 Daytrading
Secrets - Playing the Corners
One of the common axioms among successful
daytraders is to never over trade. You must show patience
in the stock and commodities
futures markets.
I would suggest that theme be taken further to say that only the best trade set-ups be
considered for your trading capital. If the commodity and
stock market is not unfolding exactly according to your pre-determined
trade criteria, then let it go. The markets are a painful
teacher in correcting "almost" or "close enough"
trade selection. Once an ideal setup has been identified,
a critical decision must be made . . . what is the proper
investment device for this trade.
This is really my point which I'll share with you the benefits
of this hardest learned lesson. If asked my profession, I am
quick to respond that I am a commodity futures trader. If
further asked as to my principle methods, I'd probably respond
as most traders would -----"I'm a trend follower."
Sounds OK so far. In my experience, which spans 20-years off-and-on,
most "trend followers" are really "trend faders"
or "bottom pickers" or whatever else you want to
call someone who tries to enter a "trend" at the
very beginning, i.e. the exact top or bottom.
There are numerous commodity traders
who can not resist the thrill of pinpointing the commodities or
stock market turning-points I am primarily addressing.
If you wish to take advantage of probable market turns,
such as seasonals moves in grains, or extremes of some nature, save
yourself some money and sleeping time. Use a futures trader
derivative ----- futures (bull or bear) spreads, an option,
or even an option spread, straddle, or whatever.
What I call "playing the corners" in futures is extremely risky,
and usually very costly. The markets just don't seem to have
a sense of (your) timing! However, if your chosen vehicle
of market participation is a spread or an option, then your
"adversity" exposure is much more manageable. Your
timing can be off while your theme is correct, and you can
enjoy tremendous returns.
Let me give you some recent examples, sharing my trading
theme, setup and method of participation. First, let's look
at corn. As all market watchers were well-aware of, last year
we had a huge crop of corn. Corn was resultantly knocked down
to the common lows of the past six years in July (weekly price
approximately $2.10-2.20/bushel). As we progressed into December,
I developed a trading theme that I felt would take advantage
of what I considered a perfect trade setup. The theme was
basically this: the bad (bearish) news was out in corn and
fully priced into the market. Corn was holding in a weekly
trading range of $2.10-2.28/bushel.
My commodity futures trading
experience and historical
commodity price charts reviews acknowledge almost without fail, speculators
would run-up old crop corn as the new year planting season
approached on sheer anticipation (hope) of some weather phenomena.
It doesn't seem to matter whether there is a catastrophe or
not ----- speculators like to be there just in case.
Fine with me. My commodity futures trading strategy was to take advantage of this consistent
market tendency, assuming the trade setup was perfect. The trading range
pattern and parameters had held-up for 21-weeks; long enough
to establish a tradeable base (envelope) breakout. When corn
broke to the upside, defeating the five month old parameters,
I felt very confident that they'd (speculators) run-up July
corn values well over the (at the time) price just under $2.40/bushel.
To take advantage of this, and not get caught-up in real breakout,
false breakout stress, I decided to buy some July corn 240
calls. They were reasonably priced at 10 ($500.00) due to
low volatility (the base), and I had many months for my trade
expectation, which was to at least double my money, to work-out.
Experience had taught me that adverse moves against me
by deferred month (distant), options would be minimized by
my time-value inherent in the call, and that I could easily
ride out the all-too-common whipsawing around the breakout.
As of this writing, my trade expectation has been met, with
my protective stop now at double my money. My greatest drawdown
was (I believe) one quarter of a point ----- not too stressful!
A recent example of how to play extremes is perfectly illustrated
in examining cotton. In this case, my investment method was
a very simple (bear) spread technique. Again, the setup is
something I perceived as an ideal situation, especially made
for a "play the corners" technique. Spot cotton
was trading at (high) price levels not seen since the civil
war, and the deferred (new crop) months were trading at a
very substantial discount to spot. Add to this, a history
in which cotton typically comes sharply off spike peaks. All
I needed for implementation of my trading theme, which was
to buy new crop (Dec.), sell old crop (May) cotton, was a
message delivered by the market itself that it was time to
play the corner. That was received clearly on March 17 and
20 in spot cotton closing down limit both days (in a row).
I know from my my
commodity trading history and experience limit days are surpassed
in the direction of the limit move approximately 80% of the
time. On the following day, March 21, the market gave me a
wide trading-range to put on the (bear) spread. From that
point, I had a very viable coverage of cotton's history to
fallout, and limited exposure to one of those inevitable market
swings against me. As it turned out, and as of this writing,
this spread has been a tremendous performer, and is very safely
protected by another double of my capital exposure. I slept
like a rock during those five successive limit-down days.
So, if you want to be more relaxed and a focused futures
(trend following) trader, play the corners with futures derivatives.
What you'll like best about using these strategies ----- the
relative ease of pain when you're wrong!
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