Archive for April, 2008

Stormy March…….

Tuesday, April 1st, 2008

Well, March has come and gone. It’s been a tumultuous month in most markets and wheat  has been no exception. Priced spiked up to all time highs and there have been equally sharp falls since then.

Daily volatility skyrocketed, resulting in margins being dramatically increased. As of writing, margin on a wheat contract is $6,075.

Slippage, which used to be about half a point per trade, has gone through the roof and I have had some trades with slippage of 3 to 4 points per contract! 

The 30 point limit (which has existed for what seems like years in the wheat market) proved woefully inadequate and the Exchange has had to usher in a new 60 point limit. What is more, this can expand by 50% automatically up to two times, following further limit moves. On a number of occasions this month, volatility has been such that limits expanded to 90, and then 135 points for days in a row, before reverting to the new 60 point base. (Indeed, after another limit move yesterday, the first trading day in April will start with a 90 point limit in place.)

So, how has my regime of disciplined day trades with tightly controlled risk fared during all this tumultuous activity? Quite well, thank you…

I’ve mentioned before that many profitable trading systems can be subject to long, demoralizing  draw downs which last for weeks, months or even years. These systems suit some personalities, but not mine. My goal has always been to operate a system which gives me steady profitability over a long period of time, regardless of market conditions. Accordingly, I am very focussed on short term price moves and momentum shifts, and the bigger picture view of a huge market shake up tends to pass me by. I scarcely notice it (except for the bigger margins and increased slippage}.

There were 20 trading days in March. On 6 of these I was unable to find any trade. On the remaining 14 days,  I had 7 wins and 7 losses. The average win to average loss ratio was very nearly 2 to 1, so the month ended up quite profitable.

This year, I have made, after all costs but before tax, 8.7% on capital employed in January, 10.6% in February and 16.8% in March.

As I have continued to work with this style of trading, I have come to believe that I can look forward to returns averaging a minimum 10% per month with no (or very rare) negative months. One of the most frequent questions I am asked is "How large an account do I need to make a living?" Of course, every individual has different living requirements, but I believe you can realistically hope to achieve 10% per month (gross income) as a day trader. Whether or not this meets your living requirements is entirely up to you. 

Of course, a trader with a small account may plan not to draw out trading profits, leaving them to compound in the account until a stated goal is reached. Furthermore, if you have never traded before, it is essential to start with a small account until you learn what is going on…..!