There is a difference between a good trade and good trading


Many novice pedestrian traders focus on the next position. Consistently success traders focus on the process and care little about the outcome of the next trade. The distinction is enormous.

I made a comment in a recent blog about a trade being a loser yet being a good trade. I received a number of inquiries about how this can be a reality. So, I thought I would discuss the matter.

Often what I post is the analysis of a chart with some comment on the implications of the chart construction in question. Many other traders disagree with either my method of analysis (i.e., classical chart principles) or the conclusion of my analysis.

Hey, I am ok with either type of disagreement. It is what makes a market. So, as long as there is no name calling or rudeness feel free to disagree whenever you feel the urge.

Yet, many readers don’t or cannot comprehend two factors:

  1. An opinion or analysis of a specific market may or may not equal a position
  2. In reality, my trading is based on process, risk management and the reality that I am wrong more often than I am right. While the analysis of a given chart may be interesting, that analysis fits within a much more comprehensive approach to trading than it is possible to discuss on an ongoing basis.

I select and manage trades basis on a set of rules, guidelines, best practices and principles that have evolved over three decades. These rules, guidelines, practices and principles dictate for me what trades I do, how much I risk, what leverage I assume and how to manage the trade.

A given trade may end up being wrong.  A recent example was a short trade in Copper on Apr 10. I rode that trade down and up and down and up before taking a loss on Apr 26.

The question for me is simple: Was this a good trade based on my trading algorithm. The answer is an absolute “YES.” But was the analysis right and the trade profitable. The answers are an absolute “NO” and “NO.”

Then there is a recent trade in the Swiss Franc. A 3-1/2 month or 10-week triangle was completed on the May 8 close. The target was met on May 23.

While the practical (P&L) implications of the Swiss and Copper trades were very different, in my mind these trade were both perfectly aligned with my trading approach.

Thus, there is difference between a “good” trade and a profitable trade. As a trader, your goal should be good trades. Then you let the profits land where they may over a multi-trade series.

I am presently short the Russell 2000. Is it a good trade based on my trading approach? It is as good as it gets! Will it be a profitable trade? I have no idea. Do I care? Of course, I would much rather take a profit than a loss. Yet, loss or profit, the trade is a good trade.

In conclusion, while you may disagree with using chart patterns for the basis of trading or you may disagree with my opinion (and maybe my position) on a given market, please know that the results of any given trade is relatively unimportant.

A given trade is nothing more than a datum point in a series of data points that are governed by sequencing within random probability theory. And, unfortunately, that is a subject for a much later date.






A perfect example of how HFTs pick your pocket — courtesy of the CME Group


Pocket picking at the CME Group (@CMEGroup, $CME) — how the electronic futures trading platforms cannot control volatility creation by the HFTs

Two charts are shown to demonstrate how the HFTs manipulate the CME’s electronic platform to pick the pockets of speculators. This chart also reinforces my recent posts on the paramount importance of the closing price and the irrelevance of intra-day volatility.

Chicago times are used. Two charts below show the pocket picking caught on security camera. Remember, spot and futures trade at reciprocal values, so a rally in the spot should be reflected as a drop in the futures. Let’s watch the pockets being picked minute by minute.

7:29 ending

  • Spot closes at 1.0039
  • Futures close at .9953

7:30 ending

  • Spot has very narrow 3 pip range, closing at 1.0043
  • Futures break 43 points (worth $430 per IMM contract) on thin air, closing at .9910

7:31 ending 

  • Spot opens at 1.0043 and drops quickly on economic news. Very little volatility occurred prior to the sharp break.
  • Futures open at .9966. In other words, there were NO trades between .9910 and .9966 (a value of $560 per IMM contract)

This is what happened at the IMM (host of the HFT pocket pickers).

The HFT programs recognized the stack of IMM stops starting at .9936 when the market was trading at .9953. The HFT sold the market heavily into the stops so that the sell stops cascaded. The HFTs then took the over side of the cascading sell stops, covering the sales required to create the cascade. Once the stops were cleared up the market traded up 56 points without a trade.

Let’s assume the HFTs did not sell at the high of 7:30 (ending time) minute and buy at the low. Let’s assume they picked up half of the 7:30’s range of 42 points, or a profit of 21 points. Not a fortune, but repeated (to lesser extremes) hundreds and thousands of times per day we can start to grasp why 60% of futures volume is coming from the HFTs.

Now, let me make this clear — what the HFTs did is not illegal. But, it shows the great risk traders taken by trusting the CME’s electronic platform with intraday stops. It is obvious to me that the electronic exchanges have stacked the deck in favor of HFTs against the interests of small traders.

Traders beware. This is the importance of the closing price.



So much for a buy and hold strategy on higher commodity prices


Pictures speak louder than words


By the way, do you know why base metals such as Tin and Aluminum (and others) have collapsed while Copper remains stout? Easy. Copper prices are being manipulated because Copper is used as the collateral for so many loans in China. The banks are proping up Copper prices. If Copper prices declined (as they should) a some loan portfolios would be called. This could result in dumping of warehoused inventory which could put a short-term squeeze on the Chinese banking system.

All the above charts equal the chart below:

Although, there are one or two bright spots. See my special report on buying Soybeans and selling Corn from April 2011 here.


Markets: $RJA

Why high/low/close bar charts have become worthless


In the modern era of trading, the intraday violation of a chart boundary line has become meaningless

There was a time long ago (10 years ago) in a place long forgotten (a trading pit) when the intraday violation of a significant chart pattern boundary line was an important event. No longer!

[Note: This post is intended for classical chartists who are position or swing traders and who consider momentum as a factor to enter a trade. All others, read at your own risk.]

Three factors have combined to increase the magnitude and nature of price volatility to the point where intraday pattern completion is no longer valid.

  • First, HFT trading now represents as much as 60% of the volume in some futures markets on some days. The practical function of HFT trading is to cascade stops. HFT algorithms are built to leverage resting or probable order flow into a wider bid/offer spread.
  • Second, and related to the first, the electronic exchanges have replaced pit exchanges. Us old timers once could have resting orders in place, but held secretly by a trusted pit broker. Now all resting orders are stacked for the world (and HFTs) to see and exploit.
  • Third, the absolute price levels of most commodities (and stocks) are such that the value per futures contract (or share price) swings wildly. I remember entire years when the trading range for Copper was equal to single day trading ranges now. This makes resting stop orders prey for being picked off.

So, what is the practical solution for chart traders? I offer several suggestions.

  1. If you are trading chart pattern breakouts, only enter a trade if the pattern is decisively completed by a closing price.
  2. Never, I mean never, place resting stop orders in the overnight markets. Limit orders are ok. The overnight market represents a den of thieves.
  3. Use mental stops based on the closing price. This will require unusual discipline to enter and exit if the closing price stop level is actually triggered.
  4. Use a much wider “emergency protective stop” on existing positions to protect against such events as a possible bombing of Iran by Israel.
  5. Because the entry and exit prices are based on closing prices the risk cannot be precisely determined in advance. Thus, use less leverage.

The closing price is the single most important price of the day. The Friday close is the single most important price of the week. The closing price is important because positions at that price demand overnight margin — the closing price is the “put up or shut up” price. The impact of day traders and most HFT operations are washed out on the closing price.

Remember, a pattern is not a pattern until it becomes a pattern — and becoming a completed pattern requires completion on the close.


Gasoline prices: 2012 vs 2008


“Those that cannot remember the past are condemned to repeat it”

George Santayana, 1906

Oh, how soon we all forget!

See linked story from here

Markets: $RB_F, $CL_F, $QM_F, $HO_F



Precious metals are at “do or die” spots on charts


On April 24 I posted a blog stating that Gold was within a week or so of declaring its next $250 move. See here.

The Gold market worked higher for about a week after the post above, reaching a high of $1,672 on May 1 (a day that became a one-day minor reversal).

Has the $250 move in Gold begun? I am not sure — but I am sure that Gold is right at the edge of the cliff hanging on by its finger nails.

The weekly chart below of Gold shows the major trendline from the 2008 low under the orthodox lows (thick line) and through the week-end closes (thin line).

The next chart is a blow up of the previous graph — showing the two key trendlines superimposed on a daily chart.

I need to openly declare that I want to be a bull in Gold — yet I am not presently long. I accept the conventional wisdom bull story in Gold — even though I know that conventional wisdom is usually wrong.

Yet, as the daily chart shows, Gold needs to make a stand at present levels. A move below the April low at $1613 (especially if it’s on Friday) would not be good news for the bulls. Of course there is always the chance the market will spring an historic bear trap by taking out all the stops beneath the April low and immediately turning higher. But, fortunately, bear and bull traps quickly reveal themselves and provide excellent opportunities to get right with the market. Yet, as a chartist, I would have to respect a decisive violation of the trendlines just below the market.

The chart below shows the price of Gold expressed in Swiss Francs. I have long used this expression of Gold to be a confirming indicator. This chart shows that the Gold/CHF ratio remains in a symmetrical triangle. But a breakout to the downside of this graph would be additonal bad news for Gold bulls.

Finally, the weekly chart of $SLV shows that the market has remained in a bear channel since the April 2011 high. The upper boundary has continued to turn back all rallying attempts. Only a decisive close above the upper boundary would provide hope for the Silver bulls. Sorry, Silver bulls, I am just calling it like I see it.

Markets: $GLD, $GC_F, $SLV, $SI_F