After Christmas thoughts

Hi Brett,

Brett Steenbarger, whom I really respect and whose blog I follow on a regular basis, pointed me to Mike Bellafiore's new article at SFO magazine. It really was one of the first to make sense to me describing patterns as result of HFT, seen in the market over and over again, while I was struggling to accept these as real.
I have struggled the last few months with my trading setups, as they did no longer work as expected. Nothing to really put my finger to, just a feeling in my stomach, that the futures I follow do not move as expected. Taking longer to break out, testing levels again and again only to spike, after I covered my position for scraps. I adapted by scaling back on my trading to nearly zero. Just placing one or two trades a day to not lose the feeling for having money on the line at all and if these did not work (or if they worked - but after I covered) I left the market to itself. I reworked my charts, to find something better fitting, but nothing feeling right so far. 
I know the market will be here tomorrow or the day after, when I will have found the confidence again to trust my signals and therefore trade more aggressively.
I know exactly why I wasn't able to rework my charts the way they should be. I'm an engineer -not by profession, but by heart- and I need a logical explanation, before I trust something.

…and I had none. I couldn’t explain multiple V moves, breaks which happen only to get reversed 100% only to break again and reverse again. The moves no longer spoke to me. I was still able to formulate longer term plays, but those I don’t trade with futures. Like a Euro/USD trade which I made with my account itself moving from Euro to USD when Euro broke down below 1.48 sometime before Christmas. This trade made sense at the time I took it and still makes sense. Nonetheless it went against me 80 or so ticks at first and in futures I would never ever held such a position.

I have my further work cut out it seems. Sure, it all comes back to trust what you see all along on your charts. But, the mind can put so many doubts in your decision making process, that the opportunity is gone, once you have put them all aside.

EUR/USD

I went long USD in my account, when Euro broke below 1.48 after testing 1.51xx.

Will stay there until Euro comes back above I think. Euro should test the 1.38-39 level on this retracement in the long run, which is the 50% retracement level of the 1.2475 to 1.5150 move

 

and the 38% level of the move down from 1.60 to 1.2475

Any bounce upward above the 1.4450 level has the potential of forming a double top with a retest of the 1.5150 level on the weekly chart. Only a break and weekly close above former support at 1.5275 would negate that.

Long-term targets on the Euro see it trading above the 1.80 level, but that might take more than a few months….

Adios Wave Study, welcome Volume/Range study

The comments received on my last post (in public and in private) suggest, that FFA (Fast Fourier Analysis) will give me the results I seek, but will still fail to predict future price behavior. Meaning implementing that, I will get yet another failing study.

In the back of my mind I know, I have to include volume somehow. I use volume in my trading, when watching the tape, when watching charts form, but I can’t put it in words or formulas.

Prices move up, when there is more buying than selling. But at any given moment in time when a trade happens, buying and selling volume is absolutely equal, equities change hands. This 50 contract trade on the ES at 1105.25 means there was a seller of 50 contracts and a buyer of 50 contracts ES. Volume on minute charts tells you not really something. Sure you can see, what prices did when there was a volume spike, meaning when more contracts where traded. If they move down sellers were willing to accept lower prices just to get rid of the merchandise, but what about the buyers? Why do they buy, when sellers move the market aggressively down. Some have to, but most don’t.

Volume and time are linked, actually volume, time and price are linked. Higher volume for some time at a certain price level tells you there is someone out there, taking all that is offered and betting on a move change. On a volume and on a time chart this is seen as a flat section of the tape.

The wave is the norm, the flat section on the chart is the exception.

Euro breaking down on a 15min chart. You see Sellers making a stand and just selling into the buying after a spike down until you suddenly see the buyers making a stand. There is a spike down initially, there is again that selling, but suddenly the selling is absorbed at the 1.4850 level. There is a final spike down, prices recover and recover into the previous range above the level, the buyers made. Sellers don’t give up that 1.4870 level so easily, it’s the Asian trading session now (charts are on CEST) and volume is light. Still buyers continue to come into the market and force prices further up.

I talked about volume, so let’s add it

That huge bar down is accompanied by high volume. But what does it tell you, how can I fit that knowledge into a formula telling me that the 1.4850 level will be the one, where buyers will make a stand.

Volume * Range will give you a high value, when Volume is high and the range of the bar is high. That’s to be expected, actually. I don’t need an indicator telling me what to expect anyway.

Volume / Range will give me a spike if Volume is high and the Range is small. That sounds a bit more interesting! I should see a spike, when there is someone taking a stand, because then we see high volume and a small range bar.

I will leave it at that…and see, if I get some input from you.

New wave study

It's Sunday morning and I have some time playing around with an idea I already had for quite some time.

Prices move in waves. I think we can agree on that and using charts means, we try to predict future price behavior from past behavior aka prices are not moving randomly.

Also looking at any line chart in any timeframe, we see waves within waves. And usually we see breakouts (up or down) followed by consolidation followed by a new wave up or down and again consolidation. We use divergence, price patterns, whatever to tell us, it's time to take a trade, because we believe to see a pattern we recognize and which tells us, that a certain move is imminent.

 
(Friday's 5min ES chart European time zone)

I thought of a theoretical way to get a similar chart and a simple formula was able to do that:

y=sin(x)

gives you a standard sinus wave which in it's simple form might represent buying, consolidation at the top, selling, consolidation at the bottom and an endless repetition of the cycle

y=sin(x) doesn't do the trick, but if you define x to be different distinct timeframes, each a timeframe with a group of traders working that timeframe and you just add them up, like each wave in the ocean is just the sum of all waves it is composed of, you get a very interesting picture:

Gives you this graph:

In this graph you see a lot of patterns, we use for our daily trading.

And I thought to myself, if there was a way to match the line chart of the ES above to such a theoretical chart, you might get a really good predictive study.

I have no idea, how such a predictive wave study could be implemented, but maybe it's an idea worth thinking more about. Maybe you don't need a complex neural net to try to explain market behavior within the day, maybe a relative simple Wave study is sufficient. You need to play with the parameters and the number of Waves within waves, to get a good representation of the market, but starting with the major timeframes should work. Volatility could be added by multiplying certain timeframes to match news events pre-market.

It's just an idea, but maybe you have some time to follow up on it and play around with it.

Oil daily

Quite some time, that I posted an article, but that chart was too good to be left on my computer alone.

A rising trendline against a stationary resistant line. It's that time of the year, where we usually will see oil prices come down a bit on a seasonal basis. And you see that on that daily chart above already. We had no major hurricanes, no militant attacks, no craziness from the OPEC but oil is still holding up - trying but refusing to make lower lows.

That means, we will see a test of that 76 level again. And you know what they say: On a third test, they usually break, making the way free for the 85 target area.

Sure if that test fails, the fall will be long and hard, as the only real support comes in at the 68 and 61 levels.

Right now I like to go long oil around that rising trendline.

How Money is created

I wrote about it last year. But it is so important I decided to repeat it today

You ever wondered how Money is created?

Take a seat and watch these videos

Part 1:

Part 2:

Part 3:

Part 4:

Part 5:

Momentum Pattern I

I will from time to time post patterns as I see them.

The first one is a momentum pattern in Natural Gas Futures. These futures are fast, usually have iceberg orders in the market, and can spike really lovely.

Take a look at this 10-Tick chart

I highlighted such an iceberg order, which was renewing itself. The market had tested the daily low and failed a few ticks above at 3.704, it went up and someone tried to sell it down again. But there was a lot of buying in the market, which you see in that nice line formed in the chart. The buying relaxed a bit, only to spike through the line in the sand, which is your signal to go long.

NG can run 40 to 60 ticks, still 3.750 was resistance in premarket, so I was wary when I saw the divergent wave pattern. I took the hint and exited with +20.

 

Here is another example of the same pattern at the above mentioned resistance level

As you can see it first failed, but there was support 10 ticks below and the market continue to try for a break, which eventually happened. Never forget: It's a momentum pattern, so don't hesitate to bail, in case it fails and don't expect home-runs.

Should have's .... are there for a reason

I stumbled on an older article Brett Steenbarger posted last year: Second-Guessing: The Should-Have Syndrome

which I found really worth reading, as I missed it last year. And it got me thinking, which lead to this article today.

 

- I should have taken a stop, even if the trade turned out to be a winner. Last time it cost me a lot!

- I should have taken that trade, because all signals were there. But last time the same setup did not work!

- I should have held that winner longer, it was obvious, it would do the breakout this time, wasn't it?

Should have's ... can help you, as they are another way your inner self is corresponding with you. It's a discussion happening in real time in your head, when you are focused on the markets.

Listen to that voice, don't give in on it, but argue. There are times, when it is worth overriding that voice. If you are proven wrong, next time, it will be harder to override that voice!

At other times it's only prudent to follow that advice. Your trading plan is there for a reason and its rules are to be followed, unless there is real good reason to deviate. One rule may be that round numbers are usually Support / Resistance levels and you get out at them. They may break on the first test and leave you with a feeling of missed profits, but usually S/R holds on the first attempt, so getting out and locking in profits is only prudent as a daytrader.

Not taking a trade, you should have taken is a tricky one! But there is a reason for it. You just can't see it, as you are so frustrated with yourself.

It might be that you have personal issues today. Maybe you have no time for the trade as you have to leave in a short while or you have other things occupying your mind interfering with your trading. Be happy you haven’t taken the trade and get your things in order, so you can concentrate on your trading again.

But it might also be that your subconscious mind is seeing some flaw in your setup, you haven't identified yet and therefore have not integrated in your trading rules. Maybe your setup assumes high volatility and is just not working at its best in ranging markets. Your subconscious mind is extremely good at analyzing the markets and is signaling you just that. Of course, if the setup then works, you are frustrated not having taken it, at the same time ignoring the last 5 trades, where the setup worked just so or actually failed, but you still assumed that being do to the normal P/L% ratio of your system, when in reality it was caused by a market sentiment shift, you haven't acknowledged yet.

Try to deal with your Should have’s .. in a positive way. This will respect the parts of your mind, which are having problems with your current course of action and prevent them with interfering in your trading in the most unexpected way. Eg by flooding you with panic feelings, when a real cool head is actually needed. And it will actually help you in your trading, as it is always a good thing to be able to argue the reasons for your trade at any time.

If Should have’s … pop up in your head while in a trade, look at the position in an objective way, try to see it as a position your best trading buddy just told you about and he/she asked you, what you would do with that position.

Euro again

After a failed H&S pattern on the daily down to the 240min timelevels the Euro moved into a sideways consolidation pattern holding above the neckline, but below the shoulders of said H&S pattern. We can see some important uptrend lines on the Euro, the first one has been broken a few days ago, the lower one coming into play now, but leaving the Euro still a lot of room.

On that 960min chart you can see where we stand right now. Yesterday we broke down finally, but that reversal we see right now leaves me questioning my decision to go 3/4 into the USD with my account at the 1.39 level. Retaking the 1.40 level will get me back into the Euro in the account. We might see another week or two of holding patterns in the Euro, but then that second uptrend line comes really into play and will decide whether we go higher or not.

Shift in sentiment

It's some time I published an article. Not due to lack of trading, but due to a shift in sentiment and approach to the markets. A study of my approach to the markets showed me something very clear:

• The time I force it, I lose.
• The time I become confident, I become careless and I lose.
• The time I take one small step after the other, I win.

It is frustratingly slow, it is a calm way of trading, sometimes I do just one trade a day, sometimes I do none, sometimes I do 3 or 4 trades, I stop when I made my target. I miss a lot of moves, and sometimes I feel I should press on, but then I remind myself, that it doesn't work that way.

Think about it this way: Over time you can fairly well define the win/loss ratio of your personal trade system. Now this win/loss ratio will not tell you, if the next trade will be a winner or loser, and actually even if all trades are independent, that win/loss ratio will be fairly accurate over a bigger number of trades. It will be also fairly accurate over a number of trades within the day.

So does it make a difference to start the day with a winning or loosing trade?
Knowing that each trade is independent, obviously NO.
Knowing that during the day my personal win/loss ratio will kick in, absolutely Yes!

Which means:
If I start with a winner and make or exceed my daily goal...I stop
If I start with a winner and don't make my daily goal... I continue. If the next trade makes or exceeds my daily goal, I stop.
If I still did not make my daily goal, I consider stopping for the day.
The least I do is take a walk with my dogs and switch contracts. Why: Because my daily goal is quite small and I can make it with one or two trades. So if I don't make it, my approach to the markets is wrong today.

If I start with a loser...I continue
If I have a second loser in a row, I'm out of sync for the day and I stop
I might even stop for another whole day, just watching the markets that day, to get back in sync.
If on the other hand that second trade is a winner...I continue. My personal win/loss ratio based on number of trades (not profits) is 58% winner, 22% breakeven and 20% looser, so the second trade being a winner is consistent with my personal w/l ratio encouraging me to continue.

This approach to the markets gives me a lot of time to do other things...I like it!

And I like the way my account is doing if I follow this approach to the markets.

...

Yes I miss the fun of trading more frequently during the day. Actually its boring at times.

But I noticed one thing: The personal win/loss ratio shifts during the month, if you follow this approach. I wasn't able to change my personal w/l ratio for 5 years. Taking this approach I have.

It might also have to do with my new trading system, I wrote about in my previous articles. So to give you another glimpse at what I'm following now, take a look at this Euro 240min chart

If we stay above that rising support line, I expect a real big move up in the next few days or weeks. if not, next support on the downside is 1.3736 and 1.3440.

Wave examples

Piper asked for a 89 SMA on the charts. Here it is. A 60min and 5min crude oil chart...

Wave oscillator

I promised a follow-up on my article Wave within Waves. It seems the idea has merits. The one question not answered was: How many different timeframes should I implement to get a reliable reading. My first implementation used 3 different settings, as these were the oscillators I always had on screen. I now expanded that to 10 different settings based on the Fibonacci number series and added a second independent oscillator, which I setup the same way.

This is what I got (crude oil July 09 60min):

and here is a crude oil July 09, 5min chart

Even if both oscillators forming my new Wave oscillator are independent from one another, both are scaled to use a mid-line and the scale seen on the indicator is fixed, so crosses of the lines are not just arbitrary due to screen resolution or chart size.

I'm now looking working with the assumption, that readings above the mid-line represent uptrends, readings below represent an underlying downtrend.

Color-changes at extremes might signal a trendchange.

Color-changes near the mid-line might represent an entry opportunities with the trend.

Crosses of the oscillators might confirm the color change signals.

Divergence of the blue line against price near extremes may support a trendchange signal signaling exhaustion of the previous selling or buying momentum as prices are running into support or resistance levels.

I will have this setup on screen for a while to see, if these assumptions are correct. If yes, I will try to implement an ATS, which should impartially tell me wether these assumptions are correct or not. I won't do that in the first place, as an ATS requires very strict rules. And there is a tendency to tweak an ATS until it produces the desired results. First I need to get a feeling for the setup, I need to understand, if this setup produces good signals or not. Then I can start looking to implement the rules into a mechanical ATS.

Waves within Waves

Looking into a new (old) concept. Waves within waves. Why do we sometimes see springfloods, why do we sometimes have big violent moves in the market place, while seemingly similar circumstances at other times give us just a ripple with no food to gain?

Can you predict the height of any single wave in the ocean? If you knew the height of any wave in the ocean at one point in space and time and you add them all together, then you could. Or you just measure the height by placing a ruler into the water until it hits the ground. Now you can be fairly sure, that any trough you measure will be followed by a high. And the lower we go, the higher the next wave(s) will be.

Kinda' interesting, don't you think, if you assume, that the marketplace moves in waves as well.

The indicators we usually use, measure one wave. Yes one single wave in a specific timeframe. They simply ignore the remainder of the universe. But to measure the depth of the ocean, it doesn't suffice to measure one wave. Actually you just can't measure the height of one single wave. That wave is the sum of all waves making that specific wave up.

I had on my previous charts 3 stochastic %D lines (81,3, 27,3 and 5,3). The one indicator you see above is the sum of these 3 lines calculated as (%D(81,3) + %D(27,3) +%D(5,3))/3. The lowest reading lead to the best move for the day so far.

I will put this new indicator on my charts and watch it. I will experiment with it by adding other timeframes to see, how the information changes.

Maybe this makeup for an oscillator is an answer to the one flaw any oscillator has: It works excellent in ranging markets, but once a trend exceeds the length of the oscillator, they suck big time.

New Articles

Hi Newton,

thanks for your encouragement. I'm sure I will write more often again, but right now I'm reading not writing. I'm reading "The Daily Trading Coach" from Brett Steenbarger. A book I can only recommend. A small, very small part is from me as well, as I participated in chapter 9 by writing Lesson 82.

The book is really good and for now I'm taking my time to get it's lessons in my head.

But be sure, I will post new ideas again in the future...

A different look at the Tick index

The $Tick index (the Number of stocks trading on an uptick - number of stocks trading on a downtick on the NYSE) never told me a lot. I had it on the screen to watch for extreme values, but other than that a chart always looked too erratic to me to be of any use.

But playing around a bit I now found a display which actually tells me something:

   

Instead of displaying the $Tick-NYSE in any kind of chart, I plot it as price histogram. This shows you quite nicely where we trade in relation to the 0-line, where the POC is, which gives you a kind of short term trend (being below 0 it tells you the trend is down, being above we go up).

The first chart shows you, what you would expect from the $Tick. A nice bellshaped curve, with the POC above 0 as we had a day with an upward bias yesterday. The second chart gives you a shortterm look into the $Tick displaying the selling into the close yesterday.

Here is the Ensign software template I use to create this chart for those of you interested in replicating the chart.

(If you have your manager not set to add symbols automatically, check the template for the symbols used, so the calculations at the bottom of the chart work as well)

Euro

Where we going from here?

The Euro took a dive the last 2 days and me being in the Euro in my account have to ask myself, where are we going. I'm a daytrader, I know not a lot about swing trading, still I need to, as my account holdings have to be in a currency and I like my holdings to work in my favor not against me. So if the Euro weakens against the USD, I go into the USD, if it is strong, well I remain in the Euro. Or is there another currency, which is even better suited to be in, which is going up against the USD and the Euro. Gold comes to mind, but gold is too volatile, I trade gold, but I don't put my account holdings in gold.

As I said I'm no swing trader, so I stay away from other currencies than the Euro or the USD. Otherwise it gets really complicated and I don't like it complicated.

Which means I just have to answer these questions daily and every weekend:

Shall I switch from Euro to USD or USD to Euro or shall I hold. Where is the point, where I reverse the account from one currency to the other.

Currently I am long from the 1.2570 area, but that might change. Take a look at this daily Euro chart:

There is something about to happen. That triangle will break. To the upside or the downside. Chart analysis tells you that such triangles tend to break to the downside, but before we jump to conclusions, let's take a look at the longer time charts.

A monthly and a weekly chart:

Monthly oversold, the weekly barely out of being oversold and showing a double bottom.

And the 240min chart (below) shows the Euro above the 50% retracement, which is around 1.3100

We might have a good flat top here, but as I'm not daytrading my account itself, I think I will keep the account 66% Euro for a while longer, actually I might go 100% at the 1.3100 level and keep that until that green line is broken to the downside for a 100% USD reversal below 1.3000.

Sanuk

Wikipedia tells you it's the Thai word for fun. A fitting name for a trade setup I recently got introduced to. Trading is fun. The trade will or will not work, nothing you do can change that, once you have committed yourself to be in the market. So why is it relevant, whether this individual trade works? 25 trades should show you a profit overall or your setup has some flaws, but one individual trade...it works or not. Nothing you can do. So be relaxed, have fun and let me tell you about the Sanuk trade and how I understand it. Bruce will correct me, if I got it wrong, I'm sure.

Markets move in waves up or down. If the trend is down, you see lower lows and lower highs. If the trend is up you see higher highs and higher lows.

If in a downtrend you suddenly see a higher high than the previous high, something has changed. The Sellers are no longer able to sustain the constant selling.

If in an uptrend you suddenly see a lower low than the previous low, something has changed. Now the Buyers are no longer able to sustain the constant buying. Here's the chart behind that theory:

Take a look at this CL chart. Prices making lower highs and lower lows. Near the bottom you see a double top in the downtrend and the Low of the current move is formed at 17:25.

The low has been made at 51.72 and prices shoot up to 52.04 trading above the previous high at 51.91.

You missed that nice upmove, but there was no way to distinguish this low from any other previous low in the downtrend. So either you take all green bars forming in the downtrend or you accept, that you will not trade the reversal from the bottom. (Btw: I use Heikin Ashi Bars, which makes it easier to see whether we are in an up- or downtrend.)

But now we have the chance of a Sanuk trade setup forming.

Looking at this chart, what will most likely happen?

Exactly, Sellers will come in and try to force oil down again. But there are now Buyers in oil, which were able to push oil above a previous high and that means there are Buyers left behind, who did not enter the bandwagon and are now waiting to get a good price to enter oil on the long side. At the same time shorts will now be hesitant to push oil further down by just selling it short, as Buyers have shown their hand and their willingness to step into the market in the 51.75 to 52.00 area.

What does this mean? We are now looking for a retracement and will enter on the first green bar after that retracement has been made. Great! How shall I know, when the retracement is complete?

Look at this chart:

I placed a line from the previous high to the current higher high. And I placed a parallel line to it drawn from the low.

We don't go long now, we wait for the retracement to hit that lower violet line and then we wait for a green bar. Using HA-Bars this is the easiest way to tell, when a temporary bottom has been made and prices start going up again.

No hit, but a near hit...you could enter here

....or you wait:

Long 52.08 or 52.05

Now where is your stop and where is your target in this trade?

Stop first: 51.90 should be adequate and most will go for it. Target can be a fixed target of 10 to 20 ticks in oil, or you use the upper violet trend line, or you do as I usually do and switch to a longer timeframe for targets.

On the 100 tick you see 2 resistance levels:

Oil can move fast and violent. So if prices stall in an upmove where you are in and long, you don't hesitate to take profits. The least you do is move your stop up and be sure you use Stop Market orders, not Stop Limits as these tend to get jumped in oil.

Ok, from you entry at 52.05 you got a first target at 52.30 and a second at 52.45. 25 ticks for the first and 40 ticks for the second contract. Not bad at all. As you can see on the 100tick chart oil made the first target but failed to make the second target.

 

And on the 25 tick chart I used for the entry you can see, that you got quite a lot of warning, that the second target might be elusive:

Seeing this you either move your stop up to the 52.10-52.20 area to secure some profits or you close the trade for a nice profit.

Trading should be easy, it should be fun and your setup's should provide you with consistent profits. They don't need to be big, but they have to be consistent. This setup helps me on that path.

The setup is not my invention. As I said, I got it from Bruce and you can find him in the Sanuk Google group, if you interested and take the time to look for him. Access to the group is by approval only.

Markets trade in sync

If you are used to watching multiple related markets, you will notice, that they tend to trade in sync. If the ES is going down, you expect the YM, the NQ, the major European markets to do the same. They usually do, but there are differences and you can profit from these.

First a word of caution: Never trade the lagging contract in the direction of the leading contract. There is a reason it lags.

ES is the leading contract in all my setups. I seldom trade it, I use it to define the major market trend.

Above you see the ES making a leg down. The CAC40 (french index) followed that last leg down, but the DAX, while trading to the downside is hesitant. That's a great example of a lagging contract.

Seeing this scenario the first impulse is: Ha, they missed it, for whatever reason they missed that downtrend in the market and are still holding support on Dax.

You sheep!

I have no idea why Dax is holding up, but that market has a lot of strength. Take a deep breath, you have missed nothing, instead pull up your trading charts for the DAX and wait for a signal to go long. The moment the ES turns, DAX will explode.

Of course, if ES takes another leg down, even the strong ones will follow, but that's what Stops are for.

Indicator

You might have noticed, that my charts have a Stochastic indicator on them. In trending markets I look for pullbacks on the trend to enter with the trend, seen as a sling on the Stochastic Indictor.

Today I added a second indicator, as sometimes I have that dumb urge to jump into a market. We all know that feeling: Hey, that's a great move, it has legs, and again...I missed it!

Depending on the day, I sometimes just click and enter the trade. Usually when the market stalls and reverses, leaving me pondering the stupidity of my trade.

So I added an overbought, oversold marker. If %D of Sto81 + Sto27 + Sto5 is >280 or <20 a marker is shown, reminding me of the danger to open a trade with the trend in this timeframe.

See the red lines above the stochastic indicator.

Tech Spread

I wrote about the Intermarket Spread between YM and NQ, set at a 2 YM : 3 NQ ratio.

Here is a 60min chart of that spread showing the ranges I noticed so far.

In my Sim account I made a nice profit trading that extreme -3400 reading by going long the spread (Long 3 NQ, Short 2 YM) and closed the trade in the morning at -2550 for a 683$ profit.

The assumption was that NQ was already down all day, while ES and YM showed profits until succumbing to the selling after AMEXCO posted that news-item about credit card defaults. So any selling would be done in the financials, while tech, even if it slipped further should already have found a bottom. Meaning the spread should come back to the usual -2200 to -2400 number I have identified as equilibrium for now.

Intermarket Spread

For now I've just looked at calendar oil spreads. But after digging myself into Keith Scharp's book "The complete Guide to spread trading" I tried an intermarket spread yesterday:

1. You look at the market and decide which one is strong and which one is weak.
2. Right now the Technical's are relatively strong, while the big caps, especially the Financials are weak
3. Meaning: If it goes up you can expect the NQ to outperform the other markets, if it goes down the YM will be the heaviest hit
4. Trading an intermarket spread means: You go long one market and short another at the same time
5. But first you need to understand, that trading 1 NQ is not the same as trading 1 YM contract. They don’t move at the same speed
6. Therefore you do a little calculation:
   NQ at 1080 * 20$ (per point) is worth 21600$
   YM at 6625 *   5$ (per point) is worth 33125$
   To make them move at the same speed, your long and short positions need to have approximately the same value
   NQ: 3*21600$ = 64800$
   YM: 2*33125$ = 66250$
7. So your Spreadtrade would look like: Long 3 NQ and Short 2 YM contracts
   Most brokers will recognize that this is a Spreadtrade and give you a very low commission on the whole trade. In case of IB yesterday this trade cost me about 6500$ margin (IB gives the margin advantage for the corresponding 2 long and  2 short positions and adds to that the 1 contract long NQ margin)
8. This trade will show you a profit in rising and in falling markets as long as your assumption that Technical's will outperform the big cap Dow stocks is correct. It will show you a loss, if there is a snap back rally in the financial sector.

In spreads you need to be right about the fundamentals not about the direction of the market.

Being in a trading hole

Been there, done that, will do it again...

From time to time emails from readers reach me asking me, what to do when you are in a hole. Something which worked last year really fine, suddenly stops working and you find yourself down 50% to 70% of last years profits or worse of your account value at the start of the year.

Stupid example? I don't think so! You can do it with 1 trade, if you are careless and stubborn. (I just proved it going long 30,000 FAS last Thursday in my 125k$ IB demo account, which is now reduced in size by 65% in just 2 trading days...just to prove to myself, that taking a 2,000$ loss on a big position is the correct way to trade... but I will hold it into extinction if necessary)

Being in a real big hole is something, which seems to happen to all traders over and over again. Strategies seem to stop working for no apparent reason and when you finally realize it, you are already down big time.

Question is, how do you stop and reverse the downward slide to climb out of the hole again.

1. You need to have capital, so you have to make sure that you still have an account to trade. Which means: STOP TRADING NOW
   Stop for a day, a week, a month, as long as it takes. The market will be there waiting for you, when you are ready again.
2. Markets change and you have to adjust your strategy to compensate or you switch to a new market which fits your trading strategy better.
3. Something private: From time to time you will find articles about new markets in this blog. Most likely I'm in a hole or I'm feeling no longer sure in the market I'm trading at the moment. It might be that something changed in my trading environment, which causes me to trade at changed times, or I'm occupied with private matters which should take precedent to trading. The result is always the same: My trading system is not working the way I'm used to, I'm not getting the results I expect from trading and that causes me to look somewhere else. Usually when I do that, I write about it to get insight from you through emails or comments in the blog.
4. One thing you know, when you have fallen in enough holes is, that you will come out of them stronger, if you have discipline and persistence. Go back to the basics.
5. First answer this question:
   What has changed, the market or I?
6. If its me, then the first thing I do is: I stop trading.
   1. Maybe my environment has changed and I have to adjust my trading system to the new setup. EG: You had 2 screens and you upgraded to 4 screens. Suddenly you are flooded with information and you need time to adjust. More screen space is great, but you can't process all information presented to you, you need to learn what is important and where to find it on your bigger screen space.
   2. You have less time for trading, but your trading system requires you to be present 100% of the market hours or you will miss your chances.
   3. Something really difficult: You are suddenly dependant on the money earned through trading. It's a huge difference, if you have a regular income and your trading profits are just a nice add-on, compared to having no income other than your trading profits.
   4. Maybe you don't have enough sleep, you drink too much, you don't exercise. Trading requires you to be fit. So take care of yourself.
7. If it's the market:
   1. Question that assessment of the situation as markets usually do not fundamentally change very often. They do, but your trading system should capture quite a range of different market conditions or it would not have been profitable in the past. And that means, before you decide your trading system is not working, it's a lot more likely that something within yourself has changed causing the losses you experienced.
   2. If everything you do is the same you did in the past, then your system might no longer be working. You could try to tweak your system, but usually tweaking a profitable system leads only to an unprofitable system in the future.
   3. Try a different approach: Ask yourself, what is the basis of your system, why is it working, what are its components, what environment does your system need to work profitable.
   4. Once you have answered these questions look for a market which fits your system. No one forces you to trade ES, YM or NQ. There are a lot of markets out there and once you know, what your system needs, you can look specifically for these markets to trade.
8. Once you found your market
   1. Start demo for a week
   2. Learn the movements of the new market
   3. Start trading small
   4. Forget the notion, that you will be whole tomorrow or the day after. You are in a hole and it takes time to get out of the hole.
   5. But know, that once you found your mojo again it will go very fast and you will be stronger and better prepared the next time you fall in a hole.

I hope these points help some of you currently in a trading hole. They helped me in the past and will help me in the future.

Spread Trading

In trading you need to move on, when it becomes crowded. There is still money to be made, but the moves become random, the edge you have erodes over time and you find that more and more setup's stop working, have not the follow-through you are used to or more and more trades hit your stop-level. Sure you can fine-tune and you should do that for a while, as you might just be slightly out of sync with the market. But when you start doing that it's also time to broaden your horizon. You need to look for new, greener pastures.

I'm doing that at the moment and you might find it interesting to take a look yourself, so I will add these thoughts here.
In trading you will seldom find something really new, what has changed is the velocity, what took days and weeks can now be made in hours and minutes. That change is true not only for equities and equity index futures, that is also true in commodities or bond trading.

I recently started looking at spreads, actually calendar spread trading. This chart shows the Spread between April Light Sweet crude and march Light Sweet Crude (CL J9 - CL H9)

Calendar spread trading is a very old trading technique, it works a lot better better in physicaly delivered contracts, than in money settled contracts, but it trends in both. What you will see, is that this spread has not a lot of momentum spikes and if there is one it is usually safe to fade it, as Oil is still Oil, the only difference is the delivery time. So spikes and freak moves seen in the individual contract to get the weak traders out, will not show on the spread chart, as the spikes happen in both contracts. Only the underlying trend will really move the spread, meaning get it right and stay with the trade. I have just ordered Keith Schap's book "The complete Guide to Spread Trading" which Newton Linchen recommended and whose website you might take a look to.

You can make war about the same meager bone or you can step aside and look for new bones outside of mainstream. These usually are bigger and safer to get than the ones thrown to the Wolfe-pack.

Trading Forex with Futures

Trading currency futures or major Forex pairs makes no difference at all. The spread is 1 pip usually, so why bother with futures? Well, currency futures are traded on a regulated exchange, while Forex is not. Some see no difference, I do. Still the major reason I like futures compared to Forex is just a plain old habit: I'm used to trading futures.

Still I need to revert to Forex, when I want to deviate from the major Forex pairs, do I?

Let's start with the basics. This are the major FX pairs:

EUR/USD Fx (Euro)	trades as EUR futures	(6E on Globex)	(1 Tick = 12.50$)
GBP/USD Fx (cable)	trades as GBP futures	(6B on Globex)	(1 Tick = 6.25$)
USD/JPY Fx	trades inverted as JPY futures	(6J on Globex)	(1 Tick = 12.50$)
AUD/USD Fx	trades as AUD futures	(6A on Globex)	(1 Tick = 10.00$)
USD/CAD Fx (loonie)	trade inverted as CAD futures	(6C on Globex)	(1 Tick = 10.00$)
USD/CHF Fx	trades inverted as CHF futures	(6S on Globex)	(1 Tick = 12.50$)

In Forex some Majors are quoted as Currency against the US Dollar, others are quoted as US dollar against the other currency.

In Futures trading all currencies are quoted against the USD. Also compared to Forex the Tickvalue is fixed.

There are cross-currencies in futures as well, but with the exception of the EUR/JPY (RY H9 on Globex) they have no volume at all and should be avoided for trading, as the spread is just too wide to trade them.

Still looking at charts of GBP/JPY or EUR/JPY you might be tempted to trade them. You try and realize, it's just not working. You have been spoiled by futures trading and are just too used to your trading platform.

But there is a way around:

Most major cross-currencies can be traded using a major pair, which means you can trade them using futures as well

Cross-Currency	Major FX	Major FX	Future	Future	Value	Tick
long EUR/JPY	long EUR/USD	long USD/JPY	long 6E	short 6J	250,000$	12,50$
long GBP/JPY	long GBP/USD	long USD/JPY	2 long 6B	short 6J	250,000$	12.50$
long CHF/JPY	short USD/CHF	long USD/JPY	long 6S	short 6J	250,000$	12.50$
long EUR/GBP	long EUR/USD	short GBP/USD	long 6E	2 short 6B	250,000$	12.50$
long AUD/CAD	long AUD/USD	long USD/CAD	long 6A	short 6C	200,000$	10.00$

Other can not be traded using futures, unless you trade a certain size, as the tick value on the futures is not identical

Cross-Currency	Major FX	Major FX	Future	Future	Value	Tick
long AUD/JPY	long AUD/USD	long USD/JPY	6 long 6A	5 short 6J	1,250,000$	62.50$
long CAD/JPY	short USD/CAD	long USD/JPY	6 long 6C	5 short 6J	1,250,000$	62.50$
long EUR/AUD	long EUR/USD	short AUD/USD	5 long 6E	6 short 6A	1,250,000$	62.50$
long EUR/CAD	long EUR/USD	long USD/CAD	5 long 6E	6 short 6C	1,250,000$	62.50$

For Shorts the positions have to be reversed.

Cross-Currency	Major FX	Major FX	Future	Future	Value	Tick
short EUR/JPY	short EUR/USD	short USD/JPY	short 6E	long 6J	250,000$	12,50$
short GBP/JPY	short GBP/USD	short USD/JPY	2 short 6B	long 6J	250,000$	12.50$
short CHF/JPY	long USD/CHF	short USD/JPY	short 6S	long 6J	250,000$	12.50$
short EUR/GBP	short EUR/USD	long GBP/USD	short 6E	2 long 6B	250,000$	12.50$
short AUD/CAD	short AUD/USD	short USD/CAD	short 6A	long 6C	200,000$	10.00$

Other can not be traded using futures, unless you trade a certain size, as the tick value on the futures is not identical

Cross-Currency	Major FX	Major FX	Future	Future	Value	Tick
short AUD/JPY	short AUD/USD	short USD/JPY	6 short 6A	5 long 6J	1,250,000$	62.50$
short CAD/JPY	long USD/CAD	short USD/JPY	6 short 6C	5 long 6J	1,250,000$	62.50$
short EUR/AUD	short EUR/USD	long AUD/USD	5 short 6E	6 long 6A	1,250,000$	62.50$
short EUR/CAD	short EUR/USD	short USD/CAD	5 short 6E	6 long 6C	1,250,000$	62.50$

New-York Magazine

The Day of a Day-trader:

Take the time to read this: Stock-Surfing the Tsunami

New market: OMXS30

Last year, actually it was in December I was tempted to join a different broker, who was offering me 500$ margin on the ES. I test drove his platform, making huge demo profits in the ES by taking extraordinary risks of course.

Trading 10 or 20 or even 40 cars, when you come from 2 to maximum 4 cars makes a huge difference. I did decide not to go that route knowing in real trading I would most likely blow my account in a matter of days by being just once stubborn. I have been stubborn at times and will be stubborn again. I know myself.

None the less, I know I need to increase my trading size if I want to make a living from trading. And that means I need to get used to the swings involved.

That's when I found the Swedish OMXS30 market futures. They move very similar to the ES, they trade in 0.25 increments and the range is comparable. But the tickvalue is different: Each tick in the OMXS30 is worth 25 SEK, the exchange rate being around 0.11 USD, which means the tickvalue of the OMXS30 futures is 2.75 US$. That's quite a difference to 12.50 US$ for the ES and that makes it an ideal vehicle to trade size without losing your shirt.

The contract has good volume and I currently trade it in increments of 4 cars, with a maximum size of 20 cars. Profits and Losses are shown on my platform in the currency the contract trades which means I see the profits jumping in the 100ths, but in US$, that's approximately just 1/10ths. Real cool to get used to bigger numbers.

Marketdata subscription for the Stockholm Derivatives Exchange on IB is 1 Euro, margin is 950/760 USD. The market trades from 9:00 CET to 17:30 CET which is 2am EST to 11:30am EST.