Archive for February, 2008

The end of a dramatic month.

Friday, February 29th, 2008

I suffered another full loss today, getting stopped out in a trade where price turned round and eventually went on to make my target. The loss was -17.25 points.


These kind of losses are particularly disappointing and tempt you to fiddle with the system, but it is crucial to maintain your trading discipline. Losing is part of trading, and sometimes you suffer a run, even in a system with a good positive expectation.

Reviewing the week, I lost 44.75 points which is the worst weekly result I have had in several months.

However, let’s put this in context for the month of February. It has been a remarkable month in the wheat market. There has been record highs, combined with unprecedented volatility. Since the start of the month, daily limits have expanded 450% and margins have increased by approximately 150%.

These are truly freakish – and dangerous – conditions, but I have been able to trade calmly through it all following my normal trading process. In reviewing the month, I have included a loss of 16.5 points for 1st February, which was a night I didn’t trade, but would have lost if I had done so.

During the month, there were seven losses, six days with no trades (all because of limit moves), and seven wins. Because the average win was larger than the average loss, I made 53 points. After all costs, I made a profit of 10.55% on my account. This is not as spectacular as it might have been without the losses in the past week, but still acceptable. It demonstrates one of the benefits of disciplined day trading, the ability to maintain a positive cash flow over a reasonable time scale despite a run of losses.

Looking forward to March, I am hoping the sharp sell off will continue, limits will revert to 60 cents, and the "hot" money will be flushed out of the market. We’ll see! 

Wheat shows huge volatility.

Thursday, February 28th, 2008

Here is the two minute chart from yesterday’s main trading session.


Notice there is one bar there where the price leapt from around 1160 to 1350 (limit up). That’s a 190 point move – $9,500 per contract – in two minutes. I had been stopped out of my long trade in the general chop prior to this sudden move.

Trading markets as volatile as this is very difficult – and risky. It is vital to have proper money management in place to ensure that your risk exposure is kept under control. This should mean that traders with smaller accounts are held out of the market altogether, and that those with larger accounts are trading a reduced number of contracts. This is being reinforced by the exchange which has once again raised margins on wheat (to $5,400 per contract). 

Trading costs can also be high, because slippage on stop orders can easily be 2 or 3 cents! At this time, trading discipline is absolutely paramount.

The expanded limit of 135 remained in place today. If there are no limit moves today or tomorrow, it will revert to 60 cents. I took a short position which didn’t go anywhere and stopped out for a small 3.75 point gain.



Wheat limits expand again.

Wednesday, February 27th, 2008

Wheat was flirting with the lower limit  of today’s market at the open, even though the limits were expanded to $1.35 per bushel. Then price made a rally and I jumped aboard. Unfortunately the trade failed, losing 15.5 points.

The week has kicked off with a couple of losers, but both have been managed according to my plan. I just need to stay patient and disciplined.


A wild market.

Tuesday, February 26th, 2008

As discussed yesterday, the automatically expanding limit came into play today (plus or minus 90 cents from yesterday’s close). Price was very volatile, fluctuating through a range of over 50 cents in the first 10 minutes of the session, but the automatic limit adjustment mechanism seems to be working and allowing the price to find its level without artificial restraint. 

I joined an early push to the long side, but this faltered and I was stopped out for a loss of 15.5 points.


According to the new rule, if there are no further limit moves during this and the next two sessions, the limit will revert to 60 cents. 

Wheat roars up again..

Monday, February 25th, 2008

Wheat was up 60 cents (limit up) within a few minutes of the open today, and as I write there are over 23,000 contracts bid at that price, so there seems little prospect of any further movement today.

These kind of days probably cause frenzied excitement in the wheat trading pits, but are a bit boring for me, as they offer no day trading setups. What will be interesting is to see how the new limit rules work in the market. This is what the new rule says:

"There shall be no trading in wheat futures at a price more than $0.60 per bushel ($3,000 per contract) above or below the previous day’s settlement price. Should two or more wheat futures contract months within a crop year (or the remaining contract month in a crop year) close at limit bid or limit offer, the daily price limits for all contract months shall increase by 50 percent the next business day and an additional 50 percent each subsequent day two or more contract months within a crop year (or the remaining contract month in a crop year) close at limit bid or limit offer. Daily price limits shall revert back to $0.60 after no wheat futures contract month closes limit bid or limit offer for three consecutive business days. There shall be no price limits on the current month contract on or after the second business day preceding the first day of the delivery month."

Based on this, if the market closes limit up today it looks as though the limit will be expanded to 90 cents tomorrow, then to 135 cents the day after if another limit move occurs, and so on. If the limit moves to 90 cents tomorrow and this is sufficient to handle price variation without another limit move during the next three trading days, the limit will revert back to 60 cents.

As a day trader, it is vital to know exactly where the limits are, so the next few days will be very interesting if this new rule comes into application. I will be keeping a very close eye on this. It would be very handy if the exchange published the daily limits on their product information page before the open of each session.

The beauty of this mechanism is that wheat prices will no longer be unnaturally constrained by the limits, which will adjust automatically to market reality. Consequently, we shouldn’t see day after day of stunted activity as we did with the old 30 cent limit before the rule change. 

It is not clear to me whether the margins for wheat contracts will automatically expand along with the expanding limits. If so, it will further constrain wheat trading (especially for smaller accounts) during these periods of volatility. 

A nice trade to end the week…

Friday, February 22nd, 2008

After the market initially moved sharply to the downside, I managed to get into a long trade and caught a good slice of the move. I targeted 36.25 points and made 34.25, losing 2 points to slippage.


Reviewing the week, there were three wins (although two of them were truncated) and one loss. The net profit before commissions was 38.25 points (US$1,912.50). 

Thursday, February 21st, 2008

The wheat opening was fairly messy today, and my trade was stopped out for a loss.


I’m struggling a bit this week, because the trades on Tuesday and Wednesday didn’t make their targets, so I have a situation (for the week only) where my average loss is bigger than average gain, which is not a good situation.


When trading rules frustrate…..!

Wednesday, February 20th, 2008

Sometimes your trading rules can give rise to substantial frustration. Take today, for example. I got into a trade with a target of 45 points all up (5 contracts at 9 points per contract). Things set off nicely but price then fluctuated for a few minutes and I was stopped out for an overall gain of 6.25 points. 


Right after that, the market moved sharply in the direction of my trade and I would have achieved the full 45 points within the next 2 minutes!

When this happens, try to resist changing the exit strategy by adding rules that would have maximized the return in this case.  Usually when you do that, the very next trade acts as predicted by the initial strategy and a probable win is turned into a loss or draw. If you keep tinkering with your strategy, you will end up constantly chasing your tail.

Tuesday, February 19th, 2008

One thing about trading that a lot of newcomers fail to appreciate is that you never know when you are going to get paid.

What I mean by this is that, because all systems have lean periods, it is very hard to count on a regular income from trading.

People coming from jobs where there was a weekly or monthly pay cheque find this difficult to get used to. It is the reason most experienced traders recommend that newcomers maintain a steady income if they can – keep their day job, or maybe have a spouse in steady employment.

Having said that, one of the great things about day trading is that the bumps are shorter. Look back through this blog and you will see that most weeks have positive cash flow, despite two or three losing trades. However, there was one losing week, and it was followed immediately by an abnormal week where I had no trading opportunities at all!

That kind of thing is to be expected during the trading year, but it can be very disappointing for the newcomer, and a real problem for the person hoping to make a weekly income to buy food.

But it is not nearly as bad as it can be for people trading the many longer term systems promoted in the market. (Many of these are in the stodgy forex markets which do not move fast enough to give decent day trading profits, and are subject to high trading costs. Traders have to trade long term and hope to catch big moves to make money.)

Even when these systems have a good positive expectation, they can be subject – like any system – to runs of poor results. The problem is that such a run may extend over several weeks or months. I used to trade a system on the S&P 500 which had excellent long term profitability, but once had a losing year! 

Nobody should seriously contemplate trading such a system for regular income. Apart from the obvious cash flow problems, they are psychologically debilitating. 

In my opinion, the only approach which lets you trade for income is day trading where you have enough separate trades to ride through lean periods in a reasonable length of time. Even then, you have to be prepared for uneven cash flow.

Today, after the holiday yesterday, the wheat market moved sharply higher in early trading. I was able to catch a momentum move, but it didn’t reach my target and I ended up being stopped out at a reduced profit level of 15 points.  Still it was a satisfactory result and I executed my strategy without mistakes.



A more profitable day trading week

Friday, February 15th, 2008

Even though the market opened 20 points up, I caught a move to the downside with an early short trade. I was targeting 37.5 points, but made just 28.75.  3 points were lost to unavoidable slippage, but 5.75 points were lost because I entered one fewer contracts than I should have in the trade. 


As trade setup patterns develop, I constantly adjust the risk parameters which govern how many contracts to enter. I made a flurry of adjustments just before entering this trade, and neglected to update the order with the changed number of contracts. I’ve mentioned before that operational excellence is vitally important, and I fell down on this today. Otherwise, all my trades this week were performed correctly to plan.

After the trading blizzard last week where I entered no trades, market conditions have improved significantly. The key factor has been the decision by the exchange to double the trading limits, giving the contract room to trade naturally. I’ve had a trade each day, with three winners and two losers. There were three short trades and two longs, showing that market direction is not that relevant to a day trader. Profit for the week (before commissions) was 76 points (US$3,800).


Trading news / fundamentals

Thursday, February 14th, 2008

I received an email from a reader asking me if I ever traded on fundamentals in the wheat market, or on significant news events. The answer is no, I don’t. In fact, I don’t even look at them.

My correspondent felt that it would be almost irresponsible not to be keeping up with the fundamental forces driving the market, and that good fundamental understanding is "bound to help improve performance". I have never found this to be true.

For example, here is the Pre-Opening Wheat Market Report from the CME for today’s session. Please read it and see if it would help you deduce (a) the likely direction of the market and (b) the best times to enter and exit a trade.

Personally, I don’t find it at all useful, although it might be helpful in explaining market moves after they have occurred. 

The truth is that there are professionals and industry insiders with genuine fundamental knowledge  which I will never be able to match. Fortunately, when these people take action in the market it is reflected in the price movement. They cannot act to profit from their knowledge without leaving "tracks", and it is our job to try and detect their tracks early enough to hitch a ride on  momentum shifts they trigger.

Today I was fortunate to catch a momentum move to the long side, which returned me 33.5 points with very little slippage. Time in the market was just over six and a half minutes.


Wheat margins are now higher

Wednesday, February 13th, 2008

Now that limit moves for wheat have been doubled, the margins have been increased substantially. My broker has set the margin at $4050 per contract.

This makes it more difficult to day-trade wheat with a small account. Say you have a $12,000 account and intend risking 3% ($360) of your capital on a trade, you would like to take three contracts if your stop is set at 2 points ($100 per contract). However, the trade would be rejected because there is insufficient margin in your account – you would need at least 3 x $4050 = $12,150 in your account before the trade was accepted.

I took a long trade this evening, but didn’t manage to catch a big momentum surge and was stopped out within 2 minutes for a 9.75 point loss. 


Tuesday, February 12th, 2008

The market is pulling back quite sharply from its recent surge. That’s quite normal, the stronger the surge, the stronger the pullback, just like waves on a beach. It may mean wheat prices have topped, or it may be a consolidation prior to another push. Fortunately, as day traders, we don’t care. Our job is to catch short term momentum movements.

Today I went short two contracts and came very close to being stopped out before the market moved my way. The trade was open for just over 30 minutes.


I was targeting 27 points, but ended up making just 24.5 due to slippage. As I’ve pointed out in previous posts, trading cost (of which slippage is the major component) is the greatest challenge to day traders. 

Aggressive action in wheat.

Monday, February 11th, 2008

The exchanges have taken steps to make the wheat market more tradable. The limit has been raised to 60 points with an option to automatically expand if there is a succession of limit moves. See here.

The effect of this should be to allow price to find its natural level much more rapidly, without being screwed down by  an unnaturally low limit move.

Tonight the market opened 55 points up (dangerously close to that upper limit again). I was able to take one trade, shorting a single contract. As usual I took an exit when price did not move straight off in my direction and took a small loss of $62.50.


When you see this trade on the charts it looks like a small winner, but the violent entry slippage in the current market turned it into a loss.

The slippage is quite a feature of the current market.


An easy week to review…

Friday, February 8th, 2008

It’s getting repetitive.

Wheat opened limit high today and it looks like it will stay there. Time to shut up shop and go to bed.

For the week, there have been no trades at all. Wheat, and the other grains too, have been fundamentally revalued. As day traders needing daily volatility to trade, there have been no opportunities. The watch word is patience!

More of the same.

Thursday, February 7th, 2008

The market opened at the upper limit. Then there were a couple of opportunities to the downside which I slept through! Again, I’ve placed no trades tonight, but it looks as though the recent upward surge may be pausing for breath now, although this session could well close out limit up again. 

Wheat opens limit up again!

Wednesday, February 6th, 2008

Wheat was limit up at the open today, with no trading at all so far. It looks as though it will stay that way, so I’m going to bed!

The last few days are frustrating in that they have not provided income earning opportunities, but it will not last.  At times like this it is important to maintain your discipline. There could be a few more limit up days yet.

The MGE (Minneapolis Grain Exchange) is going to lift the limit on its wheat contracts from 30 to 40 cents per day starting February 12. That’s a great idea and it is to be hoped Chicago follows their example.

It’s like watching paint dry!

Tuesday, February 5th, 2008

I’m afraid today presented no opportunities for me in the wheat market. The main reason the last two days have been no good for me is that there has been a strong upward move, and the market has gone to or near limit up very quickly, limiting the breakout opportunities I look for.

Here’s a chart of today’s opening activity.


Yesterday’s market settled at 973, so the 30 point limit rule meant that price could not go beyond 1003 in today’s session.  I might have been interested in the break up through the 995 level if there had been more upside potential. 

No Trade

Monday, February 4th, 2008

My posts will be brief this week, as I am moving house at the weekend.

The wheat market was choppy tonight, and I saw no trading opportunity.  

A lucky mishap….

Friday, February 1st, 2008

I normally sleep for a few hours before getting up for the market open at 1:30am local time for the market open. Today, I left my cell phone on the office desk and didn’t hear the alarm. That was fortunate, because the trade I would have taken would have been a loser, capping an already dismal week. Having missed that trade, no further opportunity presented itself, so it was a no-trade day.

This has been the first losing week I have had in three months, so I guess it was due. There were three losing trades, losing a total of 17.75 points, $775, plus commissions.  I do not mind losing trades, which are a statistical inevitability, but I have not traded well in the last few weeks, and I will be thinking about that over the weekend.

Factors I will look at include the following:

  • I have been very busy arranging a move into a new house (next weekend). External distractions shouldn’t effect trading, but they always seem to.
  • Writing this blog is a further distraction, but I have committed to keeping this trading record for at least two months.
  • I have been researching changes to some of my trade management rules, and have permitted myself some undisciplined trades without completing my normal testing regime. I think this is borne of over confidence because the last months have gone so well.

That said, I earned 8.67% on my capital (net, after all trading costs) during January, and that is not to be sneezed at in any business. My aim is to perform well enough to be able to draw a monthly "pay cheque", in other words to be consistently profitable. This month’s pay is slimmer than it has been recently, but welcome for all that!