Day trading Secrets - Playing the Corners

One of the common axioms among successful day traders 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!

“Plan your Trade, Trade Your Plan!” This was the advice I heard from a professional trader when I first got started in this business. At first, it didn’t make much sense to me, but after a couple of trades it began to sink in.

Most of the successful traders I have met all seem to have this basic philosophy. They have learned that they must plan every trade before they ever think of entering the market. And once they are in the market, they must stick to that plan. “My best trades are the ones that I have planned well in advance, and I don’t deviate from that plan once I’m in.” Proclaimed one floor trader I spoke with.

The most successful people in life have a solid plan for how to achieve their goals. This also holds true for most successful traders.

Successful traders set their trade projections, stops and target prices before they ever get into a new trade, and when the market gets to their projection, they have no hesitation on getting out of the market. Now if the market should happen to go against their plan, they are also prepared to take their loss.

One of the most important aspects of being a successful trader is how you take losses. Every trader is going to have losses, that’s a fact of trading. It is accepting that fact and dealing with it that will separate successful from unsuccessful traders.

I have seen traders that will literally hold on to a losing position, until every penny they own is gone and they are forced to get out. This is no way to trade. Every trader should trade by the philosophy “the more experience you obtain trading, the better the trader you will become.” There will always be another trade tomorrow, and that trade may be the one that makes your entire year. Always keep faith in your plan and try not to deviate too much from that plan.