Good Trading Returns Again

Patience and persistence are such a great virtues for traders! This business can teach us some very good character traits! Very good swing trading conditions returned to end the week.

As I mentioned also in my earlier posting today, the first hour and the last hour or so of trading are the best, and most profitable for trading. Perhaps in the future I'll just trade those hours each day and forget the time in the middle of the session.

It's Ugly Out There!

It's very ugly out there. Trading is at a near stand-still. I am trading for 2-3 ticks each. It's very risky, and I don't recommend it.

Look at all those red dots on the Bollinger Squeeze indicator on the 3 min chart (see the second chart below). Dead!

Difficult Trading Conditions Today

Erratic conditions are dominating the trading today. Keeping tight stops and rapid executions are key when trading conditions are so difficult.

First Few Trades Most Profitable

Over the past several days or weeks, I have noticed that the first few trades of the day are often the most profitable, especially in a period of uncertainty. I believe that prices for all commodities will remain well supported, even if the markets consolidate, because Fed easing in the shadow of the ECB holding their rates higher to stave off inflation, is bound to reignite inflation for which America will pay a very dear price in the not-too-distant future. I have marked these early trades with arcs. Tradesation, unfortunately, doesn't have better methods of marking these trades without obstructing the view of the charts themselves.

New Historic High for Gold

If gold is a barometer of inflation, fear and uncertainty, or perhaps both, then it appears that there may be more of both to come, since gold has rise overnight to a new all-time high of $924.30.

Off to the Races!

Took this trade, but now, the market has settled into consolidation again (see second chart). It was profitable, but fairly small. There doesn't appear to be much to move the markets today.

Can't trade this, don't try

Want to lose money? Try to trade this! Even the tick chart is too erratic to trade profitably. The Bollinger Squeeze indicator, shown here, has turned to all red dots, which indicates that volatility is too low to place new trades.

Even the 3 min chart, shown below, has a trading range too tight to trade right now. Eventually, it will give way to greater volatility again.

Time to trade wheat, which shows better volatility today.

Markets, charts look erratic today

There appears to be some uncertainty in the market that is leading to a slightly erratic appearance in the charts today. This may represent just a temporary consolidation until buyers or sellers win out. The initial strong buying has dissipated, and a malaise has settled in for the time being.

Note that in this chart (tick chart), the Bollinger Bands have turned flat, so trading is not warranted. These conditions are a good one to lose money for traders. I will wait it out!

The Bull Didn't Last Long

Lead by weakness in wheat, the grains bullishness didn't last long. One of the reasons why I use dynamic charts is that their effectiveness doesn't change, even if the markets do. The market dynamics are constantly shifting. New players are constantly entering the markets. New forms of trading (electronic), new technologies for trading, new indicators, new trading methodologies, etc., make the markets very dynamic and cause a constant shifting and sorting.

One of the main rules for trading that I always keep in mind as a trader is that "every moment in the market is unique". This is from "Trading in the Zone" by Douglas. This dynamic of the markets is a result of some of the shifting paradigms caused by changing circumstances that I have already mentioned. This is the reason why black box trading solutions and software often work for awhile, but eventually fail. They worked in a market that has changed and no longer exists.

Soybeans prices also have not been able to push higher. This is a sign of weakness that may lead to lower prices or a retracement.

Soybeans Fired Up Out of the Chute

Yesterday, I mentioned that prices for soybeans appeared to be feeling a little oversold to me. Prices moved modestly higher last night during evening trading. This chart shows the soybeans long trade out of the starting gate this morning. It was good for more than $1000/contract at its peak. It is so strong, it may continue.

The second chart shows the daily chart for soybeans, finding support this morning at both the lower Bollinger Band and the 50-day Moving Average. While there is still a strong offer sentiment expressed by the Klinger Volume indicator, prices are showing some resiliency today.

Price support may also be due to a rebounding stock market and reduced fears of a recession. Global demand for food commodities should provide additional support over the medium to long term. Perhaps this will lead to soybeans trading in a range for a period of time. If the U.S. financial markets rebound from here, prices for commodities should remain well-supported.

Davos Economists: More Fed-Created Bubbles

Economists at the World Economic Summit in Davos, Switzerland today suggested that with such aggressive interest rates cuts, the Fed risks igniting more bubbles. What asset class will be next? You don't have to believe me. Believe them!

Here is the article on Bloomberg:

Fed Risks Fueling More Bubbles, Davos Economists Say

Soybeans Lock LImit Reached, Commodities Broadly Down

More sellers, more hedge funds are liquidating their commodities, including soybeans. Lock limit has now been reached. This close to the end of the market session, any trader would have to seriously consider whether it is worth taking any additional trades today. Crude oil, gold, sugar, cotton, coffee, and many other commodities prices are down significantly today. Wheat and corn have also now reached their lock limit down price levels for today.

I need to start looking for an ETF that shorts commodities, so I can buy it for my IRA!

Soybeans Near Lock Limit

Soybeans have now nearly reached the daily lock limit price of 50 cents. The lock limit is shown in this chart at the bottom left in a turquoise color. I will not sell again today! It is time to prepare to go long, and I won't be the only short trader today that will be reversing direction now. Many others will be thinking just like me!

Often, as prices approach a lock limit price, the forces that have driven prices lower (in this case) will dissipate, because they know that prices can't continue downward today. This frequently leads to a price reversal. In my case, I will now only take long positions the rest of the day, unless prices reverse enough that there is at least 10 cents between the market and the lock limit price. This phenomenon only occurs, however, if prices have reached their lock limit over a period of time. If prices open at their lock limit price, or reach lock limit shortly after the open, they are more likely to remain at that lock limit price the remainder of the trading session, in which case I can trade that instrument no more the rest of that day.

The second chart in this post is beginning to show this phenomenon manifest itself. This will not be a clean process, however, because as prices begin to show signs of reversing, traders who were late to exit their long trades will take advantage of every new price move upward to liquidate, causing new price surges downward. In turn, as more nimble traders, like myself, see prices move higher, we will consider going short again as our indicators give us signals to short. Up and down movements will continue through the remainder of the trading session, I believe.

Bears push lower again

Hedge Funds Broadly Liquidate Commodities

Whispers of hedge funds liquidating their commodities are causing many commodity prices -- even gold -- to move lower. It's a bit messy, but can be traded with short, quick, profitable trades!

The Bulls are Back in Town!

The bulls have begun to have soybeans for lunch today. The soybean buyers have regained their footing, and are stepping in to drive prices back up again. Perhaps we were just a little too close to lock limit down, and sellers were too few in number to continue pushing prices downward. Note in the bottom panel of the left screen the Klinger Volume indicator, shown in my last posting, is showing momentum shift toward price strength!

Another Downward Break-Out

After a few temporary and weak attempts to provide price support and move prices up, soybeans prices have broken to the downside again.

This market today is beginning to feel to me to be somewhat oversold. The Klinger Volume indicator on the 3-minute chart is showing a bullish divergence (see the small second chart). Perhaps soon, the buyers will step in and drive prices back up. This just feels to me like we are soon to see a turning point, and prices will move up again.

Soybeans Break Out Downward!

Volatility has risen, and soybean prices have broken down further to the down side. The bulls are bloodied!

Trading dies down - I wait

Note in the blue rectangle that the Bollinger Squeeze indicator has manifested to me that trading volatility has fallen too low to trade. Even the tick chart has become erratic and risky to place new trades. I must now wait until volatility rises again.

I will look for trading opportunities in other financial instruments. Treasuries and gold are the best choices for me. At about 12:00 pm EST, it is typical for trading volumes to taper off and volatility to drop. This is true of grains, but is especially true of gold, since the European business day ends at 12:00 pm EST. This is fully expected, and activity will increase again about 1 hour before close of the session.

Time to take the dog out!

Grains - Universal Price Weakness in Recent Days

Ding Dong, the Bull is Dead!
All the grains are showing a break-down of the bullish price structure that has prevailed for various months. This is the daily chart for soybeans. Note the heavy selling in the Klinger Volume indicator in the 2nd panel (blue circle), which has accelerated downward, but which had turned negative as early as Dec 28th.

We also see five consecutive closes below the Exponential Moving Average (red line -- changed from blue -- in top panel where prices are). Corn and wheat have somewhat similar selling patterns. The bull is dead -- at least for now! Turmoil on the heals of further Fed interactions with market forces may cause the inflation monster to resume, but for the moment, the bull in grains is over!

Soybeans: First Break-Out Today

I missed the early trading in the first minute or two of the session. This is the first good break-out in soybeans trading today (shown here). Wheat has been somewhat more brisk, but I am not trading wheat at the moment.

Back and Forth Trading Prevails

There is great indecision in the soybeans market today. A trader must remain nimble and trade up and down. Swing trading is the order of the day. Note that the 3 min chart (left) can not be traded, but the right chart (the tick chart) is very tradeable.

Trades for 1-22

The following charts are for soybean trades placed today, 1-22.

Rally Fizzles, Grains Sell Off to Close Lower

It appears that the grains may be settling in to a trading range. Volatility was excellent for trading. Wheat, in particular, traded in a range of more than 50 cents, closing at the low for the day.

Gold explodes $45! Commodities follow on inflation fears!

Dramatic interest rate cuts this morning of .75% by the Fed has caused commodity prices to explode higher today, led by gold. Gold has risen exponentially by $45/oz. in just 8 hours! That may be a record rise in such a short period of time!

Even oil trades more than $3.00 higher per barrel, although it remains well off its most recent highs, due to recessionary demand concerns.

Grains, including soybeans, wheat, and corn, all hit their lock limit down prices today, but are now surging to higher prices in reaction to the plummeting US Dollar. The second chart here shows wheat rebounding to the previous days' settlement price after touching its lock limit down price. Soybeans and corn have similar charts.

The US Dollar is plunging, after rising steadily in recent days and weeks. See chart #3 for the USD price plunge since the Fed rate cut.
Inflation is being fueled significantly by this rate cut. Commodity prices should remain well-supported by falling interest rates and inflation risk, and a even weaker US Dollar. The ECB's reiteration of its hawkish stance will further reinforce the strength of global currencies, and the weakness of the Dollar. This will provide price support for grains and other commodity prices.

ECB Focuses on Price Stability

ECB official: "attempts to stimulate output" artificially through rate cuts "are doomed to failure"

What does he know that our own Central Bank officials don't?

Global Stock Markets Plunge!

I was under the mistaken impression that the stock futures exchanges were to be closed today. I wish I had been trading, and shorted the stock indexes!

Here are headlines from financial websites around the world. Stock markets in Europe have fallen an average of about 7% in just one day. Yes, these headlines are for real. Your are not dreaming, and this is no joke or hoax!

Financial Freefall: Global Market Carnage Spreads to Canada, LatAm

U.S. Stock Futures Flash Red

Stock Markets Plunge Worldwide!

Stocks Plummet in Germany, Hong Kong, and India in Global Rout!

European, Asia Stocks Tumble on Recession Fears

Panic Sparks Plunge in Global Markets

Will we see Wall Street run red tomorrow? It will certainly be an interesting day!

Derivatives Trading and Liquidity in Financial Markets

I have been intrigued throughout my trading career with the derivatives markets. The recent subprime credit crisis, and the meltdown thereof, have always been a fascination to me. However, my fascination has been somewhat from a distance.

Derivatives and Liquidity

In the early days of trading in the Forex markets, and as an evolutionary process over the years, I have come to a few decisions regarding my own trading. I realized over time that one of the primary ingredients in effective trading is liquidity.

I can quickly look at a chart and determine by the look of it whether a market or financial instrument is liquid. Which of the two ETF charts in this posting would you rather try to trade? One had volume of 2.7 million shares daily, and the other had only 3,400 shares. The difference is not just easy to see; it is also easy to decide which to trade. Trading a very liquid instrument is a critically-important element of effective trading.

For this reason, I have been distantly fascinated to wonder why anyone would create a plethora of innovative, but illiquid trading instruments that no one truly understands, and that few people even trade. Of what value is an instrument that can not be bought, sold, or traded? It can't even be accurately or honestly priced! It may be cool, or it may be hot, but if it isn't liquid, its value and future is questionable.

Brief History of Futures Markets

The futures markets in agricultural products have been in continuous existence since the 1840's. Before that, when farmers brought their products to markets, buyers were forced to pay premium and sometimes astronomical prices during the winter months when grain products were scarce. On the other hand, during the harvest season, farmers couldn't get a fair price, and stories abound of farmers who would dump their wagon-loads of grain on the streets instead of selling them at a loss, because they couldn't get a sufficient price for their products to cover their production costs and feed their families. The futures markets benefit both producers and buyers of products by evening out the extreme and wild price fluctuations that plagued producers and consumers previously. The futures markets level out and provide stability to prices for everyone.

Over time, as more and more market players have entered the markets, liquidity in the futures markets has increased and improved. Speculative players in the futures markets have made them increasingly liquid and stable. This is a benefit to all who buy and sell futures instruments. One recent example of this phenomenon is that when the softs futures became available for electronic trading, prices became more stable and market noise decreased markedly within a few months. Chart patterns have become much more consistent.

Black-Scholes and the Elimination of Risk

On the other hand, when Black and Scholes developed the models and formulas for eliminating risk in derivatives instruments, they didn't find a formula for insuring against the risk of poor liquidity. These models have, over time, proven themselves deficient and thus, incomplete. Many derivatives outside of futures are highly illiquid. In fact, many are so unique and innovative that there is no market for them. Period. In an environment like this, an new type of risk is introduced: liquidity risk. Without liquidity, prices become increasingly unstable and markets become unreliable. This increases the risk rather than eliminates it. It is simply a new form of risk that is impossible to calculate, let alone eliminate.

Liquidity Beneficial for Traders

That is the reason why I refuse to trade any futures instrument that has open interest of less than 100,000 contracts. My mentor taught me only to trade futures contracts that had at least 10,000 contracts of open interest. However, he personally only trades futures that are much more liquid than that. I have come to the same decision on my own.

Liquidity is important to me because it brings price stability to that instrument, and it reduces market noise. (Volatility is beneficial for traders, but market noise isn't. It is our enemy.) Good liquidity, in turn, allows me to improve my trading win/loss ratio by taking trades that have a higher degree of reliability and chart accuracy. As markets become more liquid, charts patterns, and their predictive capability, also become more accurate and reliable. Bid/ask spreads become concomitantly tighter, and the cost to trade is reduced. It becomes easier and earlier to reach break-even and profitability.

That's why I've always been intrigued with the constant creation of innovative and never-before-heard-of derivatives instruments. The more new and creative they are, the less liquid they become, and the more unreliable become those markets. Liquidity risk increases exponentially with the innovative nature of the derivative instrument. I choose reliability over creativity when it comes to placing my money at risk. Only thus can I reduce that risk. Unfortunately, innovativeness is the enemy of liquidity, and thus, profits, in the world of financial derivatives.

Martin Luther King, Jr. Holiday

Today, the markets are closed in celebration of the Martin Luther King, Jr. Holiday.