Long CL, Short COIL

Talking about change. I tried something new for me today. I had discussed it here and here a year ago or so, but it was only theoretical then.
I was long oil (CL at 127) on a possible spike up. It was a fake and CL broke down fast 40 ticks.

 

Remembering yesterdays sell-off, I did not add to the position, but I hesitated to get out.
A familiar problem, as I was up for the day and did not want to close the week on a losing trade, especially one which wiped 40% of my daily profits.
I had the Brent oil contract (COIL) available for trading as well on my tradedesk and instead of covering the losing CL trade I shorted COIL.

 
I was now Short COIL, Long CL, which froze my exposure to the 40 ticks or more accurately to the spread between COIL and CL, which actually widened in the breakdown to about 60 ticks max. as COIL was stronger than CL today.
When CL could not take out the 125.10 mark and then held above 125.40 I covered COIL for 100 ticks profits and stayed in CL.

(I hoped I had timed it right and we would not break further)

It was the right decision and when we came back to 126.10 I closed CL for a 90 tick loss (we had spiked above 126 and I had moved a trailing stop to 126.10 as I did not want to sit through another test of the lows)

(A look at the chart confirms that I should have had conviction and stayed with the trade, but you never know, and I was happy to have successfully traded something I had thought about a year before, but never got around to really trade it.)

In the future I will actually use the WTI contract to offset a CL position, as this is also a Light Sweet Crude contract, which trades 1:1 with CL, just the spread is a bit higher. But using WTI to offset CL freezes the Loss effectively, even in a very fast market and that would have allowed me, to squeeze some more ticks out of the Short position.

Being in a position focuses a lot better than when you sit on the sidelines. I know, that had I taken the loss of 40 ticks, which most readers will recommend and gone short, I would have made a lot more. But you don't know that in advance and actually I need time to refocus after a big loss, I don't reverse a 40 tick loss. I go flat, and I would have remained patiently on the sidelines through the breakdown and the recovery without taking a trade unsure when CL would reverse on me again.
Taking the Short put me on the sidelines, while still exposing me to the market, while still forcing me to focus and make decisions. It was difficult to see that deep red CL position and it's true that the offsetting profits in COIL did not seem so big. Only the look at the total confirmed, that my exposure was not changing, even if CL showed me a -190 ticks at one time.
I won't trade that way every day, but in a fast market it's a good tool to have available I think.

Btw: I did not worry that I couldn't make back the initial 40 tick loss, because CL swings usually 60 to 100 ticks even if you are in a countertrend trade. The only thing is, that you need to get within the current swing range with your open position to be able to close the trade at a profit. Adding to a trade is one way, being long and short at the same time another and that way actually brings down your entry price a lot faster, if you are on the wrong side of a trend move.

Gold Standard

Today I read this article written by the father of Warren Buffet, Hon. Howard Buffet in 1948.

Human rights rest on Gold Redeemable Money

The issues presented then are as important today as they were yesterday.

Take a look at these 2 charts.

The first is a weekly oil chart, where I marked a range from September 2000 to December 2001

And here is the same chart, but not denominated in US$, but denominated in Gold. Meaning this chart tells you how much Oil would cost, if we still had the right to redeem our currency in Gold.

(Please ignore that this chart is labeled EUR #F. I just used the Euro to have the correct pricescale to display the Goldoil chart)
As you can see, I marked the same range on that second chart, and we just crossed the 2nd target on that Goldoil chart, while we are way beyond that on the Oil/USD chart.

Oil would still be affordable would we back our currency with something of universally agreed upon value.

Old habbits

In my development as a trader I noticed, that changing an old habit often works fine for a while, only to have it reappear at the most inopportune time sometime in the future.

As this happened a few times to me, I tried a different approach:
Instead of trying to undo an old habit, which often has very deep founded roots and which actually might serve a valid purpose, I try to live with it and give it its proper place in my trading system.

Take the fear/panic to lose all of my account in a sharp spike against my position. That fear is unfounded usually, but trading highly volatile futures means that my stops often are farther away than I feel comfortable with.
Still it was a conscious decision to trade that way, because I like to have a high percentage number of winners, which pay for the few losers, which from time to time hit my stop.
In the past, when something like this was about to happen I moved my stop, I added to the losing trade at the dumbest possible times, I did everything not to acknowledge the losing trade.

My first approach to solve the issue was to trade with small stops.
But I hadn't changed the way I took profits then and as I tended to take profits early, my overall breakeven trading system, which allowed me to continue learning suddenly turned very red and negative.
The profits I made did no longer pay for the higher number of smaller stops I had to take.
So giving in to the fear of losing a too big chunk of my account actually led to higher losses.

That approach did not work, but ignoring the fear wouldn't work either, because I knew, that would led to panic in case something unexpected happened.

So I returned to using wide stops, but nowadays these wide stops are above or below clear support or resistance levels on higher timeframes, meaning if they are hit, it's very unlikely price will come back.
Because one of the reasons I was unwilling to take the stop in the past was the 'hope' (and fear) that I would (again) prove myself the real dumb trader being stopped at the bottom or top of the move against me.

At the same time I started working on myself to increase the holding time on my profitable trades. Something easier to accomplish as doing this 'just' means, that I have to overcome my urge to take immediate gratification. I still exit profitable trades early, especially when the trade was first sometime in the red, but overall I'm quite content with my performance going from an average of 5% - 10% to 20% - 50% of the available range.

I still question myself after I take a big loss, even if the statistics now clearly show, that my profits pay for these losses. But now it's no longer panic overcoming me. I review the loss, I look for the reasons why I was not able to exit the trade at a profit and what I should have done instead. Sometimes there is no way, but often I get a better market understanding, I am able to formulate a plan, where in the past was just a feeling, you should do such and such. I also analyze myself and look for reasons why I took the losing trade in the first place. Was there outside influence, was I bored, was I distracted. If I find something it actually puts me at ease, because once I found a reason or a pattern not seen before, I can work with it, I can integrate it. The trade which just did not work, the trade which just is one of the losing trades of the system is an excuse for the mechanical system trader, but if you are a discretionary trader, you always have to pass the filter: 'Go ahead, take the trade', which makes it my responsible alone. No one to blame but me for not reading the market correctly.

And all discretionary traders know that feeling when you override your inner voice which tells you: BEWARE, it looks better than it is.

It's when these trades turn sour, I look for reasons, because I know my subconscious mind saw something I consciously haven't identified yet.

Recommended reading

Someone in the SANUK group pointed me to this article from

Linda Raschke: Tape Reading

I suggest you take a look, it's worth it.

HSI trade

HSI opens at 8:30am my time for the afternoon session and lately I started trading HSI again, as that contract has a high range, something I like for my trading. HSI was down for the day, when it reopened and the selling continued, but found a bottom at 24760.

Long 24840 and Add-on at 24830 after 24800 held. I had decided to keep the trade when I was not filled at 24844 after the HH was in as I saw a good possibility for a Gap fill.

The trade was not straight forward, actually it came twice to a point where I was ready to throw the towel or close at break even, frustrated that the trade was not working and glad that I got out at BE at least. I held, because we made a double bottom at 24800 and then a higher low. After we made that HL the risk was really there that I would close the trade, which again ran into that selling resistance below 24860. But I stayed with the trade and was rewarded with a 24901 exit.

Countertrend

Buy low, Sell high

Short high, Cover low

Trade with the trend after a consolidation

Trade countertrend after a momentum spike

These simple rules have made me a lot of money over the last 3 months, but the last rule can sting, if applied at the wrong time. Actually it was a lesson I had to relearn the last 2 days

Take a look at this FTSE chart. I went long 6221 as 6220 seemed to hold on the 2min and the 10tick supported the trade.

The FTSE broke down and the trade cost me 250 GBP.

Next day Heating Oil making a new High, it seemed to stall and I took the short

I missed the 2 opportunities to cover at a profit and that trade cost me 1100$ overnight.

1600$ paid and yesterday I was mulling over what I did wrong, why these trades, which usually work failed. It could be that they were just losing trades but with 71 trades made so far this month, they were losing trade 2 and 3 within 1 day to another. There had to be something putting them apart from my regular trades. We had a holiday yesterday here in Bavaria, I took the day off and enjoyed the day. While taking a long walk with my dogs I let the trades play again in my mind and I finally found something which set them really apart from other trades I took these last few months. Both trades were made late in the day when the regular trading in the contract had already ended and it was actually after hours trading taking place.

Today I traded the HSI, a trade I will discuss in a separate article and the chart looked like a long to me at 10:00am my time. A bounce was due, but I remembered my lesson and the new rule I had postulated yesterday:

Never take a Countertrend trade after hours

Trade not taken, even if a Higher low printed above the -200 line, because HSI regular session closes at 10:00am.

And here you see what happened in the last 15 minutes.

HSI continued the move it made prior to the close of the regular session.

A lot of my trading is based on psychology and a countertrend trade works, because bigger traders, traders with a lot of money, who don't care if they need to scale into an opportunity, see a bargain price, when they look at a chart. But bigger traders don't look at the chart after hours. After hours is too thin for them, there is not enough volume to trade big. But that's what you need to do to turn a train around. So the playground is left for the trend traders, who continue the trend with less volume. You don't need to add a lot selling pressure to continue a slide, but you need a lot of buying to stop and reverse a train. There are enough opportunities to do that in the trading day, no need to do it when the exchange just closed. And this let to my new rule:

Never take a Countertrend trade after hours

Heikin Ashi Candlestick Charts

Croc,  I am wondering why you embrace Heikin-Ashi candles rather then conventional candles. I feel even the slightest "information giver" prejudices your judgment calls. Do you find only the ma information you want in Heikin-Ashi candles, or are there other factors these bars give you. I have noted for months and months now you use only these candles. Please fill me in on your reasoning.   Thank You, Gary

Hi Gary,

Why do I like HA candles? Well just take a “regular” candlestick chart and place the HA chart side by side. 

                  (Heikin-Ashi Candlestick Chart)              (Regular Candlestick Chart)

The HA chart looks a lot clearer and easier to read. You can tell me, but Chris you miss information, if you look at a candle with an “artificial” or calculated open and close price. That’s correct, but the information I miss is not part of any setup I trade. Actually the information I miss would cause me to close a trade prematurely would I see the regular candles.

HA candles have certain characteristics:

1. In an uptrend the candlebody starts at the bottom and the candle has an upwick. You don’t see the regular bottom or open of that particular candle.

2. In a downtrend the candlebody starts at the top and the candle has a downwick. You don’t see the regular top or open of that particular candle.

3. As long as the trend is intact a retracement in the trend will not change the color or shape of the candle.

4. If you see a candle with an up- and downwick, you know, that you see the real high and low of that particular candle.

5. A trendchange often is announced by such doji- or star-like candles near support or resistance levels.

6. The open of any HA candle starts at the 50% range of the previous candle. So to see an upwick in a downtrend the retracement has to go higher than 50% of the previous candle’s range. So even if this candle closes still red, it tells you that buyers have tried to take control from the sellers but were beaten down again. It’s a sign that sellers might be near exhaustion and a to be on watch for a double bottom and reversal.

7. The same principle applies for a top forming. You see a downwick while the candle still closes green, meaning sellers tried to take control from the buyers. They were rejected, but you should be on the lookout for another attempt thereby forming a double top.

8. Any retracement not going to the middle of the previous candle means the trend is still intact and will resume in due course. On a regular chart you might see one or multiple candles showing the opposite color, the HA chart just tells you to stay put and wait for the trend to resume.

It took me some time to get used to HA candles, to let go of the additional information regular candles give me. I gain on the other hand information hidden by regular candles as the trend is a lot easier to see on a HA chart. Only by trading HA candles was I able to increase my profit target from 4-10 tick to the 20 – 30 ticks now used and that is not the end as I’m still not catching more than 25% to 60% of any swing I see clearly on my charts.

Best regards,

Chris

Weekend reading

First enjoy some bluegrass music ... and repeat your trading mantras

Then take a look at Ed Seykota's website The Trading Tribe and dig through his materials. Some really good stuff available there.

Ready to trade real

How do you determine that you are ready, that your system will stand the test of at least the next months, that you have an edge.

You will know for sure only in hindsight. But that doesn't help you in your decision to go live or not
or in your decision to stop for a while and get back on track by demotrading for a while.

There is a tool available at http://www.enthios.com/simulator.htm to help you in your decision process

As I have more than 4 years of data available I took the test using my own trading results to determine whether something has changed, whether my odds improved over time. You need to do a bit of math to get the values you need out of your data, but Excel can do all of the necessary calculations.

2004

2005

2006

2007
 

2008

What do these lines tell you? We start with a starting capital of 100 and look how it develops over 453 random events. That calculation is done 50 times and you get a bundle of lines. The closer together these lines are, the clearer the direction the better, as long as that direction is up.

Looking at the previous article, where I posted my trading results I would have guessed that 2006 should have been a good year, but actually it wasn't. All years showed me at least a chance to profit, but the cones of the lines were fairly wide and not exceeding the 200 lines usually. So over 453 trades I have had just a slim chance to double my initial capital. In 2008 that looks obviously different. I'm doing something right I did not do correctly in the previous years. Of course I have just 4 months of data so far in 2008 and the results may look different in December. But if you trade demo and you get that picture I see in 2008 then you are ready to trade real. It's all just a chance to win, there are no guarantees in this business, but that's all you get in trading.

One way to learn trading

Following the articles I posted over the last few weeks I have been in contact with a few traders, who told me about their trading problems and asked for advice, what they should change, what they could do to become profitable. One trader quoted Marc Douglas' (Trading in the zone) advice to look for a master trader to emulate, to considerably shorten the way to success and asked me to help him on the way. I'm humbled, I know I'm no master trader, I'm just on my way and all I'm doing here is sharing that way with you, sharing my experiences, sometimes my emotions, on that way. If I found some nuggets on the way and you can use them for your own trading, I'm happy. It's my way to give back what I have learned from so many of you.

I would like to take the opportunity to say Thank you to NQOOS, who recently announced his intention to close his Tradingnaked.com website. A treasure trove, I only now begin to understand how it influenced my trading and got me to the point I'm now. As long at is still open, follow the link and dig through the materials offered there. (Actually it seems NQoos has been convinced to keep his website open for the time being.)

What do you need to do to become a profitable trader?

There is no holy grail, there is no secret trading wisdom. It’s all very plain and simple. But you need to find it in yourself. That might sound cryptic, but trading the way I understand it is nothing mechanical, nothing I can reproduce in an automatic trading system. And that means if you want to learn it you will have to invest the time. You can shorten your way by following a path that has lead to success for others. If it is your path only the future will tell. There are a lot of successful trading methods I can’t trade, because I don’t have the money or account size, because emotionally I can’t stand the high number of losers compared to a small but very profitable number of winners.

I followed a master trader, I learned a lot from her and I got my account to new highs only to go nearly bankrupt just 6 months later. The way that true master trader traded, even if it was extremely successful, was not my way. I could not trade that way and it nearly cost me my account to finally understand that. It took another 2 years to find my way, to find a way to trade that is in sync with my understanding of the markets. You will find successful traders on your way as well. You will follow their example and try to emulate their trading. But only if you are able to make it truly your own, will you be successful.

If you want a specific advice:

Maybe these articles I wrote over time will help you: http://globetrader.blogspot.com/search?q=learning

They will point you in a direction, they will show you what turns I took and if you compare it with what I do today you will see, that a lot of things I do today were known to me years ago, but I could not really implement them. (Sorry some older articles no longer have charts as the link to them is broken)

To learn trading takes time and even if you are a quick learner it will take you 4 years at minimum. You just can’t accumulate the necessary screen time faster. So be prepared to invest the time and have the money to do that. If you don’t have it, look for a job and build your trading account over time, while you follow the markets in the evening. The markets will be there when you are ready. But will you still have enough money when you have finally learned what you need to learn? It’s your decision.

I did not follow that advice, I always traded real and I'm lucky that I never had to rely on trading income during that time to finance my life. It would have been a lot easier and I would have considerably more money now, had I traded Sim for the last 4 years. I know account curves for trading account always look so fancy. Going up, retracement, going up, retracement, going up. Well reality looks different. At least for me. Here is my account curve looking at the trading results only:

Yes I found a way to trade which seems to fit my personality in the last few months. If it will stand the test of time I have no idea. One thing is clear: I did not give up, I continued the struggle to find a way, I continued to learn despite the setbacks.

There are some (old) ideas, which might help you on your way:

1. Familiarize yourself with what you want to trade. Get yourself a book about futures, so you have a basic understanding what what represents. I read Kleinman: Commodity futures and options and Gann How to profit in commodities, when I started trading futures

2. Get a basic course in futures trading. You can find very good information on the net for free or dig through this blog. I've linked to or commented on information I found useful at the time. And again, take a look at the tradingnaked website

3. Join a trading room, where you can see good traders trade. The Sanuk trading room on Google groups or Buffy’s chatroom on echat (see the Download section on www.ensignsoftware.com for a standalone access using the echat software) come in mind.

4. Start a trading journal. Take a look at Brett Steenbargers article on that subject.

5. Setup your trading software and charts. KEEP IT SIMPLE
The human mind on average can process 7 items of information at the same time. If you are a women you can probably handle 10 things at the same time. I'm just a man and if you ask my wife how many things I'm able to do at the same time the answer is 1. I hope it's a bit more, but if you look at my charts I have prices and horizontal lines. So I need to recognize if prices comes near a line on 2 charts at the same time.

But I also check other charts to see where we are on the overall picture...that's DAX and ES on 5 minute charts...

Four charts to check (The 30min chart is just for trend information). Of these I watch 1 chart (10 Tick) for the actual trade entry....Hmmm, maybe my wife is actually correct!

6. Trade Demo over a longer period of time, which I suggest should be not shorter than 3 consecutive months but at least until you have proven to yourself, that your Profits pay for your Losses. You need to prove to yourself, that you have an edge in the market aka that you have a profitable system and that you can be confident that you can apply your system rules consistently without second guessing yourself, over-riding rules, and other damaging stuff like that.

7. Have another source of income to finance your learning

8. Be prepared for a 4 year learning curve.  If you don’t want to spent a lot of money, you will have to dig and read a lot of the available information on the net and you will have to demotrade, because only with trading you can develop the skills necessary and find out what works for you. But you need to have enough money to trade when you have found your edge in a few years.

Sorry Marc Douglas, but in my humble opinion: There is no shortcut to trading success

It takes as long as it takes. And if you manage to be profitable in 6 to 12 months. Congratulation
I thought so as well in June 2005 and November 2006

Setup

I got an E-Mail asking this:

A question if you have time to answer...Do you always use the same setup 30 min, 2 min & 10T chart or trading on all instruments? ... Do you trade ES.?..it moves so slow I wonder whether it will adapt to these settings ?

Yes I use the same setup for all my charts. As I said numerous times...MAKE IT SIMPLE...so don't mess around with your charts, don't mess around with your trading software...get used to what you know works 80% of the time. If you have a string of losers, so be it, it's part of the plan. One thing you need to be sure of as discretionary trader: You need to know that you have an edge. And you can only prove that convincingly to yourself, if you have the statistics to back you. So have a trading journal, where you see right away how you doing. Below I have attached a copy of my trading journal for the last month, this is just an excel sheet, but I use it now for 4 years and that amount of data can tell you a lot about yourself.
  

A rising account balance is not all, you need to set yourself goals, you need to have rules, which protect you, which keep yourself safe even when you in a losing trade. In trading there is no room for panic. When you are driving your car and suddenly something unexpected happens, you react, if you panic you crash. You rely on your instincts to keep you safe. You know, that your instincts will let you do everything which is necessary to avoid the crash if humanly possible. The same must be true in trading.

Unfortunately as a trader we need to train our instincts first, before we can rely on them. Without training we will panic and usually do the wrong thing. (But isn’t it the same with driving? When your kid starts driving, you can only pray he/she will master the first 2 or 3 years without serious accident, then they most likely will have learned enough to master most basic situations)

You stick to ES because it’s not as volatile as ER2. As a trader you embrace volatility, you don’t fear it, because volatility is profit, is security for your account.

There are 2 ways to trade: With stops and without stops.

If you trade with stops you might endanger your account by bleeding it to death by taking a 1000nd stops. Taking too many stops is difficult, as it sure gets on your psyche.

If you trade without stops, you trade swings, you know that all instruments swing, that every price will be revisited eventually and that you only need to bring your average price within the next swing area to close the trade at a profit. But the risks for this kind of trading are a lot higher as you may not have the margin to bring your trade within the next swing area, you add to a losing trade and prices might still go against you, just that now the hole is twice the size it was before. This kind of trading can freeze you, it can leave you drained emotionally and it can really damage your account, as you might not be able to act, when it is time to act, because you fear doing the wrong thing again. (My highest losses came from that kind of trading)

Here are 2 30min charts: One is the Euro, one is CL (oil)

Yesterday you could have traded Oil successfully without stops, while trading Euro without stops often ends in disaster. Why? Oil has a higher volatility than the Euro, that is one reason. And Euro as all currencies has a tendency to trend stronger than oil. Oil swings a lot more compared to currencies. Currencies after a strong trend move tend to consolidate in a small range and reverse the next day part of the trend move. Oil often reverses up to 50% of any move into the close. No rule without exception of course!

Still you need something which tells you when to hold it and when to fold it.

I use this Excel-Spreadsheet, I’ve written about here: ib-excel-adapter to tell me that. If the Euro has gone 200 ticks since yesterday’s close, I trade it countertrend on a setup which presents itself. If it goes against me I add to the trade. If oil has gone 200 ticks, I trade it without stop. I might reconsider that number after yesterday, where I had a bit of a problem getting out of such a trade (but actually I made the error of looking at the move from the top instead of from yesterday’s close. Had I seen it as a US trader has seen oil, it would have been clear that there was more downside to come in oil)

And as you can see in the chart above, I messed up the final exit, leaving a potential huge profit on the table. But as I said, trading without Stops drains you emotionally, and I was not willing after seeing the trade finally in the green to let it go against me again.

Oh yes, I consider yesterdays trade as a lucky one.

I messed with my rules, none the less it was a good experience to trade it and to monitor my emotions within the trade which took a few hours to complete.

The  basic rule is: If a contract is at extremes from my knowledge of watching and trading a certain contract, then I go countertrend (unless there is a strong reason why the contract is at extremes of course). If it is not at extremes I trade trend moves and stop if necessary.

I don’t trade the ES, I use the ES as a guidance for market direction. (I do the same with the EuroStoxx50 in the morning btw) There are a lot of vehicles available which move faster and stronger than the ES, but still take their direction from the ES. I trade these, but that is my style, that is where I feel myself comfortable and where my statistics tell me I have an edge.

I have feared volatility, but trading slower contracts is not my style...water torture must be the same. The trade goes tick by tick by tick against you without hitting your stop. After 2h you are still in the trade, the stop is about to get hit and you move it and it goes again tick by tick by tick against you…Done that, been there…

No a fast move in my stop, I can accept that, I was wrong, but a relentless force driving a contract slowly against me without any meaningful retracement … Sorry that’s nothing for me.

You need to find what works for you. Where you can be in sync with the market. It can be an arcane contract like Silver, Soybeans or Natural Gas (low volume, very high volatility) or something from the mainstream like ES or ZB or ER2. It doesn’t matter what you trade, you need to know the contract, you need to know what drives it, how it trades, what is a normal swing, what is an extreme range, where does it tend to reverse a swing. It’s always the same. There are big traders in any contract, they are human (or if they are computer programs, then they have been programmed by humans) and humans tend to repeat themselves. They repeat what works for them. If you have followed a market for some time, you know where to expect support or resistance. If it works 80% of the time, you have an edge and that's all you need!