages with virtually nothing worth doing in any market. This can be very frustrating for many traders, especially newer traders who are champing at the bit wanting to trade. But experience shows that such times just have to be endured. You cant make a market come to life and your choice boils down to just a couple of alternatives:
- Sit it out patiently awaiting better times and just accept you cant do very much to make money safely. The odd few reasonable probability trades come along, but they are few and far between. Successful traders know this and accept there are periods when you just cant make the money you may feel you are entitled to be making.
- Or you can force a few trades. You have chosen to be a trader and that’s what you are darn well going to do! Sadly this is a trap so many people fall into, especially newer traders. Usually the outcome is quite the opposite of that intended and money is lost.
OK, before you swear at me let me point out I have done it as well! In fact I would venture that every trader has at some point allowed the gremlin on their shoulder to overrule their normal sensible disciplined self and forced low probability trades in an environment that should never have been touched with a barge pole.
Having paid those “tuition fees” the question that really matters is “did you learn from the costly lesson or not?” The long term winners in this business are those who are prepared to make mistakes but having made them once ensure they are never repeated. Sadly so many people make a mistake, pay the price but don’t learn from the lesson that they would prefer never to have enrolled for.
Worst still a few will actually go further in the wrong direction by knowingly repeating the same mistakes over and over again having convinced themselves for some reason that “this time will be different”. It wont be!
In fact the very worst outcome of all is when such a forced trade does actually pay off once in a while. This positively reinforces the bad habit that so desperately needs to be exorcised. Now our trader is in real trouble. He (or she) is no longer a trader. He is now nothing more than a gambler driven by exactly the same misplaced beliefs that cause gamblers to enter the downward spiral that eventually leads to their demise.
But it is perfectly normal to make a few mistakes, a lot of mistakes actually. I have made more mistakes in the 28 years I have now been trading than I care to imagine. I regret every single one of them, but if I have learned from each mistake then I have at least come away from the experience having received something valuable in exchange for the money it has cost.
Occasionally you may repeat a mistake before you summon up the discipline to accept the learning that you have now paid for two or three times. That’s OK, we are all human so it happens. Just work to ensure that you don’t repeat a mistake too frequently before banishing it for good. I like to look at it this way:
- The first time you make a particular mistake, you learn something about the system, the trade set up and/or the environment in which it was made.
- The second time you make the same mistake, you learn something about yourself as the trader, about your feelings towards the trade and about your level of discipline.
- The third time you make the exact same mistake, you learn that you are at a crossroads in your career. Are you to continue as a trader, or drift into becoming a gambler? Only you can win the mental game of trading, no one can do that for you. So do you exorcise this particular demon once and for ever, or simply close your account and go and get a new job – you really are at this decision point, so you better give the right answer!
Times like we have witnessed this summer appear to be so benign to the outside world. After all nothing much has been happening right? Yet it it just such times that can make or break a trading career. If you have achieved a break-even result over the last 3 months, or come close to it, then you have actually done very well indeed. Many traders have had a really rotten summer.
But there is light at the end of the tunnel. These things always seem to go in cycles. With so many markets having had a really quiet summer, many have now jumped back to life and opportunities are flooding back. Having stared at a pretty blank sheet of paper for several weeks, we now have 16 markets on our watch-list. That’s a lot. We usually have 4 or 5 markets that we are stalking at any point in time. The summer drove that way down and now suddenly the elsatic band has snapped back. Everything is set for a busy end to the year.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
That tiger had teeth!
This is a follow up to my article of June 26th – Catching a tiger by the tail. (Its on the home page www.Simon-Townshend.com if you are a more recent subscriber.)
If you recall we were looking at the sugar market and discussing how to manage a long position in what we thought would be one of those rare examples of of an “outlier” trade. At the time I wrote:
“…when trailing a stop with the objective of catching an outlier event, remember to leave the market room to breathe, don’t trail the stop too tightly. Here we saw nice follow through on Wednesday and Thursday, but the chances are that the market will pause and consolidate for a few days very soon. If the stop is too tight we risk getting nicked out too soon. So we will keep it well back for now, still being guaranteed a decent profit. Once the market has consolidated and left behind a new swing low, then we will ratchet our stop up again and just see what unfolds from there…”
- When a market goes parabolic its time to beware
Now it is time to reverse that recommendation and tighten the stop right up close to the market.
This is how this has been unfolding:
The first retracement held well above the mid-point of the expansion day that we used to provide our first wide trailing stop location. As the trend continued the stop could have been slowly ratcheted up still keeping it well away from the market.
Now the market has gone parabolic and we need to rethink the strategy again. The first thing to know about a market that looks like this is that the biggest part of the move may well still be in front of us, as incredible as that might sound! Once a market starts going parabolic it can really accelerate hard. But when a parabolic move ends it usually ends spectacularly in a massive V-reversal. You do not want to be holding the position when that happens as the down move can be at least as violent as the initial move up.
So we would like to give this a little bit more chance to show us whether or not it has more to give to the upside, but we don’t want to be holding on once this swing has ended. Overall we have to remember we are traders here to make profits. If you are still holding this you have an enormous unrealised profit under your belt. You have achieved the almost impossible task of spotting and catching an outlier. So first and foremost you must hold onto that profit. The market will take it back from you if you don’t grab it!
Now the strategy is to lock in this outsized profit. There is still an outside chance that this market will continue to explode higher, so dont just exit but do tighten that stop right up tight to ensure any give back is only a small percentage of your open profit. A true parabolic market will keep making a higher high and a higher low every single day until the end when you dont want to be holding the baby any longer. So you can now trail a stop right up to yestreday’s low each day that a new high is made (i.e. ignore inside days). At some point, maybe today, you will get taken out and you will bank one of the biggest profits you will make all year. At the same time you are still giving yourself the chance to increase that profit even further.
An awful lot can happen in a day from this point on. So now is definitely the time to be on your toes.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
Catching a tiger by the tail
In Golden Rule 1, we discussed the importance of having a robust, quantified and clearly defined exit strategy for each and every trade or investment.
Irrespective of the style, strategy or timeframe, successful trading is very much about understanding and working with probabilities. This has to be so in a world where there are no certainties, unless you are able to forecast the future. In 30 years I have never found a single person ever who is able to forecast the future, so I am prepared to bet that you are in exactly the same position as me – having to work with a statistical advantage and allow probability to make profits for you over the long run.
Consequently our exit strategies must be designed within this same statistical framework and then there is one particular fact to accommodate – the bigger the profit you shoot for the less chance you have of achieving it. This is why the best traders don’t play for home runs. They treat trading as a business of slowly grinding out regular more modest profits. “A day’s work for a day’s pay” is the mantra. Notice how opposite this mentality is to that of a gambler who is constantly thinking that “the next one will be the big one”, only to be disappointed yet again.
With the chances of hitting big home runs being so low, most exit strategies should almost ignore that possibility. But that does not mean that we won’t occasionally find we have caught a tiger by the tail. So we also have to know how to adapt when luck, which is all it is, lends a helping hand. Here is a great example of how we adapt our exits to handle a potential outlier event.
Sweet move in the sugar market
Let’s take a look at the sugar market – usually a pretty dull, boring market that for some reason flew into life this week handing us an unexpected gift. On this chart I have marked up the last four days, Monday to Thursday.
Over the weekend our S-I-R swing trading system flashed up a buy signal in sugar. So on Monday morning we dutifully bought some. We got lucky on the entry buying fairly close to the low of the day. As usual (Golden Rule 1) our exits were predetermined so exit orders were placed as soon as we were filled on the buy order. Monday passed uneventfully for this trade, although I was pleased to see it close on the high of the day. The best trades always work immediately and without giving you any grief so this was a good sign.
Tuesday arrived and blast off! For some unknown reason (unknown to me at least) the whole world must have decided to buy sugar and we had this explosive move that you can see in this huge bar on the chart. Our trades are exited in 3 equal parts and the first two exit orders were both filled during this big Tuesday rally. Each exit has a specific purpose within our trading plan and a predetermined price. Now here is the first trick – It is very unusual for two exits to be achieved the same day, so when this happens I know something unusual is going on.
Because two exits in a day is an outlier event, I switch tactic for the third and final exit. As we potentially have the proverbial tiger by tail here I cancel that final exit order. Instead we switch to using a trailing stop as there is now a very good chance that it will reward us disproportionately for holding on.
Here is the second trick – If the move is for real a huge range like we saw here on Tuesday will not be retraced into very far so the stop can be placed initially around the mid-point of the day’s range, i.e. around 16.50 here in Sugar. This in itself will lock in a nice profit if triggered, so we will do OK even if Tuesday turns out just to be a one day wonder. However the odds favour a much bigger move and as that move unfolds the stop can be progressively raised locking further profits in.
But when trailing a stop with the objective of catching an outlier event, remember to leave the market room to breathe, don’t trail the stop too tightly. Here we saw nice follow through on Wednesday and Thursday, but the chances are that the market will pause and consolidate for a few days very soon. If the stop is too tight we risk getting nicked out too soon. So we will keep it well back for now, still being guaranteed a decent profit. Once the market has consolidated and left behind a new swing low, then we will ratchet our stop up again and just see what unfolds from there.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
Real time trade unfolds
If you happen to have followed this site closely, or have it RSS’d, you may have noticed the update I put out yesterday on the earlier Natural Gas article, “More Gas”. Here we have a nice trade unfolding in real time and it is a good example of how I expect my “Serious Investment Returns” trades to work. I.E. immediately and with vigour.
We bought July Natural Gas early yesterday morning pre-market at 3852. Actually to be precise it was late on Sunday night a few minutes after the electronic session open. We got lucky with the fill, buying just 8 ticks off the low of the day. (Not many people trade Natural Gas I know, but 8 ticks is nothing in this market that had a range yesterday of 415 ticks.) This is how trades are supposed to work; immediately, significantly and without us taking any heat. They dont always work this well or this fast of course, but this is a classic example of how my trades are designed to behave. I dont know whether I am obliged to disclose this or not, but this is a trade we are taking for the fund.
The market closed yesterday at 4249, just off its high for the day, a gain of $3970 per contract. Our first (of three) exits was hit today just a few minutes ago at 4275. With a trailing stop on the rest of trade, we are now going to make a profit on this trade whatever the outcome. Ideally this market will go on to develop a new uptrend, after plummeting for a year. That is what we are playing for anyway. It might just fizzle out and die right here. Or the downtrend (it is still technically in a downtrend) may simply reassert its dominance and take us out. Only time will tell, but from here on it is only a question of whether we make a small profit or something more substantial.
I am not telling you all this to be a smart arse. That is not my style at all. The truth is that we missed out on entering two other long trades yesterday, that both had spectacular days; Bean Oil never reached our entry price and Cotton did but I was too late getting my order in. I am as prone to human error as anyone! So I’m not so smart really!
The reason I am telling you this is simply because properly designed trades do work like this; quickly, significantly and without giving you any grief. If you find in your own work that this is not the profile you regularly see, then it tells me that your own trades need further honing. I know a lot of traders “get away” with sloppy trades by using big wide stops, but that is not really a long term sustainable solution.
I’m also not saying it is easy to find these fast, furious and sweat free trades – but it can be done if you are persistent. This is my real message from this example…
- keep working at it
- keep honing
- keep improving
- understand that Rome really wasn’t built in a day
- and above all have faith that regular decent trades are there to be had
The other reason I decided to update you on this is that we started discussing Natural Gas a few days ago and somehow I ended up disclosing what we were doing in this market. I am not going to make a habit of disclosing in public what we are doing in real time, so this will be a rare example! As they say on Mastermind, “I have started, so I’ll finish”.
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Copyright © Simon Townshend 2009, all rights reserved.
Follow Up: (June 3rd) Wide-scale liquidation in commodities today, took us out of this trade on our trailing stop for a small profit. The odds now favour this market forming a range down here for the time being. Anyway there you have it, a trade that did not go to plan but still made a little money. The first exit was achieved at a good price, the balance at a less good price but for a profit nevertheless. The key here was being patient for the right entry. Being patient is really difficult for many traders, myself included. But as you can see it is worth developing patience and that sounds like a good topic for another time.
British Pound back in fashion
In our last Hedge Cuttings [Hedgehog members newsletter] we pointed out the unfolding structure in the British Pound…
“On the currency front, the pound is starting to exhibit action which could ultimately form a bottom and begin the slow trek back upwards, but it will be some considerable time before we are looking at switching back into dollars. The first of the three criteria needed to reverse the trend is now in place, but we need to see all three before looking for sustainable upside in this market. If all three criteria fall into place we could well be on our way again – a mirror image of the move down from 1.92? That would be nice, but it would take much longer going back up than it did coming down.”
OK, well everything did fall nicely into place and we had confirmation of a new uptrend on May 6th when the GBP-USD closed at 1.5149. It hung around in that area for a few days and finally gave us a nice impulse that we always like to see at a trend reversal point.
It is pretty overbought at this time, so we should expect a bit of short term consolidation now. (The first pullback to the 1.54-1.55 area would be expected to hold as support, if it even comes in that far.)
A new uptrend confirms that the Pound has a bottom in place and the long hard slog back up should take place over the coming months. As always we have no idea how far the new trend will take us, all we know for now is that the trend is up and momentum is increasing so for the time being higher prices are to be expected. Remember though that bull markets are much slower to unfold than bear markets, so we won’t be looking to switch back into Dollars any time soon.
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Copyright © Simon Townshend 2009, all rights reserved.
More gas
How ironic that a few days ago i was complaining about the persistent decline in the price of natural gas and yesterday we had a buy signal in this market that to be honest I rarely look at!
Occasionally it pays to be a bit agressive!
So here we are Long July Natural Gas from 4150. This is an agressive trade but with huge potential if it comes good for us. It is agressive due to this market being in a downtrend, but this signal gives us advance warning that a trend change may be starting to develop. Consequently it has a lower probability of success (perhaps 50% compared to the 80% we normally expect), but the risk/reward ratio more than justifies taking it. So lets see how it unfolds!
This is a signal from our S-I-R swing trading system that is being used for the forthcoming signal service (see the Trading Signals page).
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Copyright © Simon Townshend 2009, all rights reserved.
Follow Up: (June 1st) Our first trade was closed out for a small loss, as we require our trades to work immediately or we pitch them. However the setup was based on the expectation that the market would make a higher low, which so far it has done. So we bought again early this morning at 3852. To remain valid we now want to see 4690 taken out over the next few days.
Rip off Britain
Have you ever felt that you were being conned but not been able to quite put your finger on why you felt that way?
Well that was just how I felt when I received my last energy bills recently. Both the gas and the electricity bills were the largest we had ever received. No doubt we have all watched the news on and off over the last few years talking about rising energy costs, how scarce gas is becoming, how our suppliers are having to increase bills due to the spiralling wholesale prices etc etc.
Like me you may well have fallen for the sob stories and not looked into it any further? Taken for granted that we are being told the truth? With my bills hitting all time highs I just knew I was being ripped off and decided to look a bit harder. If you read any further you had better be prepared for one heck of a shock!
Here are the annual statistics on retail gas prices from the “Department for Business, Enterprise and Regulatory Reform”, showing the dramatic rise in prices we have all witnessed in particular over the last 3 or 4 years. This chart doesn’t even show the record breaking monster bills we have all been paying in 2009.
Wow with those sorts of price rises there surely must have been terrible rises in the wholesale gas price over the last few years. Those poor energy companies must have really been getting their margins squeezed, trying to absorb as much of the price rise as possible so as not to pass it all onto us angry consumers. I almost felt sorry for them struggling to operate in an environment with such runaway prices.
What a sucker!!! Those feelings instantly gave way to pure anger when I looked at the wholesale gas prices over the last few years. Imagine my surprise when I realised that gas prices:
- Are at their lowest level for 7 years
- Have fallen in the last year from 14 to just 3.5 (don’t ask me what the units are, but that’s a 75% fall whatever you measure it in!)
- Were at their highest in 2005 and rapidly fell from there
The true cost of gas has been going down just about as fast as our bills have been going up! We have been right royally shafted, swallowing all that hype hook line and sinker! Thanks for nothing Britain. Caveat Emptor!
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Copyright © Simon Townshend 2009, all rights reserved.
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