The Swami Speaketh

I find you odd.

Yes, you.

You never know what kind of post topic is going to push trader's buttons, so to speak. Jules said I was sounding swami like with my previous post. The EIT (exceptional Irish trader) had told me the same thing after he read that post. Ok he actually called me guru like.

I found this all rather offensive as I thought I had just posted a blog stating that I don't want to be your guru.

Maybe I do?

No

I don't.

I thought my point about what market do you trade was important. I still do. I think it's very important. In fact I think it is the most important factor after money management. So I offered what I thought was a very simple way to gauge different markets in order to see if there might be something else out there that you could trade. There may be something better than crude oil, if so let me know. Crude isn't always the best thing to trade as there are many posts on this blog with me whining about the lack of signals on crude oil.

Anyway I thought it was important but I get the feeling that you don't. Maybe I didn't say it right, or maybe I sounded too swami like. If so I apologize.

What if all our plans, technical analysis, indicators, systems, didn't matter? What if the only thing that mattered was a market that will get in a trend and stay there for a while? If that were the case, or at least partially the case then maybe we should take a little time and examine the different products there are to trade. Maybe we should spend more time on that rather than hours of studying whether a 34 EMA is better than a 21 EMA?

You can look at daily or hourly charts with the ATR as a guide to quantify the products range. It doesn't really matter how you measure as long as you apply the same measurement to all the markets you want to look at.

That leads me to another point, the market you want to look at. People seem hesitant to look at something else, they get very attached to their market and they don't want to leave it. I know I am the same way, slow to change.

You don't have to change, just look. Measure a few different markets and if something jumps out at you sim trade it for a while. Yes the power of sim, you don't have to dive into the crude oil pit head first (oops I let that crude bias slip out there) you can sim trade.

Why not?

Since I'm wagging crude's tail today have a look at the chart. I know, I know, you're saying, will he just shut up and post some charts!

Fine, be that way and since I am not your Swamiguru you can just look at the shiny chart and forget everything I said. :)

2 Minute Crude Oil Chart
I took the first two and passed on the last two.

Is it the market or me?

What makes a system perform better some days or weeks than other times? Is it the trader or the market? It can be both but let's assume the trader has his head on straight and is functioning as he should. Maybe I should say she if we are talking about a functional trader. :)

If the trader is on her game then the only other variable is the market. We trade the same system every day but we trade it in market conditions that change every day. The eternal question is, has the market changed so dramatically that my system doesn't work anymore? I think the answer is yes and no. The market may have changed to the point where your system doesn't work as well as it once did, but the market will change again and your system will work again.

What to do?

Risk management rides to the rescue again. Remember we are assuming the trader is following the rules, so the risk management rules should keep you whole until the market returns to "normal".

There is one other thing we can do besides sit on the sidelines. We can trade multiple markets. I am currently trading crude oil, soybeans, and Russell 2000 futures, but I don't trade all of them every day. In June soybeans were the gift that gave every day, in July and August they have been terrible. Crude oil has been moving nicely and the Russell has its moments as well.

How do you tell if your market is moving? Yes I know you look at it. But is there some math we can apply? For me the ATR (average true range) is a nice guide. Below you see 3 daily charts of the markets I trade. You can see that soybeans keep going flat with crude and the Russell in a nicer trend. You can see that now, looking backwards, as always it's a little harder when it’s actually happening or more precisely when the market conditions are actually changing.

I use a 5 period ATR (5 days average true range) to give me a number. If you track that number, or watch the line, you are given an absolute value of how your market is performing in terms of range.

You need to understand what the ATR number means in ticks for your product. As we are trying to take a little meat out of the middle of the market the larger the sandwich, the easier it is to find that middle. If that makes any sense. :)
So for me, the product with the largest range is the best one to day trade.

Try it and see if it has any value for you.

Daily Russell 2000 Chart
Daily Soybean ChartDaily Crude Oil Chart From these charts you see that the Russell's ATR in ticks is 136, soybeans 112, and crude oil at 277.

For my way of thinking and trading, crude is the man.

A Tale of Two Trends

A wise old trader tells all who will listen the key to success in trading is knowing when not to trade. That would suggest another key is knowing when to trade. For me when to trade is when there is a trend with some range. All other time in the market should have you flat.

Today there was not alot of time where you needed to be flat. The day only got better as it went along with 2 huge moves in the afternoon session. The down move was faster than the up move. You can see them nicely on the three minute chart.

How you get in and out of these trends really doesn't matter, the key is to identify when a trend is in place and trade it. Just as the key is to identify when there is no trend in place and stay flat.

Identifying trend is easier said than done as many moves start out looking good only to reverse quickly. I have not mastered this yet but do find multiple time frames and the average true range a good way to identify a trend to trade.

Now We Wait

Daily Crude Oil Chart (click on chart to view)

The daily still looks like it is going to head south again, but I don't swing trade so I don't care.

After we find out if Congress is going to do anything, we still have an American consumer with too much debt and American banks that are not going to be quite as willing to lend money.

Of course once the sub prime mortgage crisis settles down we can start on the credit card crisis.

All in all unless China and India can make up for the reduction in American crude oil demand I think oil is headed lower.

You would think that on a day like yesterday that saw crude oil move $10.00 +, a nice Norwegian, Danish, Swedish, English, Canadian could make some money trading it.

You would think that, but you would be wrong. Yesterday's stats, 1 win, 1 be, 3 losers, for 35 winning ticks / 42 losing ticks = RR .83.

Today's much milder trade had 3 wins, 2 bes, 3 losers, for 108 winning ticks / 38 losing ticks = RR 2.84.

There are times when the trade simply becomes too volatile to trade with your "normal" time frame. The best chart to trade yesterday would have been the 15 minute chart. At least I recognized that my time frame was not working and quit trading early.

Today's more "normal" price action fits my trade template. One indicator you can use to recognize this is the Average True Range. I keep a 3 minute chart up with a 10 period ATR on for this purpose. You can also see it in the DOM, if price action is jumping all over the place you are either going to have to change your trade parameters or stay out of the market.

Today's trades

Wild Trading

The crude oil market was always considered to be volatile, so this market would have to be called something else.

Wild is one description. As I stated in an earlier post you either have to raise your stops or stop trading until this market cools down.

My measure of volatility is the daily 5 period average true range and it is currently running is dollars terms at $6,370.00. That is the largest range I have ever seen in crude oil.

Of course that ATR number has the Friday $10,000 plus range in it, but still this range / volatility is huge and should not be ignored by traders as it changes the whole market place you trade in.

If you did not know what product you were trading and had not been in the market for the past 2 weeks you would not believe that this was the same product you were trading 2 weeks ago. 14 days ago the 5 day CL ATR was $3,930.00.

So with that in mind if your trading is not working, it is not working for a reason.

The market has changed.

So what do you do?

One other method that can stand beside raising your stops is increasing the format in which you view the market. If you normally trade a 144 tick chart move up to a 233tick chart, if you trade a 3 minute chart move up to a 5 minute, etc.

At the very least keep your eye on a higher time frame market and wait for trend on it before you look at an entry on the shorter time frame chart.

If you don't want to risk dollars in a different time frame try simming it for a while and see how it works.

Remember you don't have to trade, and a day with no live trades is a break even day, which for some may be an improvement on past results.

Crude Oil Range & Liquidity

What to trade, what to trade.

Why do I trade crude oil instead of the Russell, Dow, or S & P futures?

Two words; range and liquidity.

If you look at the bottom of the daily chart posted you see a little number, 4.21. This number is the 5 period (in this case days) average true range of the crude oil contract.

In dollars it means the daily average true range over the past 5 days is $4210.00. You can use 5 days or 10 days or whatever number you want, but I would encourage all traders to take a look at this number on the contract they trade.

If you are only going to capture a limited percentage of a contracts daily range, does it not make sense to try and capture that percentage out of a $4000 range rather than a $2000 range?

Liquidity is the other prerequisite to trade and crude oil has more volume than most equity index futures other than the big daddy, the S & P futures contract.

While the S & P has more volume check out the range and see how it compares.

Oh and the eternal question for crude oil again, how high can it go?

To infinity and beyond.

Trade the plan.

(click on chart for better view)