Bloodbath on the Stock Exchanges

These two heat maps tell it all. Again the beauty of trading in futures allows you to be one of the few investors who can profit from this.

What about trading losses ?

In answer to a question about losses, I don’t keep quiet about my losses but I do keep them small by using very tight trailing stops. You can’t enter a trade unless you have an exit plan.The stop loss value and profit targets are input into the Trade Management System before the trade is executed and are activated the second the trade is live.They can also be moved dynamically on the chart itself during the trade. The trade either goes my way or I get out. With a click of a button you can close the trade if you feel uneasy. The liquidity in terms of the number of contracts traded daily on the futures exchanges allows for this. Oil and Gold futures are amongst the most liquid markets that exist. It also means a very small spread (the difference between the bid and ask prices.) In both oil and gold futures it’s seldom more than 2-3 cents, so if you exit a trade at the market price rather than via a limit order you’re never more than a few cents off the pace.

I seldom let my stop get hit because I’ll close the trade before that and take an even smaller loss. The beauty of futures is the ability to profit from both long and short positions. If you make a loss it is an opportunity to re-evaluate your reading of the market. If the market has turned fundamentally then you just trade with the new trend.

So I talk about my losses a lot because they’re so small. The trading is dynamic so you have an instant live view of your P&L and it’s easy to make a decision to close the trade. Only when people have big losses do they keep quiet. In electronic trading where you have total control there is not a reason in the world to occur a big loss (relative to your risk, that is). It’s all in the risk management. I only ever risk 2 % (which is the dollar value of your loss at the price of your stop) of my working capital on a trade and work on a risk/reward ratio of 1:4. My stop value for crude oil is a mere 30c but it works if i’m making the trade for the right reason at the right point. That’s where a solid understanding of Dow Theory, Elliot Wave Theory, Support and Resistance levels as well as Fibonacci ratios comes in. If you don’t understand where to trade and why then you’ll always be churning.

The minute you are in a pre-determined profit area the trailing stop kicks in to breakeven and then follows the profit target by a preset amount. Initially you’ll find that even with a 1/3 win, 1/3 breakeven and 1/3 lose you’ll make money as long as you stick to the plan of keeping your losses small. Most amateur traders cannot accept losses so they let them grow bigger in the hope the market will turn. And then they cut their profits short because they’re so thankful for a profit and scared of losing. So they get the ratio backwards i.e. big losses and small winners. My win ratio after 3 years is close to 72%. My average winning trade is 6-7 times bigger than my average losing trade because I learned the ratio early on and stuck to it religiously. In the beginning you can lose 10 trades in a row, win 2 and still make money if you stick to the strategy.

I also trade a lot less … maybe 3-5 trades per week as I now only trade when specific triggers are lined up and specific conditions are in place. It’s not a random choice. I choose the point to trade after hours of analysis and wait for the market to come to me. As for the broker becoming wealthy, well a trade only costs me $1.98c per roundtrip contract. That’s peanuts.

Winning allows me to enjoy life so I don’t find myself becoming asocial at all. Just the reverse. I enjoyed life far less and was much more asocial when I was stuck in the corporate 9 to 5 treadmill in a suit and tie getting instructions from assholes and working with dummies. When I first started trading I traded only a single contract and  I first traded the $5 mini Dow futures, then the $20 mini Nasdaq futures, then the $33 mini gold futures, then the $50 S&P500 futures. I focused on making just a single point per day. When I could repeatedly do that i upped the ante with more contracts and a higher trading frequency but kept doing the same thing and then eventually moved to bigger markets. What you see now is the result of 3 years of 20-hour days learning and learning. I don’t find the market faceless at all. Each of the futures markets has a unique character and you can learn to understand when the market is out of character and when not to trade. Some days are scalping, high frequency trading days when the market is moving sideways and other days are swing trading days when the market is trending up or down.

My first goal was to recoup my initial investment. After that you can’t really lose can you ? My trades maybe don’t make for interesting dinner conversation but I have many more interests than just this. Besides, I find that gold and oil as global commodoties make for excellent conversation. Day trading, amongst many other things, is about price pattern recognition in timespace. I learned that early and I’m good at it for some reason.

And lastly, the traditional time-based  charts do not work for intra-day trading. Nobody will ever tell you that. The passage of time has no impact on price whatsoever yet most amateurs are taught to use time-based charts that give off myriads of false signals. I re-programmed my charts (it helps to know C++)  and use a mix of momentum based charts such as Range charts, Renko charts, Volume charts, Tick charts and Point-and-Figure which are all much better at indicating market sentiment and key turning points. Volume analysis plays a big part behind the scenes as does learning to read the pace of the tape during live trading.

So that’s how I do it.

Here’s another fuck you, Michael Jackson

On Friday morning at 09h10 CAT, when the price of crude oil was at $110 and climbing, I predicted a drop down to $106 via Twitter ( go have a look ).

There were several factors that led me to this conclusion. Firstly, the US Dollar Index had been slowly inching upwards during the Asian overnight session. Secondly the Crude Oil Volatility Index (OVX) had spiked overnight and was also climbing up. Thirdly, the technical indicators, specifically the MACD showed a clear divergence between the new high and a dropping momentum. But most importantly , $106 was a 61.8% Fibonacci pullback from the last bull channel.

I don’t make a prediction unless I put my money where my mouth is. When the buyers failed at the pivot point just before the US markets opened I sold 500 futures contracts short. A risk free trade as I was only using profits from previous trades to cover the margin. You can see the trade below at a sell price of $108.50c at 16h00 CAT and a close at $105.81c at 20h27 CAT.

A cool profit of $1 344 172.50c for just over 4 hours of work. ( Although about 10 hours went into planning and analysis).

So fuck you, Michael Jackson. I bet I pay more tax than you earn in a year.

Never Cheat a Monkey

NEVER CHEAT A MONKEY

In the ultimatum game, you are given R100 to split between yourself and a partner. Whatever division you propose—if your partner accepts it—you are both richer. How much should you offer? Why not a R90-R10 split? If your partner is a self-interested money-maximizer, he/she isn’t going to turn down a free ten bucks, right? But proposals that deviate beyond a R70-R30 split are usually rejected. They aren’t considered fair. “I’ll scratch your back if you’ll scratch mine” only works if I know you will respond with something approaching parity. This sense of fairness is hardwired into primate brains. In studies with capuchin monkeys in which two monkeys work together on a task and only one is rewarded, if the rewarded monkey does not share, the partner will refuse to help in the future. And when both monkeys are rewarded but one receives a sugar-packed grape and the other receives a less exciting slice of cucumber, the monkey who receives the cucumber becomes noticeably outraged, even throwing the cucumber at researchers in disgust.

DOUBLE YOUR MONEY

Gamblers are highly sensitive to losses, but not in the way you might think: They tend to follow losing hands with bigger bets and turn conservative after a win by placing smaller bets. Experiments in behavioral economics demonstrate that most of us tend to be cautious when granted the chance to lock in a sure gain. We don’t want to lose what we already have. We are so loss averse that most people will reject the prospect of a 50-50 probability of gaining or losing money unless the amount to be gained is double the amount to be lost. Thanks to the wonders of fMRI technology, we now know that as the gain-to-loss ratio rises, activity increases in the dopamine-sensitive areas of the brain (dopamine normally rewards decisions that are good for the organism, such as making food, family, and friends). Differences in loss aversion between individuals can be predicted by how much a person’s dopamine receptors were turned on by gains versus turned off by losses. Risk takers owe their boldness to basic neurochemistry.

“REAL” TRADE

Imagine that you have pre-purchased a R100 ticket for an event you have been eagerly anticipating, but when you arrive you discover that you have lost the ticket. Would you plunk down another hundred bucks? In experiments, 54 percent of people say they would not. But now imagine that instead you arrive at the venue intending to purchase your ticket at the gate. As you pull out your cash, you discover that you have lost one of the two R100 bills you had folded into your wallet. Would you still purchase the ticket? When asked, 88 percent of people said they would. Rationally, there is no difference between a R100 ticket and a R100 bill. In economic jargon they are fungible—pieces of paper of equal value used as a medium of exchange. Emotionally, though, there is a difference. People sort their money into categories in what behavioral economists call “mental accounting.” A ticket is a commodity, a product, a thing—like a stone tool or a trading shell—while money is symbolic and representational. Our brains evolved to handle tools and shells, not currency.

THE PRICE OF HAPPINESS

Would you rather earn R50,000 a year while other people make R25,000 or earn R100,000 a year while other people get R250,000? Stunningly, studies show that most people select the first option, even when they are told that the prices of goods and services would be the same, so they would only be able to afford half the lifestyle. As H. L. Mencken quipped, “A wealthy man is one who earns R100 a year more than his wife’s sister’s husband.” Why would someone choose half the money? While our genes account for roughly half of our predisposition to be happy or unhappy, much of the rest comes down to how we view ourselves in the pecking order. We want what other people have—our happiness depends on it. In our hunter-gatherer past, there was so little wealth to accumulate that love, hard work on behalf of one’s family and community, and socializing with fellow group members as friends and peers were the primary roads to happiness. When we fall to the bottom of our tribal order, our happiness plummets, even if our tribe is Fortune 500 CEOs.

Crude Oil Magic Carpet Ride : $300K with 1 trade

Oil prices rose to a fresh nine-month high near $109 a barrel Thursday amid signs the U.S. economy is improving against a backdrop of elevated tensions in the Middle East over Iran’s nuclear program.

Buying at the strong support level around  $105 I thought it may rise $1 or so in keeping with the pattern. But it turned into the trade you dream about.

The price blew right through the pivot and four resistance levels to end on $108.77c. Trading 100 futures contracts saw a profit of $312 872.50c. The Renko chart below tells the story best.

And that’s not even taking the earlier trades and trades in Gold into consideration.

The US Dollar Index, shown below,  was the key indicator trigger to making this trade.

So fuck you, Michael Jackson and your cohorts.

$100 000 before breakfast

I very rarely carry a trade over the 15 minute closed period between sessions, but yesterdays Gold price reaching the top of the medium-term channel at the end of the trading day was an opportunity not to be missed.

The trade below has a hard stop set at $1781.50c which means that should the price come back up while I’m sleeping the trade will close automatically and generate a profit of $15 000. If it carries on down you can wake up to a pleasant surprise.

Crude Oil this morning was again showing strong support around the $105.77 price so a long position was taken at 08:15 am. By 9:15 am it had already yielded $51 842.50c

Combined total so far as both trades are still running : $137 675.00c

Crude Oil brings mega-profits again

Both crude oil and gold traded in a sideways range for most of the day. If you recognise this trend early enough it makes for great trading conditions.

In the charts below you see the two trades made in oil futures, first short off the session high and then long off the pivot point which turned out to be a strong resistance point.

 That’s $165 755.00c profit on crude oil for the day.

I again missed a great long opportunity on Gold as it finally broke out upways off the sideways channel it had been in since 2nd February. Nevertheless it still yielded $52 000.00c off a short trade in the morning.

Again +$200K for a day’s work.

My KLOUT score is still zero.

How about $200 000 in a day ?

OIL

Oil increased to a nine-month high after Greece won a second bailout and Iran said it stopped selling crude to France and Britain.

Futures rose 2.5 percent after the euro-area ministers approved 130 billion euros ($173 billion) in aid for Greece by tapping into European Central Bank profits and coaxing investors into providing debt relief, shielding the region from a default. Iran stopped selling oil to the countries yesterday, preempting a European Union ban and forcing the price up.

But for most of the day Oil continued in a sideways pattern, failing 3 times to break the pivot level at $105.37c per barrel. In the live chart below the first trade was made with a long position of 50 contracts at $104.78c. Buyers failed and the trade was closed with a profit of $10 501.25c. Not too shabby for a break that didn’t materialise.

The 2nd trade was made after the price dropped back down. I entered at $104.54c and closed at $105.04c as buying volume dropped off. Another failed breakout but nevertheless a more than handsome profit of $25 101.25c as seen in the chart below.

Again the price dropped back down and the third trade was made at a price of $104.40c after strong support at the $104.30c level. This proved to be the breakout and patience was rewarded as news of Iran broke and the the price rocketed up to $105.80c. Closing here realised a profit of $69 991.25c on 50 futures contracts shown below.

GOLD

Gold had been edging up steadily all day and I totally missed the two long breakouts but managed to make profit on the short counter-trends.

Trade number 1 on gold was a short position at the upper resistance levels yielding a profit of $17 951.25c at close as seen below.

So convinced was I that the price would drop off these highs I failed to spot the breakout but managed to enter at the next high on a short position with 100 gold futures contracts as seen in the chart below. This $3.50c pullback still yielded a profit of $34 442.50c but the long trade would have been the better option.

Still believing the price would drop I missed the next breakout as well but mangaged a short position off the new high at $1757.80c with 100 contracts. A drop of $3.70c gave a profit of $36 812.50c.

The final trade was a last ditch attempt at a short postion on oil but I aborted pretty quickly as closing time loomed. It yielded a profit of only $10 382.50c.

Final tally for the day : $205 182.50c.

My KLOUT score remains on zero.

Sorry, I don’t do training !

I have had numerous requests for training of some sorts in futures trading.

Unfortunately this is not something I am willing to do.

The money is in trading, not training.

If you find someone willing to do training, believe me, it’s because they’re not making money trading !

The best I can do is a 1-day workshop over a weekend on the basics and where to go for more information.

I have no formal trading education. I am 100% self-taught.

I first read about 10 books on the subject and watched thousands of YouTube videos before I even looked at a screen. Then I spent about 12 months just studying historical data from the previous 3 years and learning price patterns and price theory. All self taught.

And then came learning the technical indicators and how they matched up to pricing structure. I did market replays for about 18 hours per day trying about 200 different technical indicators through trial and error before settling on the few that work for me. The less bells and whistles the better.

Nothing can ever predict what will happen next. The technical indicators only give you a means to project forward based on previous patterns. And most of all you will need to study Fibonacci ratios and support and resistance levels so you can try determine how far markets will fall or rise at particular price points. You’ll also need to understand the myriad of Economic Data that are released daily to a set calendar and how they affect different markets and why.

But first-off you’ll need at least 2 years of learning just to get to grips with the basics.  You will also need a  tax-clearance certificate and Reserve Bank authorisation to transfer funds out the country as well as some risk capital of about $25 000 to start.

Risk capital is money that wouldn’t change your life if you lost it all. Never ever borrow money to trade with. It’s a recipe for disaster. You’ll also need to understand risk management and how to set stop levels and determine profit targets to remain liquid.

An ADSL line, UPS and a static IP address from your ISP are a must. As is a workstation with graphic support for at least 3 full HD displays, a Core i7 processor and about 8Gb RAM with preferabbly a 64-bit version of Windows 7. And you will need to be comfortable installing hi-tech software and debugging problems. It helps if you know the C++ programming language. There is no local support whatsoever and you’ll need to figure out the charting on your own. YouTube is a goldmine of information for this purpose.

It may look easy in hindsight on a chart.

It’s not.

Once enough people have those basic things in place we can discuss dates.

Can you do it again ?

After Thursday’s volatility, Friday was a day to treat with caution as Monday is President’s Day, a US public holiday, and most US exchanges are either closed or closing early.

My strategy has always been to start the week slowly and as the week progresses to increase the number of contracts traded by using earlier profits to offset increased risk. In effect it means zero risk.

A long position on oil was always a bad trade as the market struggled 3 times to break through the $103 barrier.  Once it did the price approached the channel highs identified earlier and a slowdown in buying volume signalled a setup for a short position at the top resistance level. In the chart below you can see the live trade entered at $103.23c with 50 contracts at about 16h45 pm. The trade was closed at 17h01 pm when the price reached the previous day’s high. A small drop of only 50c but a profit of $25 051.25c in 15 minutes ! It’s all in the timing and the planning.

Gold was also reaching the high’s of the bullish channel identified in the planning stage and showed a classic pullback all the way back to the golden Fibonacci ratio of 61.8%, as seen on the chart below. The slowing momentum of the MACD indicator  was the trigger for another short position entered at a price of $1734.30c with 50 contracts.

The trade was closed as the price intersected with the 61.8% Fibonacci retracement and the previous day’s Volume-Weighted Average Price at 18h32 pm .

This was a $15.70c drop in the gold price and yields a $78 431.25c profit as seen in the live trade below.

Total profit for the 2.5 hours of “work” for the day was $103 482.50c or R796 815.25c.

The bottom of the pullback is a classic buy area but being Friday with a public holiday looming on Monday no further trades were made.

My KLOUT score remained on zero and nobody noticed I have no Facebook account. But people continue to spread vicious, unfounded rumours. I put it down to jealousy and the frustration of being stuck in a dead-end corporate job where one day you’ll wake up to find your pensions gone.

Can YOU make $100 000 in a day ?

Better than expected economic data from the USA as well as a strenghtening of the Euro vs $ gave the markets the expected volatility today. As explained in the previous post below, when the dollar index weakens then gold and oil tend to rise.

The day started off fairly slowly and the first trade, as seen in the chart below, was made at 8:30am as the gold price made a pullback from the overnight low. When volatility is expected you can use profits from previous trading sessions to increase the number of contracts. The risk is zero ! This trade was closed at 9:12am and even though it was only a $4.10c rise in the gold price the profit was $10 230.63 with 25 futures contracts. This whilst most people were stuck in traffic.

Using the same tactics of expanding your trades with earlier profits, this was to be the perfect setup for rallies in both gold and oil later in the day.

In the chart below you will see the single trade made today for crude oil futures. Again your risk is zero because you are using previous profits to hedge the 25 contracts. This trade was made at 3:00pm as markets started to react to the economic news and the price reached resistance. An entry price of $100.92 and an exit at 6.59pm when the price peaked at $102.68c per barrel gives a profit of $44 000.63. Not bad for watching a screen for a few hours !

At the same time the gold price had started to pull back off the session low and in the chart below you can see the live trade. Again using previous profits makes the risk for this trade zero.

The entry price was $1712.30 per oz. and was entered at 16:55. The price peaked at $1731.60c and the trade was closed at 9:30pm giving a profit of $48 250.62c

The reason for closing at this point was the overbought position of the stochastic indicator which signalled a pending drop. This turned out to be the case.

Total profit for the day : $102 481.88c or R796 284.20c after commissions.

And my KLOUT score is zero and I am not on Facebook.

A Trade in Gold Futures

Gold and Oil normally have an inverse correllation to the US Dollar Index and can often be traded together. The oil market yesterday was pretty flat but gold showed a steady upward trend for most of the day.

Gold futures earn you a profit/loss of $100 for every $1 increase/decrease in the gold price. Though less profitable than oil, the daily moves are often bigger and the risk is lower than with oil.

Below is yesterdays gold futures chart, in this case a Renko chart as opposed to a Range chart. Renko is the Japanese word for brick and this chart only plots in a single direction at a time, which helps to filter out market noise. Range charts plot a set range irrespective of market direction.

This trade was entered into at the opening of the Tokyo exchange and held for most of the day. The trade was closed out just before the opening of the US exchanges and was only $2 off the daily high. Pretty good timing.

An increase of $14.50 in the gold price with 15 contracts yields a profit of $21 700.38 or roughly R168 000. The upside of this is that you get to keep your profits offshore and you can repatriate the funds when the exchange rate is in your favour.

So if you have been following the futures posts I am sure you have realised that you can earn in 1 week what most corporates will pay you in a year ! And that’s just with relatively small trades and a small number of contracts. Sure beats begging. So why sweat for a boss who doesn’t care for you and a company who will have squandered your pension by the time you retire ?

Today sees some major economic data released. US unemployments claims, monthly PPI, Housing Starts and Building Permits as well as Ben Bernanke‘s speech at 16h00 should make for plenty of volatility. Which is what day-traders want.

Swing Trading the Intra-day Oil Futures

This type of trade is a result of painstaking analysis and homework as shown in my earlier post “Anatomy of a trade in oil futures”. Discarding the 89-range long-term chart for a while we get evidence of a new bullish channel if we drill down deeper using a 21-range chart as shown below. This channel can be seen between the 2 purple lines.

As the price reached session highs and intersected with the upper channel this signalled a sell opportunity given that the US Retail figures released at 15h30 were not as good as expected. They showed the biggest monthly drop in unadjusted retail sales figures in history ! Below is the live trading chart for this short trade, again using 10 contracts. The trade is entered at $101.63c and closed at $100.44c when it reached the bottom of the channel and intersected with the previous day’s closing price. A profit of $11 830.25c.

The aim of swing trading is to use the session high’s and lows during volatile periods as entry and exit points. What you’re really doing is reversing your trade and starting a new trade going in the opposite direction.

In the chart below you can see a 2nd trade entered as the price rebounded off the bottom channel. In this instance you use the profits from the first trade and double your contracts to 20 for a quick scalp. A buy at $100.58c and a sell/close at $101.07c yields a quick profit of $9 730.50c in 25 minutes.

So for a few hours today you’ve made a profit of $21 560.75c. At the current exchange rate of R7.7218 that’s a whopping R 166 487c. But wait there’s more ! Did you know you only pay capital gains tax on futures profits ? So ask yourself why you are slaving for a big corporate for a pension that will be non-existent by the time you retire.

But wait there’s more. You don’t need a big fancy office. Or shoes ! You can do this in your little study in your stocking feet

And to think there are imbeciles out there who think it’s all about a Klout score ! You must admit it beats posting embarrassing videos on your blog begging for business.

Why KLOUT believes you’re stupid

Aren’t you just tired of seeing those dumb tweets that say “I gave Jannie a +K , blah blah ” ?

Klout needs to go away. These metrics-applications rely on our need to know our “value” and will only continue to perpetuate the dilution of online engagement. This is an open call to the people that use these services, or are simply indexed by them, to opt-out and delete your presence on Klout. You need to understand that there is one thing social media is notorious for… the “me” syndrome.The power of focusing on “me” is undeniable, and Klout lets people who obsess about themselves put a number on their ability to chit chat mindlessly, but nothing to do with moving the needle in their business. The fact some people are even filtering who they will @reply on Twitter based on their klout score is idiocy, because they don’t understand the real mechanics to influence.

First off, Klout depends on algorithms that analyze expressions of influence, not measurements of actual influence. Expressions are, at best, a proxy of influence by any stretch of the imagination.

The Markets Never Sleep

Trading is competitive. It is a zero-sum game—for every winner, there is a loser. And, if that is not challenging enough, some of the brightest people in the world are professional traders. When trading the financial markets, the retired attorney, former marketing executive, or housewife is akin to David squaring off against Goliath. At first glance, it appears that the little guy has no chance to succeed. However, remember that when the biblical battle ended, it was David who was still standing. David’s success came from training, experience, and divine intervention; the average trader’s power comes from education, training, and experience. To succeed in the financial marketplace, traders need to fully understand it and know how to survive and thrive in it. The more knowledge you have, the more powerful you become. Most traders forget that the markets never sleep.