Commodity Price Analysis

Here is a fascinating article about the evolving turmoil and change in the world's financial markets.

Commdities Boom? You Ain't Seen Nothin' Yet

I am constantly amazed that so many people try to predict the future. I neither agree nor disagree with the assessment in the above-linked article. I honestly don't know. I just try to watch the charts and do what the markets tell me they want. This is an insightful analysis of the predicament that we find ourselves in.

Here is another:

Higher Margin Requirements Won't Dent Ag Bull

This second one sure appears to be right on the mark, since the dent in agricultural commodity prices appears to have been short in duration. Many commodities are already showing resurgent signs of price strength.

Global Demand for Grains

Interesting article from Qatar's English-language daily news service. Take note in the article now many different countries are panicking to secure sufficient foodstuffs for their peoples:

Rising Grain Prices Panic Developing World

Terrible Corn Trading, But Treasuries & Stocks OK

Grain trading in general today has been poor, but with the noted exceptions. This chart of corn is a good example. Both soybeans and wheat have both manifest wider than usual spreads, making it more difficult to trade profitably.

I have preferred to trade the 10-year Treasuries and S&P 500 mini today. Both have remained very liquid and have shown excellent movements that were reliable. I also like trading these two instruments because even if I traded 100 contracts, it would barely budge the price. It is extremely difficult for any party to influence prices by themselves.

Wheat Goes Ballistic!

Soybeans Breakout!

Soybean prices have found firm support today at yesterday's settlement price, and have now broken out higher.

The Incredible Sinking Soybeans

On the back of very little new grains-related news, expectations this morning were for relatively mild trading conditions and low volume. The strikes at Brazil's Paranagua port and the unresolved, albeit temporarily postponed, strike in Argentina, both continue, thus providing price support for soybean exports from the United States. However, soybeans have sold off quite forcefully at the open. I have no idea why, but as I've said before, the reason is irrelevant. The only thing that matters is that it has happened. Nevertheless, yesterday's settlement price has thus far proved supportive, and prices remain higher for the day thus far.

I am making some changes to my charts in the past few days, adding back in the 7 and 23 period MAs (2nd panel) from Cahen's methods. I had deleted them because the Bollinger Moving Average is nearly identical to the 23 period Moving Average (the Bollinger MA is just a 21 period MA, vs. the 23 period MA), but I am finding greater value in visualy having the two MAs together in a single panel.

Jobs: Down 80,000

Unemployment rate for March rose to 5.1% from 4.8% Furthermore, the higher-than-expected new claims reported yesterday were not yet included in this number, suggesting that I may get worse. The reported 80,000 job loss was larger than expected.

The job losses for January and February were also revised downward by an additional 67,000 jobs, and the household survey shows a stunning job loss even greater than the headline -- a 434,000 loss. The main survey tends to omit small businesses, while the household survey captures this aspect of the job market. This makes the household survey tend toward greater accuracy.

This is a poor jobs report. If there is any good news here, it is that that market expects that the worst in the economic news may be past, and there is the sentiment that the Fed has gotten ahead of the curve and things will soon be on the mend.

Triptych -- For My Friend, Oilivier! Bienvenue!

C'est le graphique de triptyque d'aujourd'hui pour le grain.

Corn Rebounds Stronger Into Close

This is a very good example of a set of parallels. Corn was the only grain I traded today. Spreads were too wide, and trading was too erratic, to trade soybeans or wheat. Prices closed below $6 -- with settlement literally just one tick shy -- but I suspect we'll see prices close above that level very soon.

Fundamentals remain strong according to this Washington Post article:

Grain Prices Rise on Supply Concerns

Prices Back Off After New Record

This is typical behavior following a new price record.

Corn: New Record $6 Bushel

Corn Picks Up Steam

Finally, corn is beginning to show some signs of price strength, and is picking up steam.

Sideways Trading

Some of the grains are showing poor liquidity today, due to thin-volume trading, including both soybeans and wheat. This chart for wheat is perhaps symbolic of this phenomenon. Even spreads have widened for wheat and soybeans, which is rare during the day session, in my experience.

Other markets are showing similar signs. Even gold prices have flattened and liquidity is fairly poor at this time.

Under circumstances like this, I will trade for just a few ticks in either direction on the most liquid markets, which are the 10-year treasury and S&P 500 Index futures. I am willing to take just a few ticks of profit.

I suspect that much of this flat trading is due to the on-going testimony of Fed and SEC officials before the Senate Banking Committee today. Financial market participants are hanging on almost every word of these officials for information about future movements of the markets.

It's Ugly Out There

Today is an example of a day that trading conditions are so poor that it would be a waste of money to try to trade the grains. After a few small trades, I've begun to look for other instruments to trade. Gold is currently looking good.

Grains Open Relatively Flat, Without Conviction

Soybeans and corn have opened the days session nearly at the levels that they ended yesterday. Wheat is higher than yesterday's settlement, but flat from the day's open. I have yet to place a trade.

Still no $6 Corn on May Contract

Corn reached $598 6/8 in overnight trading. Fundamentals remain bullish. Perhaps the $6 handle will topple today during the day session.

I am anticipating fairly subdued trading in grains today compared to recent weeks. No heavy or changed news.

Ouch! Jobless Claims Spike to 407,000!

Here is the Martketwatch link

Jobless claims have surprised the market this morning and risen to 407,000, with the weekly average rising also.

The stock market today is not going to like this. It may also bode poorly for the payroll report tomorrow. If jobless claims over the next few weeks continue on a downward path, stocks will likely fall, and the US Dollar will very likely plunge again as well. And that will drive the Fed to lower interest rates further, and commodities will likely surge higher again. Sounds like a broken record.

And we all thought we had hit the bottom.

Let's hope tomorrow's jobs report is better than expected, and that future jobless claims surprise to the downside.

Soybean Parallels Continue Into Evening Session

The Bollinger Band parallels pattern for soybeans has continued into the evening trading session without any sign of let-up. I must keep in mind, however, that continued soggy weather in the grain belt will tend to be bearish for soybeans, if farmers are forced to grow soybeans instead of corn. Soybeans have already surfaced as the most active grain for trading this evening.

Corn Battles to Break the $6 Barrier

Corn prices couldn't break through the $6 price handle today, even though new all-time record highs, and new all-time closing highs (for a front month contract) were both reached. Eventually, they will, especially if rainy weather forecasts continue for the grain growing regions of the United States. This would make corn planting less likely, but might also increase the likelihood of more soybean acreage (too bad, however, that soybean seeds are also in short supply this spring). I wouldn't be at all surprised if the $6 handle was broken during overnight trading tonight, especially since the day session ended so close to its highs for the session. Fundamentals for all the grains remain bullish, based upon tight world supplies, continued political unrest in South America, rainy growing conditions, and (once again) a weakening US Dollar. One of my favorite news sources even suggested that we may have already seen the low prices for all the grains for the entire growing season. He thought that prices would go nowhere but up from here.

Soybeans: Picture Perfect Cahen Parallels

Here is a picture perfect "parallels" pattern (left side) as described in Cahen's book, "Analyse Technique et Volatilite". Because the moving averages in the second panel haven't begun to contract toward one another, this set of parallels may continue during the evening session tonight. Parallels are the most profitable pattern that Cahen teaches in his book. However, they are also the most difficult to trade, because they tend to move in a lengthy, sustained trend rather than a short burst, as the bubbles do. They tend to have more erratic up and down movements within the higher trend. Note that only about 10 of the 42 candles in this chart move upward in a forceful way. Interestingly, however, we also notice how well they remain contained between the Exponential Moving Average and the Bollinger Bands. Exiting a set of parallels is also more complicated than a bubble pattern. Cahen recommends exiting the pattern based upon the two moving averages in the second panel. If it appears that the two moving averages will cross within the next three candles, he suggests liquidating 50% of one's position. He says to exit the remaining positions once prices close below the Bollinger Moving Average. Often, a set of parallels on one time frame will be composed of a set of bubbles or smaller sets of parallels on the next lower time frame (see the right side of this chart). I prefer to trade the bubbles on the lower time frame, entering and exiting various times.

Corn: Picture Perfect Cahen Bubble

Here is a picture perfect "bubble" pattern as described in Cahen's book showing on today's corn 3 minute chart (see the left side). The signal to exit is given at the yellow vertical line, when the (lower) Bollinger Band opposite where the price bars are located, completes its "plateau" phase and turns up. The right side shows the resulting "parallels" pattern on the tick chart.

In this chart, some additional signals to exit also occur. In the Bollinger Squeeze histogram (3rd panel from top), when the light green histogram bars change to dark green, this is also a sign to exit the trade. A third very early signal is provided by the reversal of the Klinger indicator, and when combined with the crossover of the EMA, provide an excellent exit point. Note also that the Klinger Volume indicator is beginning to show building accumulation again, as buyers are stepping into the market once again.
Unfortunately, not all (perhaps most) trades do not fit this picture-perfect pattern and are therefor not always this predictable. Thus, we must also learn to make profitable trades when circumstances exist that are less than optimal. I have found when reading trading books, that the authors only show examples in their books that are photo perfect like this one. However, the markets quite frequently present many trading opportunities that are less than photogenic, but also highly profitable. Many superb trading opportunities are manifested in these patterns also. Becoming a trader capable of recognizing these more dynamic opportunities is an important skill to acquire.

Soybeans Soft Today

Soybean prices, while modestly higher in the day session, are showing weakening demand and price softness today. My sources suggest that prices should fall somewhat in the short-term. Demand remains very strong globally, and any adverse weather conditions, or indications that farmers are shifting acreage back to corn, would drive soybean prices higher as well. Trading conditions like we see in soybeans today are dangerous, and to be avoided. Erratic prices activity today and sideways trading can not be traded profitably. I'm trading corn and wheat today.

Corn In Short Supply, Continues Solidly Higher

The significantly smaller grain stocks for corn, fewer acres being planted this year, combined with delayed planting necessitated by rainy weather in the grain-growing regions, is pushing corn prices into record territory for a second day today. If the rainy weather persists, it may reduce corn planting even more, thus pushing prices still higher. Corn is emerging as the grain in shortest supply early in the growing season for 2008. Demand is also very solid and growing, especially with nearly 1/3 of America's corn being used to produce ethanol. This short supply and stronger demand is driving corn prices still higher today, as shown in this chart of the 3 minute and tick charts for today.

Note in this daily chart (below) for corn that two days of new record high prices have been set, including new closing highs, and eight consecutive higher closes have also been achieved. That's very bullish for corn prices! If corn prices continue like this, especially if we reach the upper price limit today, we will soon see expanded lock limits and higher margins, just as we have with the other grains. Time to take advantage while I can of the lower margin.

Grain Stocks and Prices

Here is a link to a powerpoint presentation that includes these charts:

March 2008 USDA Planting Intentions

Here are some charts from the presentation. For some rather amazing conclusions about the long-term prospects for grains as an investment, look at the entire presentation, especially the conclusions at the end. Here are the sample charts:

Corn -- Stocks at 30 year lows
Soybeans - Stocks at 30 year lows
Wheat -- Stocks at 60 year lows
US Dollar - Longer-term perspective
The influence of investors and funds

Trading at Inflection Points

Traders must always seek to trade at inflection points. These are points at which the market pivots, or changes directions. This is necessary because it is at these points that the risk of loss is lowest. My primary tool for this is the Exponential Moving Average. Thus, with the smallest risk of loss, a trader can maximize the potential gain. I usually won't risk more than 4-6 ticks on any trade. If I must risk more than this, then I will sit out and wait for another opportunity.

We must also never lament a missed opportunity. If I miss a trade, then so what? I must have the faith that the market will present me with another opportunity tomorrow. Trust me. It will!

Short Covering Rally, Fund Managers Rebuild Positions

The CME is reporting that the rally in soybeans today was due to shorts who were taking it in the shorts. It was not demand-driven. The second factor that drove prices higher was fund managers who sought to reestablish their long positions in the commodities markets for the new quarter. I suspected that this was the case.

And this is no April Fool's.

Unbelievable Day! Fantastic Trading!

Trading soybeans today has been a trader's paradise! If only every day could have been like this one!

Soybeans Just Go Higher and Higher

Never would I have imagined that this trade would have gone this far or been this profitable. Rarely does a single trade go this far. Corn is setting new records today also, while wheat is sagging. I have no explanation for it, especially on a day when the US Dollar has strengthened substantially. Perhaps it's a speculative feeding frenzy, in which case prices could plummet just as fast (I hope they do, so I can go short at that point). But really -- does the reason or cause ultimately matter? Nope! The only thing that really matters to me is that it's happening. The fundamentals are irrelevant.

Great day! Unless you're short!

A Few Rambling Thoughts on Trading

I am going to share on my blog -- my trading journal, if you will -- some thoughts that I wrote to a fellow trading friend earlier today. There are several themes that meander through this email message. The primary one is the subject of achieving an automated system of software-based trading. This is a subject I don't believe I've mentioned on my blog previously. Other subjects include the use of the Weighted Moving Average along with the Exponential Moving Average, trading UP from a shorter to a longer time frame, the dynamic and changing nature of the financial markets, etc.

Here is the text of some of that message:

I may have mentioned in some of my blog posts that I was using some other methods of exiting trades (not Cahen’s). I still look for Cahen’s exits, but I have found that I can time them better than Cahen teaches in his book. The EMA usage is the best one. Right now, I’m also playing with an 11 period Weighted MA. It is slightly smoother than the EMA, and it tends to get me both IN and OUT of a trade slightly earlier. I want to code the one in TS so that it changes color like the one I coded for EMA (which I have attached to this email). I have put the WMA on my charts as a dotted white line (which you might notice in the charts on my blog – they’re barely noticeable). I’ve noticed that at some intermediate point in a trade, the WMA crosses over the EMA. At that point, I begin to ignore the Klinger Volume indicator. That point is somewhat of a turning point, because the trade is no longer vulnerable to possibly losing money. I am thinking about this WMA/EMA in terms of possibly programming it into some code at some point.

By the way, in his Encyclopedia of Technical Analysis Indicators, Robert Colby found that the WMA was almost as successful as the EMA – but not quite. It tends to be slightly smoother, much like the Hull and Guassian MAs. However, he told me in an email that he found the EMA he tested was only effective on daily charts --- not intra-day charts. He indicated that he ONLY tested on the daily charts. He didn’t know if the EMA was successful on intra-day charts. But he went out of his way to mention this fact. However, he also wasn’t using tick charts, as I am. My own experience with the EMA is that they are much more successful with tick charts than short-term time interval charts like your 10 minute one. I think this is because tick charts measure orders through the system rather than by some arbitrary time interval. The more orders that come through the exchange, the faster the tick chart candles print across the screen. While within 5 minutes, much can happen on a 5 minute chart if a shock hits the system, on a tick chart, as soon as the shock hits, the candles start to print across the screen very rapidly. And that affects the Bollinger Band patterns very quickly that Cahen teaches. In an automated system, entries and exits could happen very quickly and dynamically.

I have also found that on a strong move in the markets, prices may exhaust themselves on a shorter (tick charts, 3 min) time frame temporarily, but as time proceeds and prices get close to the EMA on the higher time frame (10-15 min), they tend to rebound off the EMA in the higher time frame (15 min) and continue in the original direction. I suspect it is because traders who are trading the higher time frame tend to add to their positions as prices begin to exhaust themselves. It is a rather remarkable phenomenon. Hence, if I am adhering to Phantom’s Rules, I will be constantly adding and removing contracts with the ebb and flow of the market. This would be extremely difficult – not impossible – to code into an automated system. Perhaps an automated system is one that will evolve over time as we find new twists on how to trade more accurately.

I can read Cahen’s book a dozen times, and I learn something new each time. While the translation is a little rough, most of it makes sense. You should have seen the translation of his earlier book published in 2001. It was so bad that some parts couldn’t be understood – by anyone! Cahen told me that a non-trader did the translation. It showed!

I agree with your thoughts on coding a completely automated system for the reasons you stated. Mark Douglas, in his book, says that a completely automated system ultimately fails. I’m not quite so fatalistic about it as he is. I know there are people who have accomplished it. However, they tend to work on one trading instrument, but not another (for example, it might work on the S&P mini, but not on gold or crude oil). Douglas says in the book that automated systems tend to work for awhile, but as the market changes, they lose effectiveness over time. This is another reason why I believe that any trading system must be DYNAMIC in nature. It must use indicators, support and resistance, etc. that are as dynamic and changing (able to adjust to change) as the market itself transforms and transmutes itself. What a challenge!

Complete automation might be very difficult to accomplish. For example, I keep very tight stops when I jump into a trade, but as the trade makes more money, I become somewhat more easy-going about it. Phantom describes this in Chapter 10 of his book (the one about John Denver). In fact, as a trade becomes very profitable, I will move to a higher time frame to manage it. I have moved from the tick chart to the 3 min chart for soybeans this morning. I will probably manage the soybean trade on the 3 min chart the rest of the day. How does one code THAT into software?

Another problem in designing an automated trading system is what to do when the prices lock limit. A system would need some mechanism to detect that and either exit a trade or not execute new trades. Fortunately with the expanded limits, this is becoming less and less of a problem.

There are numerous little iterations and subtleties that I use in my trading. Another one is that the longer a trade continues, the poorer the Klinger Volume indicator works. I also tends to work only for the direction of the prevailing trend. Klinger is great for getting me into a good trade early, but then it loses its effectiveness. Klinger is also very good when the market moves back and forth, up and down like a sine wave between flat Bollinger Bands. It is used for entry and quick exit of non-profitable trades, but is not effective for exiting highly profitable trades. Once my trade reaches about $150-200 per contract, I pay little attention to the Klinger Volume indicator.

Yesterday's Settlement As Support and Resistance

I have no explanation for this phenomenon, but I have noticed it many times. The previous day's settlement price tends to represent support and resistance. This is one reason why I mark it on my charts every day. Note the red dotted line in these charts is yesterday's settlement price. Note that frequently, prices reverse at that price point. However, if prices continue to bump against that point, eventually, they continue beyond it.

Soybean Rebound

Despite an expected further sinking in soybean prices this morning, prices have rebounded instead. In the futures markets, one must always expect the unexpected. That's why I trust my charts. They won't mislead me.

Unfortunately, when I study the fundamentals, they often do. I have found that there is always someone else who has more information, or has that information sooner than I do. However, as soon as traders start to act on the information, I see that activity manifested on my chart within moments. Then, I will take action. It is usually several minutes later than I learn the fundamentals-related reasons for what occurred.

Soybean, Wheat Lock Limits Expanded (Again)!

The lock limits for wheat and soybean contracts have expanded again for trading this evening. The soybean lock limit will be $1.05 and the lock limit for wheat will be $.90.

CFTC Commissioner Opposes Bush/Paulson Plan to Centralize Under Fed

Earlier today, in an interview on CNBC, CFTC Commissioner Bart Chilton expressed his opposition to the plan proposed earlier this morning by Treasury Secretary Paulson on behalf of the Bush Administration. That took some courage!

The U.S. Commodity Futures Trading Commission (CFTC) is the Federal regulatory agency that has authority over the futures industry, and has the regulatory authority and responsibility to ensure the integrity of the futures and options markets. It has worked extremely well for the industry!

Commissioner Chilton said that he heard about this plan through the news media, not from Sec. Paulson or Pres. Bush.

He also pointed out that the futures industry is an example to the rest of the financial industry of being liquid, fair, open, innovative, and service-oriented. (I agree with him.) He said that the futures industry and its various exchanges have provided the world with efficient, inexpensive, technology that has reduced costs and served its community exceptionally well. He also enumerated how the futures industry is different from other financial services, and it would be severely damaged by being subjected to regulations and authority that control other arms of the financial services industry.

The futures industry was born in the mid-19th century out of the need for liquid, consistent price discovery for the farming industry and those who purchased their products. No futures exchange or futures broker has ever gone bankrupt and left its clients without their money. The commodities futures industry has served its market participants extremely well. It doesn't need to be changed!

If it ain't broken, don't fix it!

Requests for My Help or Consultations!

I am receiving more and more requests from other traders who request my thoughts or suggestions on their personal trading. I am extremely gratified that other people value my opinion and would seek my advice. Unfortunately, I don't feel I can do this at this time-- with one quasi-exception that I will explain below -- for various reasons:

1. There are simply too many requests for my time and ideas than I could possibly make the time for. I receive many requests each week for help with trading. Sometimes I receive several requests each day. For practical reasons, this would be impossible.
2. My trading blog is one way that I can share the (limited) knowledge and expertise I have with other traders. In some cases, I may choose to address questions that I hear frequently by posting some ideas on my blog.
   The primary purpose of my blog is as the disclaimer says at the bottom. It is my personal trading journal containing my thoughts, methods, and trades. They are also my successes -- and occasional failures! I started this blog to replace the trading journal I kept on my PC. It keeps me accountable to myself for continued progress in my trading, and helps me to crystallize the things I have learned in a written record.
   If all this serves to help other people at the same time, then so much the better! But I take no responsibility for what others take from my blog, what they learn -- or for their mistakes!
   
3. For legal reasons, I am reluctant to offer suggestions. I am unwilling to open myself to even the remote possibility of a lawsuit. By giving free personal (one-on-one) advice to other traders, there is the potential of opening myself to unlimited liability without any compensating reward. It simply doesn't make sense. Or should I say, "cents".
   

Exception

I frequently meet with other traders in my local area. I will get together for lunch or just to chat. I am also working to build an organization for futures traders in Utah who want to form a professional association for the advancement of the profession and for the improvement of futures professionals. I have a vision for futures professionals in my locality who meet frequently to exchange ideas, improve our skills and record-keeping, and to provide friendship and camaraderie. I am always eager to make acquaintance with fellow futures professionals in my local area for mutual benefit.

Fresh Look at Corn; Changing Dynamically

Corn futures were the only grain that remained free for placing buy and sell orders throughout the day session today. Movements were very good and demonstrated the clean chart patterns that I discussed in my earlier post today.

Trading and Changing Dynamically

Traders must always remain adaptable and able to change to new circumstances. Phantom, in his book, says that a key skill for traders is to be capable of "behavior modification". Sounds simple, but its not! It is perhaps the most difficult aspect of this business!

We must be flexible and willing to change at all times. This is partly what I am referring to when I speak of trading dynamically. We must always change and adapt with the times! The markets are constantly changing like the ebb and flow of the tides in the ocean. This is one reason why black box trading methods eventually always fail. They are fixed -- static -- rather than dynamic. Something dynamic is something that is constantly shifting, adjusting, moving, and improving. If we are to survive on the seas, we much change and adapt with the markets! Right now, the stock market indexes are functioning in a vastly different manner than they were one year ago. Have our trading methods changed dynamically to fit them?

I know soooo many traders that trade only the stock index futures. They always trade the Russell 2000 or the S&P 500 futures -- no matter how bad the charts look, no matter how tight the trading range that the index is following, and no matter how much money they lose! Can you spell "stupid"?

I trade primarily soybeans. I trade other instruments (currency futures, gold, stock indexes, treasuries, etc.), but I mostly trade soybeans because the charts look clean to me, they are liquid, I can get good executions, they trade slowly enough that I can get in and out with accuracy, etc. I will probably continue to trade soybeans for some time to come. However, when circumstances change, I must also change. I will trade whatever instrument works well for me and has good-looking charts. (I know, I must be a raving lunatic to refer to a candlestick chart as "good-looking".) When the charts don't look right to me, I change to another trading instrument that does look right.

To continue to trade the same instrument regardless of how the tides in the financial markets shift, invites financial disaster. I'm in this business to make a living, so I can't afford the financial disaster of rigid, "static" trading. Go ahead and dig in your heels. I'll change when circumstances warrant!

Back to Corn

Although corn prices are the least volatile of the grains, perhaps todays price action shows a slight shift. I does for me, at least. Corn has a tighter lock limit because is shows less volatility, but it also has a significantly lower margin. But for me, the recent change from a lock limit of 20 cents to 30 cents opens a new vista in corn trading. Here's why:

A trader who might trade a single soybean or wheat contract could probably make about the same amount of money trading two corn contracts instead. The margin per contract for corn ($2025) is less than half that of either soybeans ($4388) or wheat ($6075). (These margins are stated as of 3/29/08 with my broker, RJ Obrien.) Furthermore, since corn futures have greater liquidity and sustain much tighter spreads during the evening trading hours (than soybeans or wheat), they can be traded at all hours. This is the best of all worlds, and it is only now becoming possible because of the wider lock limits that were implemented by the CME within the past few days.

Welcome to the world of trading corn futures!

Soybeans to Continue Downward?

Nearing the close of the trading session today, the ask pool of soybean contracts (waiting to find willing buyers) has gone from well over 63,000 contracts -- to only about 2000 in a matter of 10 minutes. I must assume that these are orders that have been canceled rather than filled. I have also seen similar huge pools of buyers and sellers that dissipated in the intervening hours before evening trading began a few hours later, and the soybean market began to trade freely again. However, this one feels to me like we may see more strong selling activity this evening when the market begins to trade again. The market has proven me wrong before. We'll see in a few hours' time!

The Gambler-Trader

As I mentioned in my last post, I may as well go flush my money down the toilet rather than attempt to trade charts that don't show order. I may as well donate it all to charity, because at least then it would do some good by serving society.

Many traders seem to use trading as a substitute for gambling. They treat trading more like entertainment, a rush of adrenaline, or an Internet-based casino, than a business. The Chicago Trading Pits should not be treated like Las Vegas! If you are guilty of this, do your family a favor, save your money and quit trading! Spend your money on counseling, rather than throw it away gambling in the futures market.

One sign of this "gambling" trader syndrome is that these gambler-traders tend to keep poor records. They don't treat it like a business. They also don't execute their trading plan effectively, jumping in and out of trades in a somewhat whimsical fashion. Instead of a disciplined approach in which they carefully mark their charts each day, study the news events, keep detailed spreadsheets, consistently set and achieve goals, and make precise records, they treat it like a part-time hobby instead. They don't keep spreadsheets, they don't set goals or meticulously work toward the achievement of those goals. They don't respect the power of the futures markets to ruin them financially. They don't plan their day. They don't keep a trading journal. But they do keep losing money! That is not trading! That's gambling, plain and simple! It is an addiction, not a business or a livelihood!

If think all the activities I mentioned above are too much work, then you are probably a gambler, not a trader. Trading is work! If you think its easy, you're deceiving yourself!

People who do this are doing their families a tremendous disservice and should get out of the futures market. They are doing no one any service except lining the pockets of their brokers -- temporarily. I use the word "temporarily" because eventually, they will go bust and blow through their trading account. This ultimately does the broker no service either, because the broker eventually ends up losing the client when they lose all the money in their account. Brokers have told me that they have a term for this -- churn. They must replace most of their clients every year because such a relative few make money. Those few feed off the majority who treat futures trading like a trip to Atlantic City via the computer!

This business is one that is appropriate only for highly disciplined, meticulous people. It is not one for wreckless adrenaline junkies! It is a business for people who have trained themselves to stay with a program for many years. It is not one for people who are akin to get-rich-quick schemes, playboys or high rollers. Engineers and air force pilots tend to make good traders because they are methodical and disciplined. Hot heads don't!

Women also tend to make better traders than men, although I have no idea what causes this particular phenomenon. This is merely an observation, not a commentary or opinion. But its also true, generally!

If you are committed to the changing your life and character to become a master of self-discipline, welcome to the futures business. If you think you are the exception to the rule, then you will lose all your money. If you are committed only to an easy way to wealth, you'll be eaten alive!

Disorder Becomes Order

I choose my tick charts for each trading instrument based upon how the chart looks and the amount of open interest on that contract. The greater the open interest on that contract, the greater the number of ticks needed to give my charts the orderly appearance necessary for me to trade them.

For the S&P 500 Futures

Relative disorder at 50 ticks
Appears much more orderly at 150 ticks

In the 50 tick chart, the price movements appear much more erratic, disorganized, and are much more difficult to trade. However, when I change to the 150 tick chart, price movements appear much more orderly, clean, and with fewer doji candles and shorter wicks. When one trading instrument becomes disorderly and erratic on various tick charts and time intervals, I look for another trading instrument. Today, with corn charts looking somewhat erratic and both soybean and wheat prices at lock limit, I have been looking for another trading instrument. The S&P 500 index futures would fit this bill today, based upon the 2nd chart in this posting.

Order In the Charts!

I have found that in general, the higher the time frame one looks at the charts, the more orderly they become. Most charts appear much more orderly on the daily chart than on the 15 minute or 5 minute charts. The higher time frames appear with less market noise and have a more clean appearance. However, most traders don't have the stomach to trade the daily charts because their account sizes are insufficient to weather the storms of market noise that occur.

If I can't find a chart that looks orderly to trade, I look for another instrument to trade. It is a waste of money to attempt to trade charts that don't have an orderly appearance. I may as well go flush my money down the toilet rather than attempt to trade charts that don't show order.

Often, a chart that appears orderly today will not be orderly tomorrow. In fact, even the intra-day charts will show great order during one hour and great disorder in another hour of the same day. Grains tend to appear most orderly for the first and last hours of the day session, and become more erratic in the mid session time periods.

Different Ticks at Different Tocks

At different hours of the day, a different tick value may be necessary to achieve the orderly appearance that I need to trade effectively. For example, during evening trading, I will set my corn charts to a tick value of 30 ticks. During daytime session trading when most of the volume occurs, I will change to a 50 tick value. I also lower my tick values when I trade the 10-year US Treasury futures during evening trading. I will often do the same in trading currency futures.

US Dollar Holds Support

The US Dollar Index has continued to hold support around 71.75 -- barely. Until a rebound higher becomes established, weakness is still the dominant theme for the Dollar. Otherwise, more bad news on the US economy could push the Dollar Index lower and set off a new round of selling.

Corn Sets New Record High Price Today

Following the release of the USDA Crop Report this morning, corn briefly set a new record high price before back off somewhat. The price of corn remains in record territory, however, with a previously-set record closing high price of 579 4/8 set on Mar 11th for the May 08 contract.

Wheat has again reached its daily lock limit down price, where it remains. However, the ask pool is relatively small.

Wheat, Corn Trading Freely

This chart shows wheat trading freely after touching the lock limit down price only momentarily, with the lock limit down price marked by a light green horizontal line.

Nature Conservancy Study Suggest Biofuels Increase Global Warming

More interesting news released over the weekend indicates that use of biofuels (corn, soybean, and sugar-based ethanol) increases global warming even more than fossil fuels do. How can that be?

With the higher prices of food (like corn and soybeans) that are being driven by the idea of making fuel out of them, more and more forest land around the world is being cut down in order to grow more of these grains. Thus, these forest lands that would have helped alleviate some of the greenhouse effect of carbon-based fuels are being cut down to grow even more ethanol-based biofuels.

This is a particularly stunning development, given that the study was done by an environmental group, the Nature Conservancy. It is an on-going study that will continue to be completed and updated annually.

USDA Report Staggers Market

Soybean and wheat prices have reached lock limit down following the release of the USDA report showing that acreage committed to soybeans was significantly more than even previous estimates had expected. Wheat is trading near the lock limit price, but soybeans locked limit down almost the instant the market opened, with an ask pool of nearly 40,000 contracts at the time of this writing.

Soybeans

Wheat

Corn, on the other hand, is trading higher because the acreage being planned for soybeans will largely be taken from acreage that might have otherwise been committed to corn. There are only a fixed number of arable agricultural acres available for planting in the United States. Over the past two years, many farmers have increased acreage planted in corn, but to avoid the possibility of greater pests due to progressive planting of the same land in a single crop year after year, and to avoid the higher cost of fertilizer, many farmers are rotating out of corn this year and into soybeans instead. Corn is a fertilizer hog, requiring nitrogen in particular, and fertilizer is made from crude oil, the price of which has also skyrocketed this past year. Thus, it was almost a certainty that large amounts of acreage that have been planted in corn the past two years would be rotated to another crop this year. Furthermore, since soybeans are a legume and fix nitrogen into the soil, they were a natural and likely choice for farmers to choose instead of corn.

Corn

USDA Report on Prospective Crop Plantings

Corn -- less than anticipated (bullish for prices)
Expected: 87,700
USDA estimate: about 86,000

Soybeans -- more than anticipated (bearish for prices)
Expected: 71,800
USDA estimate: about 74,800

Wheat -- about as expected

Bloomberg article link

Late planting due to wet weather in the Midwest also favors increased soybean acreage over corn, since soybeans can be planted later than corn. Continued rainy forecasts will be more likely to increase soybean acreage at the expense of corn acreage even more than the USDA forecast.