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
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.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
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.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Beware of news…but be aware of what it can tell you
The stock market was potentially in big trouble from the day they caught bin Laden.
No I’m not joking here, I’m actually being very serious. For over a decade now it has been accepted wisdom that the most bullish news that could hit the market would be catching the worlds most wanted man.
“The day THAT happens the market will just explode north and never look back.” I cant remember how many times I have heard those or similar words, since the atrocities of 9/11. And lets face it 9/11 did have quite the opposite effect, sending markets spiraling into the abyss.
So on Monday May 2nd we hear the news that conventional thinking said would trigger this rocket in equity values. We buckle up ready for the ride and watch with amazement as…
Nothing happens!
True the market was up briefly for a few hours that Monday morning before it closed down on the day.
So the next day, on Tuesday, there I am asking the traders in my group…”Where is the Osama rally then?” No one knew.
With hindsight this was the short signal of the year. But sadly we cant trade hindsight, even though bizarrely from that Tuesday onwards we had all been openly talking about the “Osama Top”.
Well now we can see from the chart above that the capture of bin Laden nailed the top in the stock market to the absolute very day. How stupid not to have just shorted it right there and then. Why didn’t we?
Well because we didn’t actually have a sell signal from our normal trading strategy and we are always fighting to follow our rules. That is true but also makes good cover for the other truth that secretly we were scared that the “rally of a lifetime” might just come about as all the experts had foretold for the prior ten years!
There can be no doubt that this was one heck of a missed opportunity. If I am honest we should have been bold and just stepped right in when the market failed to rally. No we didn’t have a sell signal in the normal sense. But we did have the biggest tip-off of all…
The fact that a market failed to rally in the face of the most bullish news it could possibly have received.
Now THAT is a sign of a market in serious trouble. Failing to respond positively when it had every reason to do so spelled the end of this cycle’s irrational exuberance!
This recent sell off didn’t just appear out of nowhere a month ago. It is purely a continuation of the new trend that started the day the market signaled that the bull market was done for, by failing to gain any ground at all when it should have exploded.
The market was telling us that the game was over. We just weren’t smart enough listen. Or to be precise we were smart enough to listen, which is why 24 hours later we were already talking about the Osama Top. But we weren’t smart enough, on this occasion, to react to what the market was telling us. This was an expensive mistake, even though we were following our trading rules by not taking any action.
The moral of the story therefore is simple…
A market that fails to rally in the face of exceptionally bullish news, is in serious trouble and has run out of steam. A market that fails to fall on exceptionally bad news, is in fact very strong and is likely to be turning up very soon. This strength or weakness is hidden from view but the LACK of reacting in the way it really should be in extreme circumstances is without doubt a genuine tipoff about what is about to take place.
Remember though a missed opportunity is only a missed opportunity if we fail to profit from it OR fail to learn from it. In this case we’ll treat this as an educational expense rather than a disaster!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Head & shoulders top…achieves minimum objective
Well it took a long time to form, but when it triggered boy did it run! Hmmm, but maybe there is more than just one force at work here?
George and I have been following the weekly chart of the S&P over the last few weeks, watching that classic head and shoulders pattern form. Yesterday the minimum downside objective was achieved. Pretty cool reaching a target of that magnitude within 2 bars eh?
Now classical chart patterns are not something I would claim to be any great expert in. But George likes the head and shoulders for the simple reason that it is about the most reliable of the “old school” pre-computer age setups.
The spice I would throw into the mix here, is my observation that the down move is a 1-sided market. Those who joined us for the seminar in Santa Monica a few weeks ago or who have worked with my behind the charts technique will know exactly what this means and its implication on the future.
So here is a great example unfolding where an age old technique and a modern day discovery are working hand in hand to create a really powerful combination.
If ever there was a certainty in trading it is this: After the dullest of dull starts to the year, exciting times lie ahead! Just remember that expanding volatility means much larger swings, which means much larger stops and much larger targets. In turn that means much smaller size so as not to increase your dollar risk per trade!
It is true that higher volatility means greater opportunity. But that greater opportunity should come from a greater number of trades and NOT from trading the same unit size with increased dollar risk per trade. Remember money management rules always take precedent over trading rules. So enjoy the great times ahead but keep a level head at all times!
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
My First Anniversary
Time certainly flies. I find it incredible that a whole year has past since my first appearance on Friends and Quinto.
If you missed it then, here is another chance to hear Jeff and me discussing the strange volatility extremes we had been witnessing in the markets. This may be a year old, but it is every bit as valid today as it was then – now that is something that we would never have believed possible!
Just click on the icon above to hear this 8 minute broadcast.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2010, all rights reserved
It’s all a question of bananas and slippers!
If you are an S&P trader I am prepared to bet you are struggling right now. I know I am. As I wrote earlier this year, if you can tread water without giving too much back that is a great outcome in this environment. I regard myself as fortunate to be hanging around within a tiny percentage of equity highs – up a bit one week, down a bit the next. This is frustrating for sure but preferable to being in a big hole.
I speak with quite a few traders and I have not found any that have been making money in this market recently – not a single one. A few are holding their ground like me and most are grateful to be doing so. But the majority tell me they are going backwards, a few to alarming degrees.
Why is this? Didn’t we used to pitch up to work each day and most days go home with a profit? Every trader recognises the drop in volatility over recent months and for sure this is not helping the situation. But there is another factor in play here too, one that has even more impact on our ability to earn a living today – volume.
Many traders get confused by volume. I often see traders saying “oh the volume today is quite good”, when actually it is dreadful. They make the mistake of looking at the future volume, when the volume that really matters is the volume in the cash market. Why does cash volume matter, when we trade the futures? Simply put, the futures are going nowhere without the cash market. So if the cash market is dead, no one is going anywhere. In addition much of the futures volume is just computers trading contracts back and forth between themselves, skewing that picture even further.
So cash is king as far as volume is concerned, so what has happened to it of late? Basically volume has halved over the last few months as you can see in this chart which shows a 30 day average of the NYSE daily volume:
2bn shares per day drop to just 1bn
It is almost a decade since we last witnessed volume this low and that isn’t even the worst problem. A decade ago it was OK for the volume to be at this level as that was normal volume in those days. Today we are geared up for much higher volume. In other words we have over capacity! Any other industry that saw its volume halved would be taking its begging bowl to the governments of the world asking for bailouts!
But market makers, traders, short term liquidity providers suffer in silence. Most blame themselves for at best not making money and losing money in many other cases.
So what should we do about it then? Well we all have different portfolios of activity, but I can share my thinking with you. Firstly I looked at my activity and did a crude cost/benefit appraisal. It wasn’t a great feeling either. I have 2 main activities – short term trading the S&P and swing trading in a range of commodity markets.
- The S&P occupies 7 hours per day, transacts considerable turnover and hence incurs considerable brokerage costs, yet has been dead flat profit wise for months.
- The swing trades occupy 30 minutes a day, are on small size so have little cost and have made great profits every single month, in fact the last losing trade was in November!
Hmmm, time to adjust the game slightly I think!
As for the S&P dilemma, here is a wonderful analogy one of my partners uses to describe the situation: Imagine a visit to your local village market, where stall holders are selling all manner of different products – food, textiles, shoes, picture frames etc. In this market we are selling bananas. We buy them for 12p and sell them for 15p. When the market is busy we do this all day long – buying wholesale, selling retail if you like. But when the market is quiet or the people in the market are only interested in buying slippers or picture frames, our bananas are just sitting there. It doesn’t matter that the price we are offering is the best price in town. If people don’t want bananas we are stuck with them until the end of the day we cut them down to 8p just to clear the shelves!
Solution – let’s just sell slippers! If that’s where the action is. The product is different, but the process is the same. We don’t need to be slipper experts as we are not actually banana experts. Our expertise is in the process not the product – in buying wholesale and selling retail. So until bananas come back into fashion, let’s move to a product that is in fashion! That is exactly what we are going to do. We will still keep a few bananas (S&Ps) on our stall, but concentrate more of our effort each day on a new product. What will that product be? I’ll share those thoughts with you next time.
For the commodity swing trades, we decided to increase our trade size by 50% now and to consider a further increase in another 3 months time. If we hadn’t had such a good run, I would have considered a bigger increase right now. But sooner or later we will get some losers so I would prefer to ratchet the size up in stages. If we double or triple our size in one hit I know that will instantly precipitate a couple of losers – I am sure you know what I mean!!!
By the way, these swing trades are the S-I-R system that many readers have expressed interest in using themselves. The good news is we are launching it right now after all these months of delay. I have a handful of traders working with me, trying it out and making sure everything is working well before I invite any more members to join. If it all goes smoothly then later this month I will open up a few more places. If you have registered interest previously then you can expect an invitation over the next few weeks. If you haven’t but would be interested in taking a look then www.SeriousInvestmentReturns.com is the place to go.
If you are primarily an S&P trader, don’t despair, things will improve again it’s just a question of when. Until then have a think about where else your skills could be usefully applied. Remember this – in the old days if a market suddenly died for a while a floor trader could walk into a different pit and work in a market where there was activity. These days all we have to do is press a few buttons to achieve the same transition, yet for some reason we are more reluctant to do so. Why?
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