Tuesday, May 30, 2006

Gold futures rollover

As you know I'm trading Gold futures and the current frontmonth was ZG M6. Today IB informed me, that their policy forbids trading in a contract which is physically delivered and has first notice day within the next 3 days. Well I wouldn't know where to get or store the Gold anyway, so that's just in my best interests of course.
Next in line was ZG N6, the July Gold contract. So I switched to it, wondered a bit about the low volume and huge spread it showed, but I thought, well rollover is tomorrow so it's to be expected, that July won't show good volume yet.
I even made a trade in it and had some scary moments in it, before after 30min and a -25 and +12 loss/win range I closed the trade at +5 ticks.
Finally a remark in one of the news I follow got my attention: They quoted August Gold, not July Gold. And that's something they only do, if August is frontmonth. Looking at the ZG Q6 contract I saw, what a fool I was trading the July contract. The volume had gone from the ZG M6 contract to the ZG Q6 contract, which showed me the usual 1-2 tick spread in the contract.
Lesson learned: In contracts, which do not follow the 3-month rollover cycle, you have to look where the volume goes instead of just assuming it is the next month available.

Tuesday, May 23, 2006



As so often I started the day trading the spanish IBEX35 contract on MEFFRV. I like it, as it trades in the direction of the German DAX, which I use as guide and it usually trades quite fast.

But today I really got complacent. I took a long at 11100 and let it ran into the disaster Stop at -50. That really hurts for a first trade of the day I can tell you. Thinking after hours about the trade I now see what made me complacent, why I did not pull the trigger a lot earlier. We all are used to our charts, we know instinctively what range we see on the chart usually, and a quick glance on the chart showed me IBEX breaking the 34ema, the cci going positive, price flattening and then going up again and I took the trade. What I failed to see, was that this chart isn’t the usual IBEX35 chart. This chart shows an extraordinary 300 tick range in the IBEX of which the IBEX had made back 200 (85 in a Gap up open) when I placed my trade. Add to it a round number and the trade failed. I thought, well it will wiggle down and retest the round number and go further up. It wiggled in a kind. It wiggled 100 ticks down to 11095 only to make it up 150 again to 11159


I wasn’t able to close the day green, but I’m really glad, that I was able to close the day down “just” 3 ticks plus commissions. Staying in the trades is a real problem for me and one I have to work on. I reentered IBEX at 11015, but was stopped out on a more violent wiggle at +20 instead of holding it further to make the whole loss back. After that -as so often– I did not see a reentry in IBEX, even if (in hindsight) there were some on the smaller time frame charts.

Trading a thin volatile market

At the moment it’s just an idea. It might be just another way my devious mind came up with for avoiding taking a stop. On the other hand, it might actually work and that’s why I bounce it into the public in form of an article.

Gold has an electronically traded Full and Mini contract. YG, the mini Gold contract is 1/3 of the full contract per tick. And the Gold contract often has an intraday range of 200 ticks or more. A signal might be valid and the contract still wiggles against you 25 ticks or the signal fails and you have a loss of 30 ticks or more. So that means to prove your signal to be right you have to give your trade more room, than at least I feel comfortable with. On the other hand if the trade goes your direction the rewards are really sweet.

Knowing this, it might be an idea to take the signal with the full contract and then scale out of it, in case the trade goes against you by going counter the mini contract, until you have hedged or even reversed your position.


You get a long signal Gold 659, so you take 1 ZG long 659.
Now you place orders to go short the YG at 657, 655, 653

If your signal works, fine. You take your profits and go, but what happens if not:
If Gold trades downto 653 you are effectively flat being long 1 ZG and Short 3 YG with a loss of 40 ticks, as the average price for your YG short is 655 compared to a 60 tick loss, if you had held just the long. Of course that comes at a price: Had you reversed at 655, you would be up on the short 20 already

If Gold goes down further, you might consider closing your losing Long position, while holding on to the Short for further profits. If Gold bounces back up, you manage the YG Short, making sure, you don’t have a Loss on it. As you are already up 20 ticks, when you open the last position at 653, it should give you enough room to manage the trade.

I would be interested if such an approch has merrits other than producing additional commission, which is why my broker would love me to implement it, I’m sure.

Saturday, May 20, 2006

A traders market in Gold

What do you buy, if you don't like the USD for political reasons, but don't want the Euro fearing repercussions. Yen? I don't think so. Gold might be a good alternative Middle Eastern Central Banks can diversify in, if they fear their US or UK accounts might get frozen in the future by some UN-Resolution.
First thing I do when reading some Iran news, is looking at Gold and Oil prices. Did they react? Yes, then it might be something behind the worrisome news I just read, if not, well it's nothing and I disregard it.
I don't see Gold going down a lot as long as Iran is playing around with nuclear power, as long as Iraq is on the brink of civil war (actually it already has broken out, just nobody calls it so) and there is no alternative fuel source available, which can easily replace the middle eastern oil and our dependency from it.
Sure, Gold has been going up too far too fast in a very short amount of time. And it might become a traders market for a few months consolidating this huge move up. But what the heck, if there is something moving 200 ticks a day up or down or even going both ways within one day, I trade it. You can learn great lessons trading gold instead of investing in it:
1. Keep your stops and NEVER, EVER dream of moving them against your position
2. Never add to a losing trade
3. Use Reverse Market Stops, as the swings in Gold are so big, that in Gold you usually can make your stop easily back, if your Stop is not too far away
4. Add to a winning trade, as a move can easily go 5 to 7 points (or 50 to 70 ticks)
I trade ZG, which is 10$/tick, but there is also a very liquid mini contract (YG) both traded electronically on ECBOT. Current front month is still ZG M6. But watch for rollover end of month if you trade the futures, as it does not follow the quarterly cycle the US index futures do.


Friday, May 19, 2006

Trading against the trend

Just don't do it. You usually can't afford it to let the market come to see it your way. Get out and reenter. It's a lot cheaper that way. And if you don't believe me, trade Gold. This contract shows such great volatility, it does in 60min what other contracts need hours or days for. And his contract will teach you to respect it..or pay a lot higher price than you bargained for. I paid 2 weeks ago, and it has done my trading really good. I get emotional, I swear, I tell myself names...but I'm out, if it's not going my way.


Saturday, May 13, 2006

OCA - One cancels all Orders

It’s a long time – if ever – that I’ve written about technicalities. If someone sucks in trading it’s me, it’s not the software, the Internet connection, my broker or the exchange. It’s me. Very simple and part of the risk I take, you take.

But as it happened now twice within 2 weeks to me, I think it’s time to remind you about some small print in your brokers contract.

If your broker supports it you most likely will use OCA orders, if you trade with Stops and targets set the moment you open a trade. Makes sense, as you never know when the Internet connection to your ISP, to your broker or to the exchange will break down. You just know, it will happen and if it happens your position is protected.

But what you most likely will forget, as it happens very seldom is, that under certain circumstances both orders might fill, leaving you in a very uncomfortable position, as you are for sure now set against the current market trend.

Say you are Long Gold 720.00 Target 723.00 Stop 718.50. As long as the market moves normally the moment one order is filled, the other is cancelled. But say Gold spikes down on one big order to 717, you are stopped and reverses immediately as a flurry of buy orders rush in, driving Gold to 725 in the blink of an eye. Well then it can happen that your target order is still valid on ECBOT, as the OCA functionality is provided by your broker, not the exchange. And even if your broker has fast connections to the exchange, it still takes time to cancel the other half of an OCA order pair. Time during which you have an active Sell order on the exchange, while you are already out of your position. Assume your target is filled, you are now Short Gold at 723.00 with the market trading at 725.00.

Do the calc and you can see that your trade has cost you 150$/contract for the stop and 200$/contract for the short, you never intended to take. Can it happen? You bet it can. It happened to me two times in the last two weeks. The first was in the Euro, while I was away and coming back found myself short Euro after the NFP release, which cost me 45 ticks to cover the trade in addition to the 20 I paid for the stop. The other yesterday in a gold spike down, which I saw and was able to cover at BE+1 knowing already what had happened and subcontiously being prepared for just that occurrence.

Thursday, May 04, 2006

Losing a hand or an arm

I want to quote a conversation I had today with a trader (I'm croc)

[10:33] (rr): i'm scared sh1tless about VPHM earnings tomorrow
[10:33] (rr): q vphm
[10:33] (HeartBot): VPHM  10.97  -0.13 (-1.16%)  <10.93 x 11.05> May 3
[10:33] (croc): cover your trade rr
[10:33] (rr): puts?
[10:33] (rr): hmm
[10:34] (croc): if your scared but hold onto it, it's just gambling
[10:34] (rr): lo
[10:34] (rr): true
[10:34] (rr): i'm confident in the company
[10:34] (rr): i'm worried about investors
[10:34] (rr): the company is alrady insanely discounted
[10:34] (rr): it's artificially low
[10:34] (rr): IMO
[10:34] (croc): or hedge it
[10:35] (croc): but usually the course of action is cover it, if you are not a big investor
[10:36] (croc): not worth to lose 1 h of sleep over a position
[10:36] (rr): i know man
[10:36] (rr): i have 1400 shrs and 16 call options
[10:36] (rr): i had 1600 but my broker liquidated cuz i ran out of cash
[10:39] (croc): well, if you ran out of cash, that might mean, you have all your eggs in 1 basket now. The 3% rule doesn't apply for smaller accounts but nonetheless 25%-30% should be max in 1 pos. aka in a 10k account max 3k in one position, if you swing it
[10:41] (rr): yeah i see
[10:41] (rr): does margin count?
[10:41] (rr): maybe 45%
[10:41] (rr): when i break the rules i pay for them
[10:41] (croc): Once I read, if a position scares you, scale it down until it no longer scares you. Sell 700 of your longs and 8 of your options, this means you lose most likely on your position, but you might sleep better. If your play is correct, you are already in and can add after earnings, if it goes against you, you lose a hand now and the other tomorrow, but otherwise it's 2 arms you lose

...and btw. (rr) had all reason to be scared.
[20:03] (croc): q vphm
[20:03] (HeartBot): VPHM  8.98  -1.83 (-16.68%)  <9.14 x 9.15> 2:03pm

Wednesday, May 03, 2006

Stop for the day

4 trades - 4 times Breakeven and a tick
Do you stop for the day or continue trading?
Of course it depends on the number of trades you do on average per day. I do 2 to 8 trades a day, so when I have 4 Breakeven trades in a row, that's more than I do on some days. But it's still no reason to stop trading for the day. What would be a reason is, if more than one of these Breakeven trades ended a 10 to 20 tick winner without me, because I closed the trade too early or if I let one of these trades go down 19 ticks, just missing my stop, it recovered and I just made it.
All this tells me, it's not the market giving me 4 breakeven trades in a row, but me. I'm actually not fit to trade, not reading the market correctly and me having luck.
BUT beware, if you have luck in the market, be grateful and humble, don't press it or the hand who just watched over you, giving you a free lesson in your traders carreer will bite you. And be sure it will not be just a sting, it will really hurt.

Monday, May 01, 2006


Suppose you like chocolate. Can you decide today to stop eating chocolate for the next 4 weeks? Recognise a habit, something you like, but which is not really important in the grand scheme of things, which you would like to stop for some reason, but never did.

Decide today to stop it.

Have the discipline to stick to your decision.

Does not eating chocolate have anything to do with trading? Oh yes!
Discipline will make you to the great trader you want to become so dearly. You are struggling, not one of the countless losing traders, but one of the 30% break-even traders, who still will never make it, unless they take the next step.

You have an edge, you have your good winning streaks, but somehow the losers still take care of them and at the end of the month, at the end of the quarter you have retraced back to zero. Be it one or two exceptionell big losers, because everything you’ve learned the last few years goes overboard, in this moment, or be it a streak, where nothing you do seems to work, where you get signal after signal and they all get stopped out.

Have you stepped back, tried to analyse what triggers it? What is the reason for your losing streak. I’m in the first category, I blew it all in 1 or 2 exceptionell bad trades, sit there, look at me, tell me “oh shit Chris, you did it again”. I take a deep breath and start again. I know I can, I know I have an edge, I trust myself and I’m (usually) not trigger shy. But I have these whipsaw trades coming now and then, which take care of a good chunk of my profits.

We have a holiday here today, so I took the time to analyse these patterns and they are usually preceded by a period of small winners, where I get antsy booking a profit when I see one, where I move my stop to break-even plus a tick the moment I see a chance it might work out (usually it doesn’t and the number of break-even trades goes up) and suddenly I’m no longer content to reach my daily goal. I want more 200% instead of 100%, even if the days before I made just 30%-50%.

So the answer to my problem is very simple:

I have become undisciplined in my trading

And usually such a period ends with a blow, a washout which gets me back on track. Which shows me, that the way I’ve traded the days and weeks before don’t work and I better revert to the known patterns, which work.

So good, so fine. Revert to the old patterns which work. Not easier said than done, because I know what I want to trade, what I’m looking for and which trade to take.

But reverting to the old pattern will only start the cycle again. It’s again Groundhog day, 6 o’clock in the morning. You need to step outside, you need to leave this circle to become one of the few who really make it in trading.

And discipline, aka not eating chocolate for the next 4 weeks, might be the way to do it. If I can’t stick to a decision like: I won’t eat any piece of chocolate for the next 4 weeks, how can I expect to stick to my trading rules? How can I trust myself not to touch a stop, to patiently wait for a setup, even if it takes the whole day to arrive? I need to be 100% sure, that I will act in my own best financial interests, if a trade is open. And discipline is the way to achieve it.

For three years now, I trade with a daily and weekly goal. Did it me any good. Oh yes, it disciplined me already, but not enough!  Well I have changed that just a bit.

A trading day for purposes of my Trading Journal now is complete the moment I reach or exceed with the last trade 100% of my daily goal, latest of course at the end of the day, when I close shop.

I can continue to trade, if I feel great, if I have a winning streak.

BUT it is a new trading day for the purposes of the trading journal. It means I again start at 0 for the day. I have no profits and I best make sure the next trade is a winner, so I have again a cushion. As I said, I don’t need to continue, but if I do, I again have a daily goal to make. Trading cautious, not taking unnecessary risks, because I’m so wonderfully green today. No, it’s a new trading day and if it is red, then it goes down as 0 winner 3 losers in a row and -30 ticks, not 3 winners, 3 losers for a break-even day as it is now.

Will this change something, will Discipline break the circle? Time will tell and I will take you along on my journey. This morning I made 1 trade, it made my daily goal and I took the rest of the day off instead of sitting glued to the screen. Euro made another nice swing, but so what? I made what I went out to make today, I don't need more today and I had a very relaxing day with my family which was worth every penny I did not make or lose today, when the Euro made it’s swings. Take care and stop eating chocolate.