In the last couple of blogs I have set the stage for a new discussion on stops. This will be the blog where we discuss them. One reader has asked for detailed case studies using stops. If I did that, I would have a 10 page blog. But, there is a place where I can do that in the future. I can’t give you too many details, but suffice to say that I will be doing web broadcasts explaining in greater detail the way I use VP. Stay tuned. What I will be doing in this blog is discussing how to set stops, survive and prosper in the markets we find ourselves in today.
I would argue that more attention is being paid to commodities today then has ever been paid attention to them before. On CNBC this morning (Friday) there was a little blurb talking about how money has left the stock market to go into commodities. I have called this a hurricane of liquidity that is wrecking havoc in our pristine little markets. All or that cash has brought a level of volatility to the markets that we haven’t seen in some time. While there are certainly underlying supply and demand issues fueling some market volatility, the impact of Index and Hedge Funds just can’t be ignored. The question is how do we handle it and how do we set stops accordingly, and more important than stops, when do we get out of a trade. I will cover all of this in a rather long blog. My apologies to those who like short blogs.
For me, the real issue is how do I make a buck in the markets as we know them? I am big on the MEANING of words. So, what do I mean by make a buck. I mean advance the value of my account and hold my losses to a minimum. Consider the high and mighty Hedge Funds made 2% profit on average in January according to the Wall St. Journal. On so many levels that is disgusting. We could make that with our eyes closed in one trade. And, all of that volatility in our markets that hurts so many only results in those gains. Ughhh. Making a buck could also mean not trading at all. In markets this volatile, unless you have a plan on what markets to trade, not trading at all could profit you the most. Making a profit could mean taking only 2 or 3 trades a month and holding them for 2 days at the most like you would if you were to trade the indices.
A few things to remember if you are going to survive this wave of volatility: Manage your money and manage it well. In the greater scheme of your investment portfolio, you should only have 10% - 20% at the MOST of your entire portfolio allocated to commodity trading. You should have no more than 10% of your commodity account allocated to any one trade. You should not have any more than 2 active trades (excluding options) on at any given time. Again, consider that right now may be the best time to go all cash, tax free money markets or the like. You don’t HAVE to have your money in the markets all of the time. And, you don’t HAVE to trade every trade or every day.
Keep in mind that NO SOFTWARE can take the extreme volatility out of the markets we see today. As mentioned in previous blogs, Vantage Point is based upon intermarket relationships and predictions based upon those as expressed in moving averages. The underlying volatility of a market will cause the averages and predictions to move more than we have seen in the past. It is important to consider that just because the markets are volatile it does not mean VP is not generating valid signals. They will just be, in my estimation, valid for shorter periods of time.
That being said, how do we survive this point in time?
Select markets that have little volatility relative to other markets. The dollar index moves less day over day than does the Euro Dollar. Same for the Canadian and Swiss. If you have to trade grains, take a look at Soy Meal. It seems less volatile relative to the other grains in the complex.
Trade contracts that have an open interest greater than 25,000 contracts. Thinly traded markets are difficult to trade in the best of circumstances.
Trade the electronic markets under all circumstances. The chance of slippage is reduced by the instant nature of the electronic markets.
Don’t trade markets where you can’t set stops in the electronic markets. ICE, that demon ICE. I don’t know if they have allowed orders other than market orders on their electronic markets. But, if they haven’t don’t trade them.
Consider In The Money or At The Money puts and calls when the 123 signal occurs. Your downside is predetermined and your upside is unlimited with options.
Here are some trading rules that I have implemented in my own trading, including stops:
I decide what markets I want to trade based upon their volatility. When the 123 signal occurs, I enter the market Electronic market on open as always. For the first day of trade only, I set my stop based upon the number generated by taking the difference between the high and the low of each day for the last 10 days and divide by 10. For the British Pound today for example, that number is 139, so I set my stop 139 points away from my fill. If that is too rich for you, and only you can decide, you can set your stop at the Predicted Next Day High or Low plus 15%. If the first full day of trading has resulted in a profit, on the second day of trading set your stop at the Predicted Next Day High or Low plus 10%. If you have profit again on the second day of the trade, you have a decision point. You can either exit at the electronic open of the next session, or tighten your stops to the Predicted Next Day High or Low. Continue to do this until you are stopped out or you see the exit point I normally take which is the reverse cross of the SMA/EMA, or signal 3 of the 123 system. Or, you can exit the trade at the electronic market on close of the second day. Or you can exit when you have made either the value of the margin requirement per contract or twice that amount. I give you many options so that you can tailor the strategy to meet your tolerance for risk.
Now, I know I am going to get e-mails asking for me to show charts or be more specific about the results of this type of strategy. I can’t provide you with that data. VP does not allow for back testing within the software easily. I can tell you that I spent the better part of 2 days looking at several commodities and this is a valid strategy for making profit at this time.
Will you make a ton of money this way? Not as much as we do when we let our trades run for days and weeks on end. But, we will make some profit and hopefully have very few losses, and that those losses will be minimal. My draw down has been about $550.00 per contract on average over the last 12 weeks with this strategy.
I hope this helps. I will challenge you all to take this blog apart sentence by sentence until it makes sense to you. Review my past blogs if you don’t understand a term.
As always, Happy Trades.
