This weekend our new trader training room, my office, at Propex is receiving a bit of a makeover from graffiti artist Andy Steel from “As One”. Here are a few shots: Before: These next few pics show the background design: Continue Reading

May 25 (Bloomberg) — David Siniapkin, a postal worker in York, Pennsylvania, uses some of his retirement money to trade options. After three years and being down as much as $10,000, he’s broken even. Siniapkin, 46, said Continue Reading

It’s interesting to see how the Aussie market has performed compared with the US. The chart shows the S&P (black line) and the ASX200 futures adjusted for the change in the currency. From the recent peak, the S&P has lost Continue Reading

Here is a really interesting article from our broker in Chicago, Craig Turner. Craig writes the ‘Turner’s Take’ newsletter. Trial details at bottom of article. GOLDMAN SACHS NEWS & ANALYSIS On Friday the SEC announced they are charging Goldman Sachs with civil fraud. As many of you know, I got my start professional right out of college with Goldman Sachs (New Associate class of Continue Reading

Fundamental analysis can easily become an academic and philosophical form of analysis. In fact if you listen to almost any of the economists being interviewed on the news or business channels, you’ll agree they offer far more “opinion” than practical trading advice. Great stuff for dinner party conversation, but nothing that will help you make money. We are however interested in how fundamentals affect the market and of course how we can trade it. For the short term trader, much of the practice of using fundamentals involves trading the market behaviour at and around the time of key data releases. With that in mind, the key to applying fundamentals is threefold:

• Have a good source of fundamental data and estimates.
• Plan the possible trades with scenarios.
• Trade the plan.

Continue Reading

In hindsight the US Federal Reserve and the US Treasury Department seem to have done a masterful job in distributing the avalanche of supply from historic deficit spending. In fact, Treasury prices seem to be getting a lift in the wake of periodic auctions, but that is probably largely a function of the lack of attractive alternative investments. We do think that US Treasury auctions have been benefiting from an “invisible hand” which could take the form of direct buys by the US government that are later distributed into the market in smaller increments. It is also possible that the US is soliciting the help of foreign entities, many of which have a vested interest in preventing a US debacle. However, we also think that the need to support the auctions will become less critical as the US government and US financial institutions get a grip on the trouble spots. We also think that a certain amount of Treasury buying interest is the result of lingering concerns of a failed recovery. In fact, the Chinese recently suggested that their ongoing interest in US Treasuries was economically based and not politically based. In other words, the Chinese were looking for a certain yield and the US Treasuries are providing that return. However, as the prospect of recovery improves it could increase the attractiveness of alternative investments and in turn pull money away from Treasuries. In our opinion the US will be able to keep certain interest rates down but that all rates won’t be held down once there is positive economic momentum. While it might be considered anecdotal evidence, it was noted recently that Miami condo sales showed a significant jump, which in turn prompted some real estate analysts to suggest that the excess supply in that area could be worked off in a couple of years. For most of the last two years there have been very few real estate experts who would hazard a specific time for a recovery in Florida real estate. Nonetheless, as we mentioned in the Commodity Outlook, we suspect that the next US Non Farm payroll report might show a better than expected reading, and that in turn could leave US Treasuries vulnerable to a compacted correction. With June bonds last week reaching their highest level since early December, it would seem like the Treasury market is at least partially factoring in a failure to recover or at least a much longer and slower recovery than one might have expected at the beginning of the year. Certainly evidence that inflation remains low was cause for some of the gains last week, but we challenge the bulls to feel good about their positions going into the next Nonfarm Payroll reading, especially if June bonds are priced above the 118-00 level! A good reading, rapidly rising energy and base metals prices and confidence in a global recovery could easily set the stage for an April slide in bond prices of 4 points! Trading Strategy: Sell 1 June bond at 118-10 limit, with an objective of 114-31. Risk the trade to a close above 119-09. That translates Continue Reading

There are a few reasons I love the calendar from www.forexfactory.com:

1. It has broad based coverage of data from most countries.
2. It gives rankings (low, medium, high) to the market significance of data releases. Continue Reading

The sugar market has been on a wild ride the past month. The market is shifting from one of the tightest stocks/usage periods on record to a more normal setup for the coming year. But the first leg down may have been too far, too fast. July sugar fell 20.6% off of the February high into the March 2nd low. Open interest peaked at 897,343 contracts on February 4th and had fallen to 741,780 by March 2nd. This massive long liquidation trend leaves the market oversold as of early March. Looking forward, Brazil’s sugar production should jump 8-10% this year. The crush season should get started in late March/early April, and this should help ease the global supply tightness. On top of the many customers who will be awaiting new crop Brazil sugar, the spike up in ethanol prices inside of Brazil could spark a need for increased ethanol production early in the season. The real key to avoiding another world production deficit for the coming year will be weather in India and China, as both regions have seen sub-par crops the last two years. China production is expected to be near 11 million tonnes in 2010, down from 12.43 million last year. This could leave a large production deficit for the second year in a row, and China has been selling state owned reserves since late 2009. We would not be surprised if China emerges as a strong importer for the coming year. The US may also be a strong importer in the months just ahead, as stocks are tight. India’s consumption has been about 7 million tonnes above production for each of the past two years, so the market will become Continue Reading

While the soybean complex may be inundated with too much supply, the focus of attention for the corn market over the near term will be on longer term demand factors and of course on the outlook for planted acreage. In its baseline projections issued in late 2009 in preparation for the budget process, the USDA put corn planted area for the 2010/11 season at 88 million acres, up from 86.5 million this past season. This estimate will be updated in the USDA Outlook Forum for February 18-19 (released after this writing), but there is a general market opinion that corn planted area will increase by 2-4 million acres over that number, with some estimates even higher. Traders seemed to dismiss the preliminary baseline projections from the USDA, but we should point out that while there are more than 2 million acres coming out of the Conservation Reserve Program and winter wheat plantings were low, the baseline projections for the 8 major row crops are projected at just 247.1 million acres, down from 248.9 million last year and from 253.1 million acres in 2008. If the baseline numbers are close to correct, the trade may be overestimating total plantings for the coming season. The enclosed table shows several “what-ifs” for the corn outlook for the 2010/11 season if we assume that producers will plant 4 million more acres this spring than they did last year. We have also assumed a slight increase in usage for the coming year due to the surge in ethanol production and reassuring reports from the EPA last month that helped to confirm that corn-based ethanol growth is likely to continue over the next several years. In November, the US used 362.4 million bushels of corn to produce ethanol. In order to reach the new USDA forecast of Continue Reading

This video looks at the key issues of using a handy trading journal and how to create a journal using MS Excel.

Interesting story… I’ve just started working with a proprietary trading business. For those that do not know, a proprietary trader trades with the company’s internal funds and within certain guidelines and limits set by the management. While putting together some training material for some new traders, I started thinking back to my time racing motorcycles. I started racing after several years of riding road bikes and just being fed up with those annoying speed limit signs. At first it was just a paid track day once in a while; then once or twice per month; and then it all became rather serious with a complete racing bike and garage full of expensive parts. By the way, there is a great trading related point to all this, so please read on… Back to the track, the road to racing kinda went like this: Back in 1999, I had a very good trading month and within hours of funds hitting the bank account, I paid cash for a brand spanking Suzuki Hayabusa – at the time the fastest production road bike ever built. Very nice pic below.

I obsessed over this thing and rode it every chance I had. I soon realised this missile was quite dangerous with my limited riding skills so set about taking lesson after lesson. The way I thought about it was my bike was at a certain level and I had to catch up to it. I completed multiple courses run by the Superbike School, Stay Upright and a couple of others. I soon realised that as much as I loved the Hayabusa, it was not ideal on the track – super fast down the straightaways, but terrible around corners given its size and weight. So I replaced it with a new road going Suzuki GSX-R1000. After modifying with better brakes, exhaust, suspension as well as full race fairing, I had a very credible track bike. See pic (me on left).

This is where I stepped things up and started competition racing. I was still hooked on doing as many riding courses as there were available. I repeated a few and then hired my own personal instructor. I even had personal instruction from a couple of top level Australian riders. Brilliant stuff. At this stage, I also tossed the modified Suzuki and bought a proper racing bike. This was another Suzuki, the same model in fact, but one that came from the factory as a full race bike with all the proper trimmings. I wanted to give myself no excuse for going slow. Continue Reading

Here are the results from the poll posted last week. It’s not surprising to see moving averages and chart patterns taking the lead, but a shame to see good old market profile at the bottom of the list. My guess there is we have Continue Reading

Here is a short list of excellent books for new and intermediate level traders. Book Reader: The Kindle Kindle Wireless Reading Device (6″ display) Kindle DX Wireless Reading Device (9.7″ display) Trader Interviews: Market Wizards: Interviews with Top Traders The New Market Wizards: Conversations with America’s Top Traders Trading Psychology: The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist Continue Reading

With a host of physical commodity markets showing impressive upside action in the early days of 2010, it certainly seems like the world needs commodities. Unfortunately, it would appear that many see the influx of investment into commodities as a bad thing. As usual our society remains fixated on instant gratification. We suspect that waves of uninformed officials and uneducated bandwagon journalists will foster desires to “do something” about “high prices.” After almost 30 years of market analysis we are fascinated with the unwavering knowledge in the mainstream press that certain commodity prices are too high. Perhaps the pundits have a case that oil prices are expensive relative to “classic” physical supply measures, but the IEA projecting only a 2.3% decline in global oil consumption from its historical peak to the sub-prime recession trough suggests that even the worst economic conditions in 60 years weren’t enough to markedly slash world oil use. The IEA also expects that 2010 world oil demand will climb back above the 2007 peak that was estimated by the US EIA. With December 2010 corn prices as recently as September trading within close proximity to their cost of production, low milk prices forcing a large contraction in the dairy industry and a doubling of gold prices failing to expand gold mining output, commodity prices aren’t too high, they are too low! With the increased cost of energy, transportation, processing, security and increased demands for environmentally-friendly or sustainable output, society simply can’t expect to have prices as low as they have been for most of the past 30 years. Historically, commodity producers have received a small portion of the cost of the finished products, and with those producers periodically presented with deflated pricing, they face an unacceptable risk in ramping up production without the prospect of significant returns. In looking at charts of cost of production for corn and soybeans, it is clear that production in those markets needed support from the government for the better part of the last 15 years. In the book Fast Food Nation, the author suggests that farmers growing potatoes might be lucky to get 2 cents out of $1.50 spent on a large order of fries at a fast food chain. Another author is even suggesting that the high cost of oil could restrict commodity production to the geographical area where it’s produced, which highlights some of the backward thinking that is often directed towards commodity markets. Certainly livestock producers were hurt by the ramping up of corn prices in 2008, but instead of liquidating a massive portion of the livestock herd because of a lack of profitability that in turn could create a shortage of meat, the prices of pork, beef and chicken need to rise to high enough levels to sustain an appropriate level of production to meet demand. In our forthcoming book Big World – Small Commodity Markets, we will highlight the need to ramp up production in almost every commodity market. At this point it would seem the US government has too many irons in the fire to attempt to take over commodity production, too. In retrospect, rapidly expanding middle class across the globe, commodity output will needs to increase, and the best way to encourage that is to allow market forces to work. Keep a pulse on the industry and access more industry news. Continue Reading

I’m having a good read of Van Tharp’s latest book: Super Trader: Make Consistent Profits in Good and Bad Markets. It’s quite a good read and captures some key trading principles including what he sees as the five components to trading well: 1. The trading process. The things you need to do daily to be a good trader. 2. The wealth process. Exploring your relationship with money, how you deal with it and how it deals with you. 3. Developing and maintaining a business plan to guide your trading. Entry into the world of trading may be very easy. All Continue Reading

Well if you ever wanted to go against a seasonal trend, here is your chance. The chart shows the spread between CME Live Cattle and Feeder Cattle futures. Given the different tick value, Continue Reading

An important consideration in any trading strategy is how many contracts to trade or how much money to allocate to a particular trade. This article answers this very question. There are two parts to this question: Continue Reading

Many of those new to trading will have difficultly understanding the concept of a margin. This short article puts things in perspecitive. When you hire a car, you pay a deposit. When you take out a home Continue Reading

Question: What is seasonal data? Answer: Seasonality refers to a pattern that depends on, or is controlled by, the time of the year. Seasonality appears in many places. For example, sales of Christmas cards logically peak before Christmas. Accounting business peaks Continue Reading

For many years, when I have told people I’m involved in futures trading, a common response has been “Oh, that’s where they do those hand signal things. What does all that mean?“. If you’ve ever wondered what they all mean, Continue Reading

Here is an article that looks at the concept of contract allocation and active portfolio management from the point of view of a high frequency trading desk (prop desk). It’s a subject that is taking on greater significance among hedge funds and alternative asset managers. There are two main parts to creating a quant approach to money and risk management: 1. Analysis of Individual Traders 2. The Portfolio Allocation Model

1. Analysis of Individual Traders

The simplest of examples of a trading system and an approach to capital allocation (trading limits) is with a game of coin toss. Consider offering this coin toss game to your traders. Tossing heads means they win two units and a tails means they lose one unit. Suppose they were each given $10,000 as a starting bank roll and can bet as much of as little as they like and play the game many times over. Now it is clear the odds are stacked in the player’s favour. $2 for a win versus $1 for a loss. That’s a ‘good trade’. But how much of the $10,000 should they bet? Once knowing the potential win is double the potential loss, most people would bet a large amount, perhaps half of the $10,000. The key to making the most money from this coin toss game is to calculate the optimal percentage allocation. This is not an arbitrary or gut feel amount. It is science and the difference between one choice and another can be significant. Suppose we pick three individuals to trade this system: Andy, Brett and Chris. The only choice we give them is how much to bet on each trade based on a percentage of the $10,000 starting capital. Andy thinks of himself as conservative and chooses to bet 10%. Brett thinks of himself as a ‘middle of the road’ risk taker and bets 40%. Given Brett is trading four times the amount of Andy, you’d think the results would be significantly different and you’d estimate in the long run Brett would come out well ahead. However, the reality is different. Here is the equity curve after 100 trades: Continue Reading

Introduction

This article provides an overview of using Eurodollar spreads as a low risk instrument to trade economic news and interest rate cycles. We’ll look at two types of spreads: bull spread and bear spreads. We’ll also look at Continue Reading

With a more bullish fundamental setup for next year and a movement by fund traders and investors to own commodities and shy away from owning the US dollar, the coffee market appears poised to attract significant new buying interest in Continue Reading

Introduction

While around for many decades, pivot points have grown in popularity since the 90’s with what has been an increasing focus on intraday trading. Pivots are derived from a simple calculation based only on the previous period’s data and are designed to provide traders with potential support and resistance levels for the coming session.

While pivots certainly do not fall into the ‘Holy Grail’ category, I have found them very useful for intraday trading, both as a signal for short term direction and as entry and exit levels. This article will set out the calculation of pivots and some ideas on how to use them.

Calculation

For one sessions’ data (high, low and close), there are five calculations. The first is the mid pivot (MP):

MP = (H+L+C)/3 The MP is simply the average of the high(H), low(L) and close(C). From here four more levels (two support and two resistance) are derived from this figure:

As you can see from this calculation, pivot levels assume some sort of trend or correlation is readable from the previous session’s data. That is, after a bullish session, where the close is the nearer the high, the next day will hold a bias for further upside by way of higher pivot levels. Likewise for a bearish day (lower close = lower pivot levels).

Charting Pivots When I first started using pivot points, it was a matter of tapping Continue Reading