Trading Tips

Keeping things simple in your trading

Beanieville posted Don’t Let All Those Technical Analysis Gurus Confuse You on Tuesday with the primary suggestion being that one should keep things simple by avoiding derivatives and leverage, and a secondary one to keep your analysis relatively simple. The title obviously only applies to that second point, but I think the general message that less complexity is better for most traders is a good one.

In particular, there’s a quote that goes:

“If you’ve been to some options or futures trading sites most of you probably feel like you don’t belong because of all apparently sophisticated analysis of the market, with so many trendlines and so many indicators you never heard of.”

I’m going to agree with the part about all the lines and indicators all over charts. I see it all the time, even among my professional colleagues. If that’s what works for them, fine, but I’m definitely not a fan. The charts I look at are simple, without all kinds of trendlines, Fibonacci retracement levels, Elliott Wave counts, oscilators and all that. To me the rest of it is clutter which serves no other purpose than to distract and obscure the important part – what prices are doing.

Now, having said that, the idea that options and futures traders are the main culprits here is just plain wrong. I’ve seen stock traders with some of the most intense charts ever. Market complexity does not necessarily equate to analysis complexity. It’s a personal thing for each individual trader. I’ll leave it to them to decide what’s best for them in the end.

The other contention made by Beanieville is that traders should avoid options and futures and leverage (which I presume would include forex as well). I’m mixed in this one.

On the one side, I’ve answered a lot of questions about leverage and margin from confused traders. For many folks it would be best to stick to simpler markets at first, until they have a solid grasp of things from that perspective before taking on leveraged trading.

That said, there are plenty of folks who quickly grasp futures and options and such. I have no problem with them starting in the perceived deep end of the pool, as long as they have a healthy appreciation for the risk side of the equation.

The bottom line for me is that different people are going to be best suited to trade different instruments. Keeping them from trading in that fashion virtually guarantess they perform below their potential.

Reader Questions Answered

Is it possible to trade only on the monthly charts?

In yesterday’s post I started to answer an inquiry which came in from a prospective equity index futures trader over the weekend. Because it covered a few different topics, I elected to split it up into parts to address more specifically. Here’s the second part.

Then there’s the choice of timeframe. Is it possible to have a very long term view of things and concentrate only on the monthly charts? That means following a major trend probably for several years. Is it workable, or would I be better off going for the weekly charts? I know about drawdowns and it’s ok with me.

It is absolutely possible to trade the long-term using monthly charts. I have done it myself on occasion. The problem, of course, is that you can wait a long, long time for the right situation to develop. At the monthly chart time frame you’re probably talking about making one or fewer trades per year – and sometimes none at all for a long period.

Personally, I tend to make weekly charts the longest ones I will actually trade from. They provide many more opportunities and the moves they catch tend to be very meaningful. It also makes it easier to get in on the big trends relatively early. A market can move a huge amount in a month.  Also, weekly time frame price moves often fit better in with the expiration cycles of futures contracts, where you have to deal with rolling forward if you plan on holding a position beyond contract expiration.

That said, however, I often look to the monthly chart for a few on the longer-term underlying trend. It helps me frame the potential for a weekly time frame trade.

Clearly, if you’re playing in the longer-term you have to account for the in-trade volatility – the stuff that produces open equity drawdowns. This is an especially important consideration for futures traders where the leverage amplifies things. That means capitalization is hugely important.

The Basics

Want to Learn Futures Trading?

The futures market is one that offers a great deal of opportunity to traders. If there’s a market out there, it can probably be traded through futures. Although a lot of folks think first of commodities (and indeed many still refer to futures as the commodities market), that is just a portion of what’s available.

Yes, through futures you can trade gold, oil, corn, suger, cotton, pork bellies, and other so-called hard commodities. You can also, however, trade all kinds of fixed income instruments like US T-Bonds, German Bunds, Eurodollars, and Short Sterling. Currencies can be traded via the futures market. So too can stock indices like the S&P 500, the NIKKEI, and the DAX. There are even futures on single stocks, not to mention a whole bunch of other markets you probably never even thought existed.

Futures trading is rather different than trading in stocks, though. In involves considerable leverage and the understanding of the deriviative instrument mechanism. It’s not as complicated as that might make it sound, though.

A while back - at the request of a futures broker friend of mine – I put together a guide to explain the ins and outs of futures trading and the futures market.

Click here to get a free introductory guide to help learn futures trading.

Trader Resources

Commitment of Traders – A Weekly Report Worth Viewing

One of the more interesting tools I use in my work is the weekly Commitment of Traders (COT) report. To quote the Commodity Futures Trading Commission (CFTC) definition:

The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for market reports in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Basically, the COT breaks down the positions of the three major types of futures (and futures options) position holders – Commercials, Large Speculators, and Small Speculators. Each weekly report shows the total number of contracts long, short, and spread for all of the traded contracts for all markets.

Commercials are generally producers. For example, agricultural producers and miners would be in the this category as they are the producers of commodity products. The focus of this group’s futures market participation is on hedging.

Large Speculators or Professional Traders are hedge funds, banks, and other institutional traders with a focus on speculative profits. These folks tend to trade in large size. This is generally considered the “smart money”.

Small Speculators are normally small individual traders. Since the trading public is normally seen as being wrong most of the time, the position of these traders can be viewed as a contrary indicator.

For my day job I focus on the stock indices. It’s interesting (and useful) to see how the positions of the different groups change with market events (like Small Specs piling in to longs through the FOMC meeting while Commercials were getting flat). I also sometimes look at what’s happening in the fixed income, currency, and other futures market. It’s a good way to see where buying and selling pressures could come from in the future.

Weekly COT reports (and historical reports) can be found on the CFTC website. Another resource for the information (free and paid content) is

Deep Posts Trading Tips

Behind the Trade

Excerpt from The Essentials of Trading

OK. So we’ve done a trade, but what does that mean? The financial markets bring together buyers and sellers. Some transactions are very straightforward, as in the stock market. The buyer pays the seller money and receives shares in return. Even when using leverage and margin, the basics of the transaction remain very simple. This is not always the case.

The stock market is what can be referred to as a cash market. That means the buyer gives the seller cash now to receive an asset immediately. It may take a period of time for the actual exchange of the assets to take place (three days in the U. S. stock market), which is referred to as settlement, but the buyer is considered to have taken ownership at the time of the trade.

The forward market is a kind of deferred cash market in that the traders agree to exchange assets at some future time, generally with a set of specific terms (price, date, transaction size, asset quality). An example could be a gold transaction. The agreement could be that Trader A commits to buy 100 ounces of certified gold bullion from Trader B at a price of $400/oz for delivery in three months. Note that when the agreement is made, no exchange of assets takes place. Trader A does not own the gold yet. That will not happen for three months when he gives Trader B $40,000 and takes delivery.

The buyer of stock is considered to be long because ownership generates benefits through price appreciation. When entering in to a forward or futures trade, however, no asset changes hands until some future time. Even so, the party who agrees to be the buyer takes on a long position. In the above example, Trader A will be the buyer. He is therefore considered to be long due to the fact that he will benefit from a rise in the price of gold. If gold were to rise to $410 by the time he has to buy those 100 ounces from Trader B, he could take possession and immediately turn around and sell for a $1000 profit ( 100 x $10 ). Trader B, on the other hand, would be short. Were gold to fall in price to $380, she would benefit in that she could buy the gold in the market and turn right around to deliver it to Trader A under the contract terms and make $2000 ( 100 x $20 ).

In most cases (all for the individual trader) forward/futures agreements require margin. This is to protect the counter-party against default of the agreement (for futures the exchange is the counter-party)

The options market differs from the forward/futures market in one very meaningful way. Like a forward contract, an option is an agreement to exchange assets at some future time. The difference, however, is that in options one of the parties – the buyer of the option – does not have to fulfill the contract – hence the “option”. The option market, however, is a cash market in its own right. Options are bought and sold in the same manner as stocks, with the buyer paying the seller for the right to conclude a future transaction or force the seller in to a future agreement (forward/futures for example).

Excerpted from <>The Essentials of Trading