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I start with an apology for missing very consistently my own objective to post on a more frequent basis. Amazing how easy it becomes when “I” get in the way of achieving “my” objectives. In my own defense, I have been working diligently on the MJF1 Partners’ auto trader. I’m excited to bring it to the LogicalSignals Trade Room where I’m already testing it in real time. The results are exciting.
I have often stated, “If you can’t beat ’em, join ’em.” In doing so I’ve had to quiet more times than not the “trader” in me. Why? Because the trader has emotions and emotions can interrupt the decision processes, by hesitating. Computers, on the other hand, don’t hesitate. They have their marching orders and execute them. As “traders” we need to understand that there are a myriad of algorithms in operation firing off orders at all times conceivably in all traded markets. Add to that the myriad of strategies that are at play via the myriad of algorithms in operation firing off orders at all times conceivably in all traded markets. Get the picture? To be successful in trading you really can’t care about the “who, what, where, when or why.” Remember it’s only a number. And many relevant numbers are being processed simultaneously and disseminated to massive amounts of servers across the globe operating algorithms written by MIT graduates. The amount of $’s flying around the world in need of a temporary resting place is substantial. And at the moment, the sheer volumes bring opportunities some will say come every 4 years as the battle for political control in the U.S. continues in a perpetual state of transition. Having the right mindset has become critical to succeeding. Getting caught up in all the hubris taking place within the current election cycle is important to pay attention to, but don’t fall into that abyss.
I don’t have an opinion of the markets that I choose to trade. For the most part, I’ve stopped thinking about the necessity to understand what fair value for the underlying should or shouldn’t be. I think of “cents” instead of the “dollars” and the probability and random variable theory as measured by volatility.
As I’ve previously discussed, anticipating versus participating becomes heavily favored towards participating. Opportunities are abundant across a wide variety of tradeable markets and are likely to remain in their various forms of “transition” through the balance of 2016. It isn’t easy to just step into a market that you haven’t traded before based purely on computer generated signals. But when trading in tune with the volatile price swings, the rewards are extremely encouraging. While there are “traders” in all of us the concept of “removing the human factor” can’t be total. The input will always be traceable back to a human being. Therefore, I’ve had to embrace the 21st century and abandon the reality of the trading floor and accept the realities of a virtual trading floor, which is, for the most part anonymous.
I am resolved in accepting the direction that my trading has taken by shifting from primarily trading options to primarily trading futures. Since I’ve kept close tabs on the “economic pecking order” and with, interest rates sitting at the top from which everything else flows into and out of, I’ve been able to get comfortable trading futures. Currently in “pecking order” this includes futures on bonds, US$/EUR, (6E), precious metals, and stock indices. I’m looking to re-engage trading within the forex markets as well.
The discussion will continue —
Gold has come back into play over the past week or so as global markets move in tandem with the US $ against the Euro and the Yen. With volatility getting kicked up several notches the opportunities for “runners” of 20 to 50 ticks is occurring with more regularity. I would anticipate that this will remain the case as the US Dollar is pulled into the global transitions happening within China, Japan, and the European Union.
Check out the chart for today’s trades and discussion.
With the myriad of players moving in and out of the Crude Oil markets and its affiliate or component products Heating Oil and Unleaded Gasoline, it becomes a definitive benefit to reference a “larger picture” view. This helps determine the trend and prevents countertrend trading when the markets move into a transition from one level to the next. Keeping the larger trend in focus removes some misaligned hesitation allowing us as traders to “participate” not “anticipate”. Keeping the larger trend in focus puts and keeps in perspective, the direction of “runners”. Trades that carry the potential and probability of posting 20, 30 or 40+ tick gains.
Bear in mind that while I continue to advocate trading without caring about the who, what, where, when and how, I do advocate the benefit of establishing the trend both on an intraday basis and then on an hourly and daily basis. Having somewhat of an understanding of the above mentioned adverbs as they pertain to trading and being more specific day trading, is useful.
In previous posts, I have discussed the Elliott Wave count that has been underway in crude oil off of the 2008 highs at 147.27. The monthly and weekly charts continue to follow a clear path that keeps the longer term trend down for now. The current “bounce” off of the 26 level lows seen in January is best viewed as a 4th wave correction within an ongoing larger 5 wave sequence down. This larger 5 wave sequence down will complete the “C” wave down of the larger A-B-C decline off of the 147.27 high.
So, to recap progress thus far: Wave “A” down began in July 2008 and completed at January 2009 low at 33.20. Wave “B” rallied back to the high in August 2013 at 112.25. From that point then wave “C” has been unfolding and has thus far completed waves 1 – 4, which completed at high in May 2015 at 62.58. Wave 5 of “C” will ultimately form it’s own 5 waves as it completes the larger parttern. Within wave “5” of “C” internal waves 1-3 are complete and a smaller 4th wave bounce has been underway of the 26.05 low in February 2016. While the potential remains in place that this smaller 4th wave is complete at last weeks 34.21 high the possibility of a finishing rally back above the 36 level remains in the picture for now. Another possibility is that crude is forming a triangle pattern which will keep it in a tight trading range between 34.35 and 29.50 before completing and thrusting the market lower as the final decline begins.
Back to today’s post title; the “What” last week was the contract roll out of March into April for both options and futures. This week the focus appears to be back on the “crack” spread. Wikipedia defines the crack spread as follows:
“Crack spread” is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it – that is, the profit margin that an oil refinery can expect to make by “cracking” crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products).
In the futures markets, the “crack spread” is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline andheating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from a change in the oil/gasoline price differential. – Source Wikipedia © 2016
The “Who” would be oil refining companies and the wealthy families that gleaned all their wealth from “black gold”. Yes, I do have a few specific players in mind, but I’ll save that for another conversation. Referring again to Wikipedia for a more pronounced description we can begin to put together the whole picture:
For integrated oil companies that control their entire supply chain from oil production to retail distribution of refined products, there is a natural economic hedge against adverse price movements. For independent oil refiners which purchase crude oil and sell refined products in the wholesale market, adverse price movements can present a significant economic risk. Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil futures and selling futures for its primary refined products according to the proportions of its optimal mix.
For simplicity, most refiners wishing to hedge their price exposures have used a crack ratio usually expressed as X:Y:Z where X represents a number of barrels of crude oil, Y represents a number of barrels of gasoline and Z represents a number of barrels of distillate fuel oil, subject to the constraint that X=Y+Z. This crack ratio is used for hedging purposes by buying X barrels of crude oil and selling Y barrels of gasoline and Z barrels of distillate in the futures market. The crack spread X:Y:Z reflects the spread obtained by trading oil, gasoline and distillate according to this ratio. Widely used crack spreads have included 3:2:1, 5:3:2 and 2:1:1. As the 3:2:1 crack spread is the most popular of these, widely quoted crack spread benchmarks are the “Gulf Coast 3:2:1” and the “Chicago 3:2:1”.[citation needed
The following discussion of crack spread contracts comes from the Energy Information Administration publication Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries:
Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products. Because refiners can reliably predict their costs other than crude oil, the spread is their major uncertainty. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. Another would be to buy crude oil call options and sell product call options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts.
To ease this burden, NYMEX in 1994 launched the crack spread contract. NYMEX treats crack spread purchases or sales of multiple futures as a single trade for the purposes of establishing margin requirements. The crack spread contract helps refiners to lock-in a crude oil price and heating oil and unleaded gasoline prices simultaneously in order to establish a fixed refining margin. One type of crack spread contract bundles the purchase of three crude oil futures (30,000 barrels) with the sale a month later of two unleaded gasoline futures (20,000 barrels) and one heating oil future (10,000 barrels). The 3-2-1 ratio approximates the real-world ratio of refinery output—2 barrels of unleaded gasoline and 1 barrel of heating oil from 3 barrels of crude oil. Buyers and sellers concern themselves only with the margin requirements for the crack spread contract. They do not deal with individual margins for the underlying trades.
An average 3-2-1 ratio based on sweet crude is not appropriate for all refiners, however, and the OTC market provides contracts that better reflect the situation of individual refineries. Some refineries specialize in heavy crude oils, while others specialize in gasoline. One thing OTC traders can attempt is to aggregate individual refineries so that the trader’s portfolio is close to the exchange ratios. Traders can also devise swaps that are based on the differences between their clients’ situations and the exchange standards. – Source, Wikipedia © 2016.
Putting on or taking off large positions can create problems as the depth of the market, in heating oil and unleaded gasoline is much thinner than crude. Recent news seems to point to a shift in the supply/demand equation creating a situation where larger players need to adjust positions. On Monday, the bulk of trading in April crude was between 33.68 and 33.38, a relatively small range within the 223 tick intraday range, but a tradeable range when taking into consideration the trend was “up”
Check out today’s $CL chart for trades and discussion:
There are days when the markets are likely overwhelmed by the extreme flood of data flowing in and out. The type of day when sudden and extreme moves paint 50 bars in all directions all at once on your chart, that happens to be hooked up to its own algorithm to generate buy and sell signals, which get fired off in succession, creating varying intensities of magnitude. It continues to become apparent to me that actual market experience of knowing how to trade may be lacking. Reactions are often nothing more than computer operators forgetting to turn off the algorithm before major economic news is released. That was Crude today
Imagine then the algorithms that are triggered into action according to the movement of a multitude of indicators, chart styles, time frames, other markets (sometimes related and most of the time well maybe) and whatever else could trigger a buy or sell order. That has been several of the markets lately. Out of the bunch that I am more prone to trade, crude, ($CL) and the S&P, ($ES) were front and center on Thursday.
Now for the humility lesson: I as many already know run a trade room – we are a small group of hard working folks trading crude, the ES, and YM primarily – and we focus on trading. We are focused on signals, market awareness, and personal awareness. When any of the three aforementioned “traits” gets skewed it takes additional knowledge – to know when to hold them and know when to fold and reverse them. That more often than not is to understand your “opponent.” Oh, in addition, there are many, many, many “opponents.” Not to drive any nails here, but the level of trading experience or maybe better said the level of understanding of how to actually “trade” appears to be lacking at times. To the point in crude today, I ran into algorithms firing off larger buy orders that swung prices radically higher. An algorithm doesn’t look before it leaps – they never have. It just receives the order to buy 250 futures and proceeds to execute. Now, today was even more “inexperienced”, mainly because I have to think the “coder” sitting in front of the computer didn’t realize that they just paid too much. After hitting the “off” button or the order was butchered getting filled there was a multitude of sell orders that cascaded the market lower as hundreds of contracts traded. My main signal generator is very sensitive to momentum and fires more quickly from buy to sell and vice versa. Using a tighter stop with a more sensitive signal generator can create a fast sequence of losses. Knowing when to take risk or reduce it is critical to holding a winner or cutting a loser. By the same token knowing when to fire an order to be more effective is just as important to holding a winner or cutting a loser.
So, today by the fourth time another algorithm triggered my stop caused an emotional chain reaction in me. One that included pounding said desktop, cussing at said screens, throwing of said tantrums. Thankfully there was just one other very understanding member there to witness the scene. I’m grateful to have had the experience of being able to explain what NOT to do as well as what to do. As painful as it can be the cure is to reaccess your signals, market awareness, and at times most importantly your personal awareness. Whether that entails continuing to trade, taking a break, or stopping for the day.
Getting into the habit of continually checking in on your personal awareness is critical to being able to participate and not anticipate. Of being able to not fall prey to self or otherwise perceived market “bad trading”. I don’t believe it is impossible to trade a smaller account in crude, the S&P or even the bonds. You just need to be able to swing with the “extensions” or “late comer” type moves. The market doesn’t need to adhere to my thoughts on direction, that will happen on its own. However, I do need to remain focused and in tune with what is happening and not worry about the intraday hiccups by other algorithms. As long as my signal generators continue to fire I know the probability of being in the market when the larger moves take place is very high.
Ok, so the “moral” of the post. I let my emotions get in the way of staying in the market and therefore, gave the broker more than I gave myself. In my book, that can be a big ‘no-no.’ Acceptable, of course. Consistent not a good trade. Particularly when the result that occurred after my tirade against ” damn inexperienced algorithms” resulted in a net gain of 105 ticks or $1050 per contract. If this happens to you, please do the right thing. Pick yourself up realize where the problem arose from – take the appropriate actions to remedy things and then decide what is next. If your choice is to stop trading remember that what ever happens after is important but only as a strong example of staying in the game! Not allowing your focus to be crushed by yourself.
Check out the $CL chart below for a more detailed look at today’s mid day action.
The answer to the title question is an unequivocal “Yes.” It could be the widening of your eyes in amazement as the $ES trades in a 20 to 30 point range both to the downside and upside in 30 to 75-minute increments for a good five hours straight. Using the right tools, (signal generator and a good auto trader) gives you a strong probability of pulling many, many ticks as the hoards of dollars get tossed about. Wow is actually the word most often heard when this type of volatility is at your finger tips to take advantage of.
Then why is that so many of us “gnats” are getting caught up in an old habit of “anticipate.” That level of frustration you feel is when you realize it has happened again. There was that moment of hesitation or disbelief in the signal change. That nagging voice of doubt saying you are buying/selling too soon or too late. When this happens I don’t know about you but I always feel like Wile. E. Coyote trying to stop himself before heading over the cliff.
I suggested yesterday that as “gnats” we need to participate and not anticipate. To do the latter first literally never gets the sequence of events rolling. The cause of not participating is similar but most often generated by different emotional memories within each of us.
Trading without emotions is of course, dependent on getting to the root, making some adjustments, and moving forward towards participating with comfort and ease. Remember your competition, for the most part, doesn’t have emotions – at least on a participating basis. There are hundreds if not thousands of algorithms calculating in just about all markets and firing off thousands of orders to buy and sell thousands of different forex, treasuries, equities, commodities, precious metals in cash, options, futures and other forms of derivatives. The nominal value boggles the mind but it is safe to say that talented firms and traders have the ability to step in and facilitate buyers and sellers in exchanging their dollars and keep a tidy sum for themselves in the process.
The ongoing discussion remains to give up the old habits of having to know the who, what, where, when and why of every move before you’ll commit to participating. Doing this allows doubt and fear into the equation and trying to work back to “participate” gets delayed even more. There’s always trying to cover your procrastination by attempting to “play it safe” and put a bid or offer in the market that just “doesn’t” get filled – oh well! Breaking a habit takes 28 days or so they say. If we consider how many days, weeks and years we have given up to our “bad habits” taking 28 days to break them doesn’t seem like such a huge price to pay.
Dictionary.com defines “probability/statistics” as:
It then becomes logical to conclude that when we anticipate more than participate we dramatically reduce the probability of success and that can be statistically shown. Learning to move beyond our “bad habits” can be acheived. The conversation is ongoing.
Check out the $ES chart which covers trading from 6:30 AM to 8:00 AM PST
I’m not sure what the BofA analyst is saying regarding China’s FX reserve numbers. They reported a drop of $99.5 billion and that ‘kicked the can’ down the road for the US dollar for the time being. There was a major shift of capital back into treasuries and out of equities and some commodities. However, it would appear that while the Chinese Central Bank is attempting to pass the hot potato back to the dollar by defending the Yuan. At the same time though with so many moving parts it is difficult to tell how severe the burns are. The chain from the Yuan to the U.S. dollar and back can get tossed between several markets and sectors before it ends up back at the central banks.
Without a doubt, we are seeing some very high stakes being played out on an international monetary scale. It would seem that to shift out of U.S. dollar positions has taken precedence and is more important than extending the stability of the global economy’s leader or number two is bound and determined to push itself into the number one position. How that then transcends from one market to the next should always lead back to the currencies of the two major players, the U.S. and China. At the moment, the pecking order remains fairly in line with the chart from last week, although I would lean more towards the top three being the U.S., China, and the EU.
Back to the markets responses to the China FX reserve number. While we wait for the interested parties to figure out how to prop up their economies without upsetting the proverbial “apple cart” there are more opportunities to trade than this mere human can keep track of — it has become essential to have a solid ‘auto-trader’ that performs for the better part – flawlessly. Without it, I remain committed to the discussion of trading without emotions and operating with a tested and trusted signal generator. And without a less than expected number from China, the equity markets, of course, continued on their current trajectory with sudden and in some cases “Sid Vicious” turns. It remains to be seen as to whether China will be able to reel in the mass exodus of reserve currencies. At the moment the harder they attempt to prop up the yuan through the front door, by selling U.S. dollar reserves that are leaving out the back door and being moved back into the U.S. markets hand over fist! The illusion remains that the U.S. has the best promise of a return. The game remains afoot.
Check out the charts on the $ES for trades and discussion.