Times are tough…but there is good news too
At the end of last week Bloomberg reported record low volumes in both the cash stock market and the S&P futures. I quote: “This is the lowest non-holiday trading day on the NYSEVOL since its data began a decade ago.”
If you are a day trader you wont need me to tell you that S&P Emini volume seems to be running at about half of that seen at the end of last year – and that was already pretty pathetic volume at that time!
Lack of volume of course leads to the listless random motion, lack of clear patterns and the nasty short-term spikes we have all been seeing lately. The odd thing is that so many diverse markets seem to be equally choppy and dangerous for short-term trading at the moment.
What should we do?
People regularly ask we what we should do about it. The answer is both simple and hard – be patient! We have no choice as there is nothing else we can do. It is our job to trade when the market offers us an edge and to sit it out when it doesn’t.
The truth is that many traders will be impatient and will get chopped to pieces as a consequence. Many will simply not survive patches like this. That is a sad but inevitable fact of life. Patience is the hardest discipline of all to develop as a trader, but times like this demonstrate why is it so critical for long-term success.
But there is good news too
As many people know I am a day trader but also a position trader. With the day trading my objective is to weather this storm and come out the other side without having lost any significant money.
With position trading the story is much better. Trading off larger timeframe charts keeps you away from the worst of the short-term noise and chop. So with the right strategy you can continue to make money even during times as difficult as this.
So that is what I advise people to do – focus on much larger timeframes at least until this storm subsides.
Even better news for you?
I have thought long and hard about doing this. But the number of requests has increased over the last three months, so I have finally decided to break my silence and once again accept a handful of serious people into my flagship position trading service…
www.SeriousInvestmentReturns.com
The reasons are obvious – this carries on making money while day trading is a bust for most people and most people are looking for something worthwhile to do while day trading is off the cards. Hence my agreeing to take on a few newcomers at this most difficult of times.
We now have 3 profitable years out of 3 since the strategy was launched and many great traders have quietly been using and enjoying this bolt on to their own trading for years now.
Before you ask, I know the question on your lips already! Yes we did make new equity highs again in January and again in February, despite all of the mess that the markets have been throwing at us.
Discipline to hold the positions?
Now as a day trader I too struggle at times with the discipline to hold onto these positions which often run for several days or over a week even at times. So I know it is hard to follow even a strategy as successful as this one.
Believe it or not, some people have not been able to stay the course even with an equity curve as amazingly smooth as this. There is always a temptation to fiddle with the trades intraday or to try and pick and choose which ones to take – neither of which improves performance else I would already be doing it!
So to take away these destructive temptations for those who struggle to stick with the simple clear instructions that the service provides, my great friend George Kleinman is also offering to execute and manage all of the trades for you, if that would make life easier. He has been doing this for a group of our members for the last couple of years and with great success.
Last night I also managed to persuade George to take on a few new people into his side of the service too. So if you are interested both options are now available again – execute yourself of let George handle everything for you.
You can read the whole story, dissect every trade, find out everything you need to know about S-I-R on the website…
www.SeriousInvestmentReturns.com
Hopefully George and I can handhold a few more people through these treacherous times as we have been with the existing members over the last few years.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2012, all rights reserved
If your work isn’t working…here’s a solution
I doubt many traders would disagree with me when I say “This is tough!” In fact this is about as bad as I have ever seen it for short term trading and understandably many traders are feeling disillusioned. There is every reason to feel disillusioned, it is our job to trade but the markets are not conducive to providing payment for our efforts.
But there are two reasons to keep our spirits up as much as possible:
- There is a simple formula for working through such times, and
- Better times are on the way
My survival formula
Those who trade with me in my Trading Den each week already know this formula for surviving times as rough as this. This is why we have been able to hold onto our equity highs throughout this taxing last few weeks.
But for those that don’t know my survival formula, here it is. The plan has three elements to it:
- Trade much less frequently
- Risk far less on each trade
- Be patient and have faith
Trade frequency
Lets say you are typically used to finding 3 to 5 trade opportunities per day, which is about what our short term trading provides us with. In this random noise environment there are actually far fewer real opportunities than normal. Maybe just 1 or 2 per day – if that even.
However noise has this wonderful way of tricking you into thinking you can see opportunities that in reality are totally fictitious. If you are not careful you will get lured into making MORE trades than normal rather then LESS. This is why such environments are so very dangerous and the long term fate of many traders is determined by these very periods.
So my simple logic says that if the number or real opportunities are fewer per day then our number of trades per day must be scaled back. So the solution is to go into the day knowing IN ADVANCE that your number of trades will me a maximum of 50% of the number you would usually expect. Instead of 3 to 5 plan on taking 1 or 2 only and certainly not the 5 to 10 or more that the noise will try to fool you into thinking exist!
When you think you see an opportunity, here’s what you do. Get up off your chair, walk to the back of the room and look at your chart from there. If you still see a nice clear trade set up, take it. If all you see from the back of the room is noise then that is exactly what it is! Sit back down and do nothing except watch the market quickly move to the place you would have put your stop! Trust me on this after years of gathering scars to prove how misleading noise can be, I have taught this crazy little technique to many people who all swear by using this “filter” to keep themselves out of trouble.
Trade risk
Over the years I have heard many people talk about the secret to trading noisy markets is to use wider stops – to keep the stops outside of the bandwidth of the noise. Sounds logical right?
Wrong! Absolutely dead flat out wrong! Try it if you like, but in practice you will find that for the very occasional trade that you might get away with without getting stopped out there will be ten that still stop you out just for larger amounts than usual!
The big mistake in the wider stop approach is that it assumes a degree of predictability to the noise and hence the argument that you can keep stops out of reach by assessing the bandwidth of the noise. But by definition noise is UNPREDICTABLE that is why it is just random motion.
So my solution, contrary to popular opinion, is to do quite the opposite. I use stops that are much tighter than normal. I give the market about half as much room to perform as I normally would.
You might be thinking “Simon that’s crazy, you are putting you stop right in the thick of the noise so it is certain to get hit!” Yes you are right, but only if your premise is based upon the need to stay outside the bandwidth of the noise. But that is where you and I would have to disagree. My premise has nothing to do with the bandwidth of the noise, I think that is a classic red herring.
My premise is quite different – If the trade is going to work it needs to work immediately. It isn’t going to hang around. Either it does what I expect and just goes, or else I don’t want it! So in a noise environment I give any trade far less room and far less time to prove itself. Because if it hangs around – then isn’t it true that we are still just in noise and the opportunity is in fact bogus?
If it is bogus why do I want to risk a full unit to find that out, let alone a larger unit than normal? Sorry but for me if it doesn’t do what I expect immediately I just want to get out for a tiny cost and be able to say I tried but it didn’t work.
Patience
The hardest part of my formula and the hardest part of all trading is having the patience to wait until a worthwhile opportunity materialises. Gaining the skill of patience is hard work, no question about it. But let me give you a couple of little incentives to think about when you are feeling the urge to click that mouse.
If you follow the guidelines above, i.e. cutting by at least half (if not more) the number of trades per day and the risk per trade, you reduce your daily risk by at least 75%, probably a lot more. Realistically your worst case risk per week in this dangerous environment is now no more than you would be risking per day in a decent environment.
This buys you time to ride out the rough patch without doing much too damage to your capital and this is before we even talk about the option of cutting back trade size (a topic maybe for another time).
Buying time and keeping losses under control is critical for the following reason, aside from keeping your sanity…
When it all changes and comes good again, would you prefer to spend most of the good time making up some dirty great drawdown which was largely avoidable, or would you prefer those new profits to be propelling your equity curve to new highs almost from the start?
I have done both, many times, in my career and I know which one I prefer. So when I look at my short term trading results over the last few weeks and say to myself “damn it we haven’t made any progress recently” I quickly remind myself “yes but we are only a couple of decent trades off of equity highs and THAT matters!”
These are the factors I think about more and more and as you engrain such principles deeper into your mind, the easier it becomes to summon up the patience that every single trader on the planet struggles to have.
Better times are coming
As I mentioned at the beginning we will see better times again soon. Quite when is anyone’s guess.
Every time we hit these patches it feels like “this time is different it will never improve”. Yet over history it always has. Every time we see these nasty markets there is a reason why it may never recover. Every time it does.
There is no getting away from the fact that we live in uncharted times in very many different respects and there is every reason to argue that “it will never be the same again”.
Personally I believe that it will be the same again at some time, but that even if it wasn’t I would still find a way to align myself to the markets to make steps forward once again. Half that battle is avoiding taking too many steps backwards during the tough times.
I suspect the timing of the pick up will be a lot to do with the turn down in equity markets. Historically that is when volume and volatility come flooding back into not just index futures but so many other markets too.
Of course when that will be I also have no idea. It will be when it will be and when it does ranges should expand again, volume should return again and those who have followed the guidelines above will be pushing new equity highs within the first few trades.
For what its worth our longer term model is now short the S&P from the 1350 area, which may offer a glimmer of hope but there is no knowing in advance if the trade will work out or not and if it does there is no saying that this will be any sort of turning point. But it just might be the first sign that the tide is turning as we haven’t had a short signal for a very long time now.
My great friend George Kleinman taught his “secret indicator” at our seminar last summer. If you were there you might like to take a look at the daily Nasdaq chart, which is rather tantalisingly also showing a short signal there.
Will either trade turn into anything more than a scalp? Who knows, certainly not me. It’s just my job to take the trades and the market gives us what it gives us. But one day the trend will change and my guess is that will be the time that the short term trading game will come back to life once again.
Take care of your capital, try not to be too frustrated and have faith that things will get better. We’ll all ride out this storm together.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2012, 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.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
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.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
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!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
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
Swapping those bananas for new slippers!
Last time we discussed changing our market stall when our current product range is no longer in favour with our customers. That is a great analogy to the situation we face in the markets today. The S&P is completely untradeable at the moment, has been for quite some time now and quite possibly will continue to be like this for a while longer.
So we know we need to find a more fashionable product, one that people are actually interested in. But how do we choose that product? That’s what I want to go over today. Here is how I answered that question myself over the last few weeks…
The first question to ask is – “What attributes make for an attractive market?”
My answer to this is 4 things – “Volume, volatility, clean behaviour and personal preferences.”
Let’s tackle volume and volatility together, as these will both be present in an ideal market. Volume is all about the ease of getting orders filled vs. giving up the bid-ask spread (and more often). Volatility is about sufficient movement to make worthwhile profits. Individually they are less helpful. Take for example Eurodollars and Natural Gas. Eurodollars have huge volume but are totally inappropriate as they don’t move. Natural Gas is the opposite. No one would argue about the volatility in Nattie, but its volume is less than ideal, especially as it tends to suffer from “air pockets” where the volume is discontinuous. If you have ever been stopped out in this market and your stop was within an air pocket you will know exactly what I am describing here!
So what short of markets list can we come up with which have both volume and volatility? I looked at 4 markets – Gold, Crude Oil, British Pound and Euro (currency). These are all high volume markets with decent volatility. There are others too but they also fall within the same groups – metals, energies and currencies. So I would prefer to concentrate on the “leaders” within each group (that’s my first personal preference creeping in).
My third attribute I call “clean behaviour” which is qualitatively the way a market moves in relatively clean swings and waves versus lots of spikes and sharp movements etc. This is about maintaining decent risk/reward ratios, i.e. not having to use unreasonably wide stops for fear of quick spikes. Using this as a selection criterion, the currencies seemed most attractive, Crude the least attractive and Gold somewhere in the middle. I wouldn’t rule any out based on this alone but it helps in starting to prioritise them.
Now let’s talk about preferences. For me there were two things I wanted to consider (a) time zone and (b) dependence on speculators. In terms of time zone my ideal would be to be able to trade during either or both of the main European and American sessions, to give me flexibility in my day.
The second is more vague and based on no more than a gut feeling I have that people have considerably less appetite for speculation than they used to have. If there is any validity to this it is probably due to a combination of the economic environment plus the recent memory of markets in meltdown. Neither of which is going to subside for some years. The evidence is the total lack of volume in the stock market, which is a purely speculative market after all. So ideally I would choose a market that has little dependence on speculation for its volume.
These factors again put currencies in a more favourable position than Gold or Crude. The volume in the currency markets is predominantly reliant on international trade. Whereas Gold has not been driven to its current levels just be people wanting to make jewellery for sure!
So having homed in on the currencies as being the more likely candidates, is it the Pound or the Euro? Actually this was an easy decision. The Euro has considerably higher volume, especially during the European session. In addition the contract size is twice as big and hence would consume half the brokerage and execution costs.
So just to get back to where we started, having identified the Euro as our prime candidate, how does volume and volatility look?
I looked back at the last few weeks, breaking the day into 30 minute segments to examine the average volume and average range within those periods. In case you are wondering why I used a small sample size it is because I am only interested in what is happing now and not what happened 3 years ago etc. Take the S&P as an example, you would get great stats looking back 3 years but it would not reflect what is happening today at all.
During the European session (within which I like to trade 7:30 – 11:30am UK time) the Euro is typically trading 5000 contracts and a 20 point range per 30 minute segment. This is perfectly tradable and is actually very impressive for a Chicago listed contract in the middle of the American night.
The American session (within which I like to trade 1:30 – 5:30pm UK time) sees a slightly better range of around 25 points combined with the obvious explosion in volume that would be expected.
These are clearly great trading environments during both sessions and not too surprisingly we have selected the Euro as our main market whilst taking great delight in kicking the S&P into touch for the time being.
There is also one other factor that makes the Euro attractive. Like all currency markets it is predominantly a cash market (circa 95% cash), with derivatives being miniscule “add ons” that have no influence whatsoever on the market. So the futures, which we prefer to trade, simply track the cash. Therefore we don’t have to worry about events such as contract rollovers, option expirations etc, which can have significant impacts in the stock market for example. The currency markets don’t give a damn about such things, so we don’t have to either.
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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
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