Download - May 2009 - Your Markets Monthly

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In this edition:

• Market Update: As at 26 May by William Chien

• Spread Trading – An Overview Guest Contributor: Guy Bower

• Technical Indicator of the Month:

Relative Strength Index (RSI)

• A couple more Universal Blocks to Successful Trading (adapted from ‘Bullseye’ by Matt & Sari)

• Spread Trading, William Chien’s CFDs, CBR &

PCD Advisory Recos update

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The Month So Far… As at 26-May-09 By William Chien

The local XJO index has rallied strongly from March ‘09. Furthermore, the rise in the XJO has been accompanied by a generally rising trend in volume as per the chart below. Based on the break of the downtrend line extending back from May ’08, it is fair to say that the XJO index will rise further. A more detailed examination of the plotted trend channel lines suggest 2 potentially significant price & time windows as per circled areas. My analysis to date indicates the major stock market indices will likely continue their bull run til July/August ’09. Please feel free to contact me by phone 1300 73 66 11 or by email [email protected] to discuss trade ideas.

Our Affiliates & Partners include:


Gold

In the long term, I expect gold to head higher after a potential dip. A detailed examination of the daily gold chart (see below) leads me to identify 3 important price & time windows which will possibly serve as important levels from where gold may launch higher. Please feel free to contact me by phone 1300 73 66 11 or by email [email protected] if anyone wishes to discuss trade ideas.


SPREAD TRADING – AN OVERVIEW by Guy Bower

What are spreads?

A spread is where you buy one asset (contract, share, bond etc) and sell something related or similar with a view to profit from a change in the price differential. Here are some examples of spread trades:

Buy (long)

Sell (short)

Why trade the spread?

Apple Microsoft You may have a view that the earnings in one technology company are too high relative to the other and the stock prices are set to realign accordingly.

Dec Crude Oil futures

June Crude Oil futures

This is a futures spread where you buy and sell the same market, but in different contract months. Temporary production or seasonal demand factors can make this kind of spread move.

Live Cattle futures

Lean Hogs futures

This is a spread where you buy one market and sell a related market. Differing production and consumption estimates for each market can often provide good trading opportunities.

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These are not recommendations for trades. They are just examples of spread trades. All spread trades are just positions where you expect the difference in price to move in your favour. As for futures spreads, these are simply spread trades in futures contracts (as per the last two examples and the following examples).

Types of futures spreads

We’ll be looking at two types of spreads using futures contracts.

Intra -commodity spreads

This is where you buy one delivery month and sell another in the same commodity (e.g. simultaneously buy August Soybeans and sell November Soybeans). These are also called “calendar” or “time” spreads for obvious reasons. Inter -market spreads

There are also inter-market spreads where you buy one commodity and sell a related commodity (e.g. buy December Live Cattle, sell December Lean Hogs).

Sometimes it’s easy to confuse the terms inter and intra . Don’t worry about this so much. It’s more important that you know the basic idea. Both types of spreads simply try to make money from the change in relative prices of the contract.

At this stage, all you need to understand is the concept of going long one contract and short another simultaneously. There is really not a lot to it. A spread trade is all about making money from the relative change in prices.

Spread charts

If you are reading up on spread trading elsewhere, you’ll need to understand how spread charts are displayed. Generally speaking you will calculate the spread as the bought (long) side minus the sold (short) side. Some books on spread trading will show the near contract month minus the distant month for intra-market spreads, but this is a little confusing.

For this article, we’ll stick with ‘bought less sold’. This is also the way we display things on the eSignal charts shown throughout.

Larry Williams

Tom Scollon

Daryl Guppy


Examples of futures spreads

Wheat

This is an intra-market spread. This chart shows the difference between March and July Wheat as traded on the CBOT.

Source: eSignal - www.esignal.com

As you can see, the period leading up to October was very quiet. Then it just exploded! Spreads don’t normally behave this dramatically, but occasionally they do. Not good if you are on the wrong side of it, but great if you are.

Guy Bower

Catherine Davey

Sari Mustonen-Kirk


Live Cattle versus Lean Hogs

Here is another example. This one is a spread between two meats futures contracts: Live Cattle and Lean Hogs, both traded on the CME. This is an inter-market spread. As you can see this one has moved around quite a bit too.

Source: eSignal - www.esignal.com


Part 2 of Guy Bower’s article on spread trading to follow in the June 09 edition of ‘Your Markets Monthly’ Contributor information:

Guy Bower is professional futures and options trader. Guy is the author

of two books:

Options: A Complete Guide and Hedging: Simple Strategies .


TECHNICAL INDICATOR OF THE MONTH

By: Jason Achjian Indicator Name Relative Strength Index Abbreviation RSI What The RSI is a financial technical analysis oscillator showing price strength by comparing upward and downward close-to-close movements. How RS = EMA (N) of U EMA (N) of D Where U = close of today – close of yesterday And D = close of yesterday – close of today N is the number of periods – usually 14 EMA is an Exponential Moving Average This is converted to Relative Strength Index between 0 and 100 RSI = 100 – 100 x ___1___ 1 + RS When The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. The principle is that when there's a high proportion of daily movement in one direction it suggests an extreme and prices are likely to reverse. Levels 80 and 20 are also used, or may be varied according to market conditions.


How to add this to your Charts in eBridge Trader

Whilst in your workspace viewing a chart, click this symbol at the top of the chart, then >>> Oscillators >>> Relative Strength Index…: The default fields that appear are the most commonly used settings for this indicator; however you can adjust them if you wish. You can also adjust colour and the weight of the line: To open an eBridge Trader account or get further information on adding technical indicators to charts using eBridge Trader please contact Jason Achjian. Email: [email protected] Phone: 1300-73-66-11.

Click OK once you’re satisfied with the settings (These can be adjusted later also). You will now see the RSI Oscillator added to your chart. You can later adjust settings by clicking the ‘RSI’ at the top left of the indicator pane below the chart and then clicking on ‘Properties’, you can also delete the indicator from this menu. If there’s any feature of eBridge Trader that you’d like covered in next months news letter please email your request to [email protected]


UNIVERSAL BLOCK — GOT A HOT TIP?

“Sometimes I hear about a hot tip but I’m not sure if I should take the trade or not. Whenever I jump on a trend my friend is on, the trend ends. When I don’t get on board, it keeps going. I also occasionally take recommendations from my broker — the problem is I only ever seem to choose the losers and never the winners. This leaves me very frustrated and confuse d and it makes me feel like I’m a jinx or something.”

This is a particularly seductive one as it comes cloaked in the glow of a secret opportunity and we all love to get in first on something new. Let’s face it though, some tips are hot and some are not. The problem is you never know which one is the real one before you act on the tip. “Will the real hot tip please stand up?” Unfortunately it doesn’t work that way. The other issues with hot tips are:

• Where do I take profit if it’s right?

• Where do I take the loss if it’s wrong?

• What price do I initially buy or sell at?

• Do I wait for a new high or low before doing anything?

TOP TRADER THINKING — EASY DOES IT If you want to get on board a hot tip (just in case it turns out to be the trade of the century) make sure you go small to begin with. If it’s going to be a big winner then a small investment will reap huge percentage returns anyway and you can always add to your position when the tip is confirmed by some real fundamental or technical data. If you focus on the percentage returns and not the dollar returns, don’t get greedy or mortgage your house to do it, you haven’t lost much if it turns out to be a dud. For example, if you have a $50,000 account then you could buy $2500 worth (five per cent of your capital) of ‘Hot Tip Mining’ at, say, 50 cents a share. Then place your stop, for example if ‘Hot Tip Mining’ falls through the natural support level sitting at 35 cents, then get out with a loss of only 2.5 per cent of capital. If it shoots to $1.00 then sell half and you’ve got the remaining half for free. If you don’t agree with these numbers then that’s fine — we wouldn’t suggest any higher risk than this but it’s up to you if you wish to risk more or less. In your trading career you probably won’t be able to resist at least one or two potential hot ones, after all you’re only human. Just have some game rules and stick to them, as getting caught up in the euphoria is very easy.

Matt Kirk

Jason Achjian


Admit you’re punting and not trading. Don’t kid yourself; many hot tips can be as much to do with trading as buying a scratch lotto ticket is. If you win it’s probably more luck than good management. It’s like playing lotto for a bit of fun when there’s $20 million up for grabs or betting on the horses once a year at the Melbourne Cup. Taking these long shots should not become a part of what you do in your trading business. Everyone’s different so this one’s hard to put a limit on but as a guide if hot tips account for more than five per cent of your overall trades or you’re taking more than about four a year, then it may mean you’re a gambler and not a trader.

If you want to be a prudent hot tip taker then look at a chart of the last year or so and only buy or sell on a break of resistance or support. Don’t just buy or sell with your eyes closed without at least some confirmation that prices are going higher or lower. This may mean you miss out on the start of a move if a share goes into a trading halt. For example, if what’s being rumoured is true, then the Exchange may stop trading pending a company announcement confirming the rumour to be fact. If this happens to share trading at say, 35 cents may reopen at 50 cents after the trading halt so you’ve missed buying cheaply. Depending on the news you may wish to pay up for the share at 50 cents or more but that’s up to you. Sometimes it can pay to chase a share and sometimes chasing a share means you’ll be paying top dollar for it only to find a week later the price has halved.

Even top traders have admitted to the occasional flutter but when they do they only risk 1 per cent or less of their capital. It’s a bit like a racing car driver pushing hard in a practice lap before the tyres are hot and sticky — they know they shouldn’t but they do every now and then for a second or two and not the whole way around a track that is filled with other cars.

If you do take a hot tip then immediately place a stop loss that if hit won’t be a loss of more than 3 per cent of your overall capital.

William Chien

Philip Dooley


TOP TRADER THINKING –

IMAGINE YOU HAVE SHAREHOLDERS Top traders see themselves and act as chief dealers of their own fund — they are known for a particular trading style and for the particular products and markets they trade. They don’t just punt around the place and trade the biotechs one month only to become bored and jump to the next ‘exciting’ sector. They stick to their strategy and know at any point in time how they’ll conduct the next trade and how they’ll employ the techniques they know work best for them. They don’t care what others do; they just care about what they do. As a fund manager your investors have signed off on what they’ll allow you to trade (called a trading mandate) and how you’ll only trade within certain mutually agreed parameters.

This is what top traders do — they don’t deviate from their mandate. Ask a top trader about a market or methodology they’ve never traded and invariably they’ll say something humble like, ‘Ooohhhh, sounds too hard for me, I’m happy with my simple system in the Euro.’

UNIVERSAL BLOCK – NO DISCIPLINE “I actually have a system I devised a couple of yea rs ago. Funnily enough, it works well but I only use it occ asionally as I ‘forget’ to stick to it.” Always keep in mind, a trade done outside of your system is not a trade, it’s a punt. Like the universal block of ‘Got a Hot Tip?’, if you suffer from a lack of discipline you’ll be taking trades all over the place with no real rationale behind any of them. If there’s Ten Commandments of Trading, number one is, stick to your system – period. Now we know everyone tells you to do this and you’ll still forget to at times but one of the best ways to manage this is to have your Trading Mandate and Trading System (your big picture and specific trading rules) written down in big, bold print, framed and stuck up smack-bang in front of your face.


TOP TRADER THINKING — I WIN BECAUSE I TRADE MY WINNING SYSTEM Write out a copy of your trading system rules and stick them up in front of you at your computer as well as on the bathroom mirror so you can’t forget to follow them. Try chanting your rules when you go for a walk or exercise. Sing them in the shower, in the car, when you’re going to sleep at night or upon waking in the morning. Sure, you may feel strange and even a bit daggy doing this, but you’d have to agree, it’s better than being a ‘cool’ and poor trader. You’re simply programming your trader’s brain to stick to what you have said you are going to do.

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TRADER THINKING’ YET…?

GRAB IT NOW & GET YOUR TRADERS BRAIN ON

TRACK FOR THE REST OF 2009!

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http://www.toptraderthinking.com/toptrader/news.asp?id=369&action=viewarticle



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In edition #7 of Top Trader Thinking Your Markets Monthly…

Matt discusses ‘Find the Right Fit’.

Look out for it late June 2009!

Email us at: [email protected] If you have any suggestions or ideas for future editions

Download - May 2009 - Your Markets Monthly

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