Finding your very own unique commodity trading edge is a worthwhile goal. Without one you are lost in the masses, struggling to push your head above the sea of expenses. Trading edges do exist, though for short periods of time. Psychological edges are more permanent. You need many. Here's how to find yours.
First let's talk about a good market for day trading. Next, we'll talk about finding a trading "edge."
The S&P 500 Index futures contract market may be the best futures game around for day-trading. It's liquid and the swings are usually large enough every day to make it worthwhile. The electronic e-mini futures market (the mini S&P 500) is lightning fast for executions that rival or even exceed the floor-trader advantage. However, it would be even better if someday they would make a big "e-maxi" equivalent to the e-mini to help keep the commissions and expenses lower.
After all, five e-minis are equivalent to one present "pit-maxi." But with the pit maxi, the price skids and delay of pit executions can easily add from ½ to a full point at times. This makes paying the extra commissions of five e-minis well worth it in the end. After all, a one-point skid is $250 for a maxi while the extra commissions for five e-minis are a fraction of that.
Price skids in electronic e-mini futures contracts happen sometimes, but are rare and simply due to heavy buying or selling, compared to illiquid "air pockets" that can occur in the pit at times. The day has come where you see big guns doing 500 to 1,500 e-mini lots electronically. It's a beautiful thing.
A look at a simple bar chart of the S&P 500 futures contract can look like Jaws V to the person without a method. What's needed are custom technical indicators and recognized patterns to present this market information to your trained mind. On any time frame, from monthly to one-minute bars, the futures price action can look random and treacherous.
But if it was an easy, trending market all the time, everyone would be rich? or better said, there would be no market because everyone would be trend following - doing the same thing, thus an impossible scenario. There must be occasional trending, chopping, extreme volatility and dullness to keep everyone on their toes. We think we have discovered a "system" (edge) and then the futures market changes.
I think change is the most important concept for a commodity futures trader to accept. As hard as we may work to find and discover the perfect trading method, the market will then change to make it worthless at times. Then it will go through its changes and come back around again and the method will work. It must be this way or else everyone would eventually be using the same trading system or method over time.
Why is it when we check out the latest high-priced commodity futures trading "system" performance listings, every year there are different ones on top, and the previous winners are often at the bottom? This is because rigid optimization does not work. Well, not for long. It's "optimized mush" as one futures trader calls it.
The perfect trading system would be one that continuously changed in sync with the futures market. It's not hard to design a great trend following method or one that cleans house during a choppy market. But there has never been a computer program designed that can anticipate WHEN to toggle on and off the various methods to match the changing market. It's like trying to predict the next tick - up or down? And what happens if the market does a half trend and half chop? Or, what if it goes quiet and then has tremendous spikes cleaning out the stops in a classic "search and destroy" session?
The bottom line is highly optimized commodity futures trading systems are doomed to failure, or break-even results at best. It doesn't matter how elaborate your software is, using fuzzy logic, neural nets or any of these high tech optimization methods; they are doomed to be a wash. A wash! That's what happens when the majority is average. The commissions and spreads take their "rake" just like the casino.
The harsh reality: You need a UNIQUE edge of some kind to pull you above the average commodity trading crowd. And if you don't know what your edge is, then you don't have one. Think about this, because it is important. I'll cover some interesting methods that you can explore in greater detail in future articles.
When talking about trading, I cringe when I hear the word, "system." It reeks of computer optimization - optimized mush, no flexibility. A better term is trading "method." A commodity trading method is something that is less rigid and has general rules that can be bent. We need to know when to bend the rules. This brings a method out of the mediocre class into one that has an edge - a human edge.
The best commodity futures and option traders in the world are usually discretionary types verses strict rule based optimization systems people. There are exceptions. To be a 100% intuitive, method trader is a tough row to hoe, agreed, but allows dynamic change to market conditions in a heartbeat.
So, where do we find our trading edge? Is it in the latest software, book, mentor, webinar, or maybe right here? It can be found everywhere, pieces here, pieces there, but mostly, the edge is within you. Sounds mystical, but it's the truth. You have to spend the time to develop your OWN unique edge that the majority do not have. And yours will change over time.
For example, at one point back in the late 60s and early 70s, few commodity futures traders had use of computers. It was found that even a simple exponential moving average worked well for the smooth trending markets of the era. Moving average commodity traders did well since the markets were trending nicely. As more traders caught on, the successful trending systems began to get diced. You will notice that many of the new and emerging foreign markets start out with smooth trends until they mature and then start the chop cycle as change moves in. It's all part of the never-ending evolutionary commodity trading game and marketplace.
There are some effective, but simple, long-term trending methods out there. Almost any method will work at one time or another. The broadest, loosest trading methods will last the longest, while the most optimized last the shortest time. The famous "Turtles" used a break-out of the 40-day moving average for many years.
They added a filter called "n." Two losers in a row = -2n. Two winners = +2n. A winner and loser = 0n. The more losing trades in a row, the more frustrated the masses and the more likely the next trade will be a winner. That is, if the break-out came three times in a row with a resulting false move and a stop out, (-3n) then the fourth signal will be more probable for success. Sometimes.
The commodity futures markets follow this general rule: They will bless some methods for a while, then turn in a heartbeat and take it all away. A good trader is always watching several methods at one time and will switch to the one currently performing...in a heartbeat!
It's breathtaking to watch a certain trading method working well and then see the market find a way to destroy these same participants in one sharp move. An example is when commodity option traders are writing (selling) options over an extended period of time. They're taking in premiums like fat cats. Happy. Quiet market. The percentages can be upwards of 90% accuracy selling way out-of-the-money futures options in a dull or choppy market. The profits are small, but consistent.
Then the day of reckoning arrives and a move way out of the standard deviation spikes like a lightning bolt. They drag some option writers out by their boots. A well known example was in 1998 when a famous money manager was selling thousands of out-of-the-money S&P 500 puts. The market took a free fall dive. He lost a big chunk of his $100 million+ managed commodity fund in a few days. I remember it well because a partner and I were long an eighty-lot of put options on the other side of his trade. We made the biggest score of our lives. But it had much to do with luck and being there at the right time. It happens at least once to everyone. Heck, just being born is the longest shot going.
Right now I love the S&P 500 futures contract (e-mini) day-trading game. I've traded it actively for the last twelve years. It pays to focus on one or two commodity futures markets and learn it well. This is the key to getting an edge when day-trading. Some day-traders can spread themselves out and apply similar techniques to many commodity markets. God bless them. But I find I need to learn all the patterns, habits, and idiosyncrasies of one market to be competitive. Just like doctors who specialize.
Can you imagine a heart surgeon trying brain surgery, or even doing plastic surgery? It's the same with markets. The more you focus and specialize, the better job you can do competing against the best minds in the commodity world out there. I have some methods I will suggest in later articles to focus and better learn your favorite futures market. This doesn't mean you can't hold long-term positions of other commodities while day trading. You can do both, but for day trading itself, you should focus on only one or two markets.
As I've said before, it's so important to train your brain to intuitively and subconsciously identify likely turning points as they occur. With practice, you will find signals going off in your body. It's different for everyone. Your body will let you know when it's time to put on or take off a commodity trade. But, it takes training and looking at the right indications with a trained mind. More to come in future articles.
First let's talk about a good market for day trading. Next, we'll talk about finding a trading "edge."
The S&P 500 Index futures contract market may be the best futures game around for day-trading. It's liquid and the swings are usually large enough every day to make it worthwhile. The electronic e-mini futures market (the mini S&P 500) is lightning fast for executions that rival or even exceed the floor-trader advantage. However, it would be even better if someday they would make a big "e-maxi" equivalent to the e-mini to help keep the commissions and expenses lower.
After all, five e-minis are equivalent to one present "pit-maxi." But with the pit maxi, the price skids and delay of pit executions can easily add from ½ to a full point at times. This makes paying the extra commissions of five e-minis well worth it in the end. After all, a one-point skid is $250 for a maxi while the extra commissions for five e-minis are a fraction of that.
Price skids in electronic e-mini futures contracts happen sometimes, but are rare and simply due to heavy buying or selling, compared to illiquid "air pockets" that can occur in the pit at times. The day has come where you see big guns doing 500 to 1,500 e-mini lots electronically. It's a beautiful thing.
A look at a simple bar chart of the S&P 500 futures contract can look like Jaws V to the person without a method. What's needed are custom technical indicators and recognized patterns to present this market information to your trained mind. On any time frame, from monthly to one-minute bars, the futures price action can look random and treacherous.
But if it was an easy, trending market all the time, everyone would be rich? or better said, there would be no market because everyone would be trend following - doing the same thing, thus an impossible scenario. There must be occasional trending, chopping, extreme volatility and dullness to keep everyone on their toes. We think we have discovered a "system" (edge) and then the futures market changes.
I think change is the most important concept for a commodity futures trader to accept. As hard as we may work to find and discover the perfect trading method, the market will then change to make it worthless at times. Then it will go through its changes and come back around again and the method will work. It must be this way or else everyone would eventually be using the same trading system or method over time.
Why is it when we check out the latest high-priced commodity futures trading "system" performance listings, every year there are different ones on top, and the previous winners are often at the bottom? This is because rigid optimization does not work. Well, not for long. It's "optimized mush" as one futures trader calls it.
The perfect trading system would be one that continuously changed in sync with the futures market. It's not hard to design a great trend following method or one that cleans house during a choppy market. But there has never been a computer program designed that can anticipate WHEN to toggle on and off the various methods to match the changing market. It's like trying to predict the next tick - up or down? And what happens if the market does a half trend and half chop? Or, what if it goes quiet and then has tremendous spikes cleaning out the stops in a classic "search and destroy" session?
The bottom line is highly optimized commodity futures trading systems are doomed to failure, or break-even results at best. It doesn't matter how elaborate your software is, using fuzzy logic, neural nets or any of these high tech optimization methods; they are doomed to be a wash. A wash! That's what happens when the majority is average. The commissions and spreads take their "rake" just like the casino.
The harsh reality: You need a UNIQUE edge of some kind to pull you above the average commodity trading crowd. And if you don't know what your edge is, then you don't have one. Think about this, because it is important. I'll cover some interesting methods that you can explore in greater detail in future articles.
When talking about trading, I cringe when I hear the word, "system." It reeks of computer optimization - optimized mush, no flexibility. A better term is trading "method." A commodity trading method is something that is less rigid and has general rules that can be bent. We need to know when to bend the rules. This brings a method out of the mediocre class into one that has an edge - a human edge.
The best commodity futures and option traders in the world are usually discretionary types verses strict rule based optimization systems people. There are exceptions. To be a 100% intuitive, method trader is a tough row to hoe, agreed, but allows dynamic change to market conditions in a heartbeat.
So, where do we find our trading edge? Is it in the latest software, book, mentor, webinar, or maybe right here? It can be found everywhere, pieces here, pieces there, but mostly, the edge is within you. Sounds mystical, but it's the truth. You have to spend the time to develop your OWN unique edge that the majority do not have. And yours will change over time.
For example, at one point back in the late 60s and early 70s, few commodity futures traders had use of computers. It was found that even a simple exponential moving average worked well for the smooth trending markets of the era. Moving average commodity traders did well since the markets were trending nicely. As more traders caught on, the successful trending systems began to get diced. You will notice that many of the new and emerging foreign markets start out with smooth trends until they mature and then start the chop cycle as change moves in. It's all part of the never-ending evolutionary commodity trading game and marketplace.
There are some effective, but simple, long-term trending methods out there. Almost any method will work at one time or another. The broadest, loosest trading methods will last the longest, while the most optimized last the shortest time. The famous "Turtles" used a break-out of the 40-day moving average for many years.
They added a filter called "n." Two losers in a row = -2n. Two winners = +2n. A winner and loser = 0n. The more losing trades in a row, the more frustrated the masses and the more likely the next trade will be a winner. That is, if the break-out came three times in a row with a resulting false move and a stop out, (-3n) then the fourth signal will be more probable for success. Sometimes.
The commodity futures markets follow this general rule: They will bless some methods for a while, then turn in a heartbeat and take it all away. A good trader is always watching several methods at one time and will switch to the one currently performing...in a heartbeat!
It's breathtaking to watch a certain trading method working well and then see the market find a way to destroy these same participants in one sharp move. An example is when commodity option traders are writing (selling) options over an extended period of time. They're taking in premiums like fat cats. Happy. Quiet market. The percentages can be upwards of 90% accuracy selling way out-of-the-money futures options in a dull or choppy market. The profits are small, but consistent.
Then the day of reckoning arrives and a move way out of the standard deviation spikes like a lightning bolt. They drag some option writers out by their boots. A well known example was in 1998 when a famous money manager was selling thousands of out-of-the-money S&P 500 puts. The market took a free fall dive. He lost a big chunk of his $100 million+ managed commodity fund in a few days. I remember it well because a partner and I were long an eighty-lot of put options on the other side of his trade. We made the biggest score of our lives. But it had much to do with luck and being there at the right time. It happens at least once to everyone. Heck, just being born is the longest shot going.
Right now I love the S&P 500 futures contract (e-mini) day-trading game. I've traded it actively for the last twelve years. It pays to focus on one or two commodity futures markets and learn it well. This is the key to getting an edge when day-trading. Some day-traders can spread themselves out and apply similar techniques to many commodity markets. God bless them. But I find I need to learn all the patterns, habits, and idiosyncrasies of one market to be competitive. Just like doctors who specialize.
Can you imagine a heart surgeon trying brain surgery, or even doing plastic surgery? It's the same with markets. The more you focus and specialize, the better job you can do competing against the best minds in the commodity world out there. I have some methods I will suggest in later articles to focus and better learn your favorite futures market. This doesn't mean you can't hold long-term positions of other commodities while day trading. You can do both, but for day trading itself, you should focus on only one or two markets.
As I've said before, it's so important to train your brain to intuitively and subconsciously identify likely turning points as they occur. With practice, you will find signals going off in your body. It's different for everyone. Your body will let you know when it's time to put on or take off a commodity trade. But, it takes training and looking at the right indications with a trained mind. More to come in future articles.
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