Trading Around your Core Position 3/25/10

Matthew Bradbard — Thu, 25 Mar 2010 19:36:50 +0000

As a swing trader I’ve been whipped around of late as markets slog back and forth. What I’ve been forced to do is trade against core positions. By this I mean if you want to be long corn for example (our client’s biggest position) some times you may have to trade options or futures of a different month against your core position. Oil failed to get above yesterdays levels and as of this post just went negative. We expect prices to drift lower but would advise cutting losses on any open shorts on a settlement above $82 in May; our target remains $77/78. Now that natural gas has seen a trade below $4 will buyers enter the market? We are expecting the long Crude/short natural gas unwind to help natural gas find a bottom. Additionally check out the inverse correlation with natural gas to stocks. A top in stocks may equal a bottom in natural gas. We have advised clients to cut half their position on May longs at a loss on a trade below $3.90. We still like purchasing June 50 cent call spreads. Surprise equities higher on the day! June ES puts are the only way I’d suggest having exposure speculating on indices coming off. Cotton lost 1.5% today putting May just above 80 cents; our targets remains 78 and then 76.Coffee prices perked up today gaining 2% closing above the 50 day MA the first time since mid-January. We have started to price out July 10 cent call spreads for clients…stay tuned. Treasuries broke a key trend line today and look to be heading lower. We would refrain from being out right short but a possible idea would be a pair trade; short 30-yr/long 10-yr or short 10-yr/long 2-yr. Agriculture came under pressure today. We advised clients who were long December corn futures to sell May futures 1:1. Those who have held back or only have a small position we would advise lowering your cost basis and buying more corn ahead of next weeks USDA. Bear in mind you may need to take some heat but we view this as temporary. The KCBOT/CBOT wheat spread picked up a few pennies today; again we are expecting December KCBOT wheat to be at a premium to December CBOT wheat. Both cattle and hogs were lower on the day; continue to sell rallies. Metals were sideways today but the fact that they were able to remain positive in the face of a stronger dollar does show some resiliency. We are expecting gold and silver to trade down before we see any substantial upside; $1075 then $1045 in gold and closer to $16 in silver. As long as the dollar stays above 82 we should see pressure in foreign currencies. If the Loonie was to trade to .9600-.9650 we would start looking for an exit door on shorts.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Swing Trading Applied to Commodities

Matthew Bradbard — Thu, 07 Jan 2010 16:27:48 +0000

by: Matthew Bradbard
January 10, 2010

Definition/theory:

Swing trading is typically defined as a trading practice whereby the underlying instrument is bought or sold at or near the end of an up or down price swing caused by daily or weekly price volatility. A swing trade position is typically open longer than a day, but shorter than trend-following trades or buy-and-hold investment strategies. Although a number of commodity trades that I’ve been involved in have been quick, others have lasted several months. The average duration of our commodity swing trades in 2009 has been 3-6 weeks.

Explanation/how to (stochastics, channels):
Swing traders attempt to forecast changes in an instrument’s price caused by oscillations as it “swings” around the dominant trend line. The price is alternately bid up by optimism and then bid down by pessimism over a period of a few days, weeks, or months. Profits can be sought by engaging in either long or short trading at each reversal. Identifying whether a market is currently trending higher or lower, trading sideways and when this will change is a challenge for many swing trading and long term trend following trading strategies. A common misconception is that swing traders need perfect timing, to buy at the bottom and sell at the top of markets is impractical. Small consistent earnings that involve strict money management rules can potentially compound returns appreciably. It is crucial to understand that there are no fail-safe mathematical models that will always work so only use such parameters as research tools, also including both fundamental and technical analyses not as definitive decision engines but rather guidelines.

Risk of loss in swing trading typically increases in a trading range or sideways market as opposed to in a bull market or bear market. A market that is clearly moving in a specific direction, albeit up or down is more appropriate for swing trades. A sideways or non trending market increases the potential for whipsaws or false breakouts. In trending markets (either a bear market or a bull market), momentum may carry the traded instrument’s price for a much longer time in one direction only, making swing trading strategies that do not incorporate this trending less profitable than trend following strategies.

Handy tips (do/don’t and why):
Some general rules that I try to abide by while swing trading are as follows:

1.) Go with the trend.

2.) When getting long buy when a market is oversold & when getting short sell when a market is overbought.

3.) A trade may have more validity if the daily, weekly and monthly charts are all saying the same thing.

4.) Have a target if the trade moves as you presume and also an exit strategy if the trade goes awry.

5.) Try to ignore the noise.

6.) Don’t forget to manage the trade

In addition to the general guidelines above, I believe implementing a specific set of trading guidelines is required to be successful. For instance, we are more likely to take a trade if both the fundamentals and technicals indicate that prices are too low or too high. However, if the fundamentals do not justify a move higher yet the prices are making fresh highs day after day and the technicals indicate there may be more upside, we would still consider taking the trade. We may simply suggest a smaller position or perhaps an option as opposed to a futures trade. There are numerous technical indicators used by traders and everyone has their favorites. The main indicators that I use for my analyses include open interest, volume, moving averages, stochastic and Fibonacci retracement levels. That is not to say we never inspect more exotic indicators such as Ichimoku clouds or the McClellan oscillators, but overanalyzing markets is often ineffective.

The goal of adhering to strict trading rules is to remove the subjective decision-making from swing trading. We suggest exercising caution when trading correlated asset classes or even when trading correlated commodities. In addition to an awareness of correlations and prudent money management, also be cognizant about the “risk to reward” dynamic when putting on your trades. A trade that requires risking $5,000 and offers a profit potential of $2,500 should not be entered.

As with all financial instruments, risk of loss trading commodity futures and options can be considerable. This risk can best be mitigated by using a trading strategy that is back tested on the particular equity, index, or commodity and continues to prove its worth with successful trades.

Swing trading should not be the only form of trading incorporated into managing one’s investment portfolio but it could serve as a valuable tool within their investment toolbox. We are convinced that in the current environment buy and hold is dead and regardless if swing trading is for you, investors will be forced to be more nimble and to be more active managing their portfolios.

To illustrate two commodities that MB Wealth has and will continue to swing trade you will see charts on corn and silver.

Corn:

: click on the chart to view

Since corn has bottomed out in early September with prices reaching a 3 ½ year low, MB Wealth has had a bullish bias and wants clients to be long via futures or options. After bottoming out, the price has resumed its uptrend and on a closing basis we’ve climbed higher without violating the support line over the last 3 months for any extended period. For further affirmation, once prices bounced off support, one could wait for movement above the 20 day moving average. The stochastic indicates whether the market is overbought or oversold and should be watched closely. This helps to time entry and exit and to place stops. Not only did the technicals suggest long exposure, but with wet weather, cooler temperatures and the slowest harvest in over 2 decades, the fundamentals also suggest higher prices are achievable.

click on the chart to view

Longer term charts sometimes help to confirm that it makes sense to go long or short a certain commodity. They can also help to give a trader more conviction and guide the sizing of the trade. As one can see, the $3.25 level has served as solid support for the last 3 years.

Silver:

click on chart to view it

On a longer term chart, we experienced over a 61.8% Fibonacci retracement at the end of 2008. This move lowered the price of silver to roughly to $10/ounce. For chartists, this would indicate an entry for those looking to get long.

click on chart to view

For the last 6 months the price of silver has been largely contained in a $2.00 – $3.00 trading range with a rising slope. This suggests that those with a bullish bias, including MB Wealth and their clients, should look to buy near the lower line and take profits near the upper line. Traders who do not believe that silver prices are moving higher or who want to do a counter trend trade would sell near the upper line and look to cover near the lower line. The stochastic shown at the bottom of the chart could help with entry, exit and stop placement. Finally, fundamental analysis of the historical relationship between gold and silver is also bullish for silver not to mention continued US dollar weakness and the inverse correlation.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

MBWealth's Commodity Blog » swing trading

Trading Around your Core Position 3/25/10

Swing Trading Applied to Commodities