Welcome to the eleventh edition of FutureSource Fast Break "Ask an Expert."
Today's expert is Zachary Oxman. With over five years of experience in the commodities market and as a Senior Account Executive of Wisdom Financial, Inc., Zachary Oxman is dedicated to meeting and exceeding his client's needs. Through the use of mechanical trading systems and technical/fundamental analysis, Zachary provides a complete picture of the markets and how they can work in your personal portfolio. [more] |
Q: Michael in Maryland asks, The Euro future looks uncertain. Where do you see it going in the short term (until the end of 2005) and the long term (through 2006)?
A: I agree that the recent movement in the Euro currency, and in fact all currency markets, should give traders pause. The markets have been extremely choppy, driven by elections, war, natural disasters, increased energy prices and overall global uncertainty. At the beginning of the year, we were discussing how the Euro was at all-time highs and how the US Dollar was due for a huge sell-off. Now, the markets seemingly have reversed course with the dollar moving upwards against the other market major currencies. Since we are systematic traders, I will give you the "mechanical" perspective of the market. Our mid-term trend following systems have been on both sides of the market as it has moved. As early as this week, we have initiated short positions in the Euro, Swiss and Pound. The Dollar Index took a long position, and we are now positioned for a further dollar rally over the next 1-2 months. The long term trend following systems have been in these positions (long dollar, short the other majors) since mid-May, which tells us that the long term trend is pointing to a dollar rally. The intermediate choppiness has put our mid-term systems in and out of a few trades while the long term models have held strong. I would assume that from the outlook given from these systems, you can expect the dollar rally to continue throughout the end of this year at least. Towards December, I recommend that you re-analyze your positions to see if the trend in the market has broken up or is beginning to consolidate. I would than recommend that you either tighten your stops or exit your positions. 2006 is still a long ways out and still too far out for me to call at this point. Between now and 2006, too much can (and probably will) happen. I would recommend, especially with currencies and the recent size of their moves, shorten your focus to the end of the 2005 trading year.
Q: David in Australia asks, What is the best way to chart the money flow for commodities? Can you recommend a web site with suitable money flow signal so that when the large institutional traders move their positions, we as individual investors will know?
A: Great question! There is a report whereby you can track the flow of large traders and speculators alike. It is called the Commitment of Traders report. Here is some background information, and I have a great product that works on the COT that I can recommend from a highly popular and successful system developer.
The first Commitments of Traders (COT) report was published for 13 agricultural commodities as of June 30, 1962. At the time, this report was proclaimed as "another step forward in the policy of providing the public with current and basic data on futures market operations." Those original reports were compiled on an end-of-month basis and were published on the 11th or 12th calendar day of the following month.
Over the years, in a continuous effort to better inform the public about futures markets, the Commodity Futures Trading Commission has improved the COT in several ways. The COT report is published more often-switching to mid-month and month-end in 1990, to every 2 weeks in 1992, and to weekly in 2000. The COT report is released more quickly-moving the publication to the 6th business day after the "as of" date (1990) and then to the 3rd business day after the "as of" date (1992). The report includes more information-adding data on the numbers of traders in each category, a crop-year breakout, and concentration ratios (early 1970s) and data on option positions (1995). The report also is more widely available-moving from a subscription-based mailing list to fee-based electronic access (1993) to being freely available on the Commission's internet website (1995).
The COT reports provide a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The weekly reports for Futures-Only Commitments of Traders and for Futures-and-Options-Combined Commitments of Traders are released every Friday at 3:30 p.m. Eastern time. Reports are available in both a short and long format. The short report shows open interest separately by reportable and non-reportable positions. For reportable positions, additional data are provided for commercial and non-commercial holdings, spreading, changes from the previous report, percents of open interest by category, and numbers of traders. The long report, in addition to the information in the short report, also groups the data by crop year, where appropriate, and shows the concentration of positions held by the largest four and eight traders.
If you are interested in a trading system that works on the COT, contact me and I will send you more information on the model.
Q: Rashmi in Delhi asks, What do you think should be the best trade plan for Silver and Copper now?
A: To answer this question, I would like to spotlight Hartfield Research. Hartfield is one of the top research bureaus in our industry, and their reports are always free to our clients. "With European gold venturing toward 17 year highs and the gold market getting some support off parallel gains in platinum it is clear that the bulls remain in control. From recent price action it would seem like the gold market will continue to be lifted by fund buying and possibly by more outright physical buying. Some suggested that the strong gains in gold on Monday were the result of inflationary expectations off the largest ever single day gain in crude oil prices, but this morning gold has gained another $2.50 an ounce in the face of nearly a $1 decline in crude oil prices. Therefore, gold is trending upward with investors and speculators providing the impetus. With gold only recently pushing up through an estimated 200,000 contract long position, the market is overbought but not yet bought out. Near term support is pegged at $470.2 with close in resistance at $475.
Regarding Silver, a critical longer term down trend channel line in December silver comes in at $7.54 today and with the gold market showing more strength, we have to think that the path of least resistance is still pointing upward. However, given the aggressive pace of the run up off last week's lows, we can't rule out temporary corrections back down to $7.33.
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Word From Our Fast Break Author
Q: Palmmer in Vancouver asks, I trade options in the grains. In the lightly traded contract months such as October and November corn, might one be unable to offset due to lack of liquidity when close to expiry?
A: I would recommend that, if you plan to exercise your options or take delivery of the underlying contract, you stick to trading options that have a traded month behind them. In your example, September or December corn options would be a better choice
Q: John in Chicago asks, Is there any technical indicator to give me an overbought/oversold signal twice a year? I've looked at every momentum related and volume related signal and cannot find such a long term signal.
A: I have always used RSI as a solid indicator of an overbought/oversold condition. Perhaps, for a unique spin, you can use the COT index (find information above) to help you determine the net position in the market. Again, the system that I have does just this, so contact me if you would like more information on it.
Q: Nick in New York asks, I can usually figure out which direction the market is heading. I have a very good execution strategy to get into a trade. My problem and question is; what do you set your stop at or how do you determine your stop loss.
A: Excellent Question! One of our prime focuses here at Wisdom Financial is treating our returns as a bi-product of our risk, or more simply, looking at the risk first and the returns second. All too often, I hear of system investors being sold on the returns of the products and indicators that they are researching. This often leads to disappointment and false hopes of quick returns and instant gratification, where in reality, the returns and risks are much different than expected. Keith Fitschen of Keith's Trading Corner says that "trading is all about pain." Translated, you have to realistically look at the risks of trading systems and futures to get your realistic expectation of returns!
With that said, we use a number of different models for risk control, typically called Money Management. The two simplest ways to manage money is to use a fixed dollar risk level and a fixed fractional risk level. With a fixed dollar risk level, you simply set the specific dollar value that you want to risk on each trade, and when you have a new trade entry, you calculate the difference between your entry price and the stop exit for the position. That will give you the specific risk level that you should use:
Fixed Dollar Risk (FDR):
1.)Entry price - Stop exit price = # of Points At Risk (PAR)
2.)PAR * tick value of the contract = $ risk per trade ($RPT)
3.)If the $RPT is less than the FDR set value, you enter
4.)Always use a single contract
Using Fixed Fractional Risk, you set a specific percentage of the account that you want to place at risk per trade. This will give you the ability to use multiple contracts, and better suits larger account traders.
Fixed Fractional Risk Level (FFR):
1.)Entry price - Stop exit price = # of Points At Risk (PAR)
2.)PAR * tick value of the contract = $ risk per trade ($RPT)
3.)$RPT * FFR % = Contracts Placed (CP)
4.)If CP is less than 1, do not take the trade. If it is more than one, take the trade. I always round down (i.e. a CP of 1.5 is a 1 contract entry)
These are a few basic risk determiners that we use. If you have any other questions or would like to learn more, feel free to contact me. |
About
the Author
With over five years of experience in the commodities market and as a Senior Account Executive of Wisdom Financial, Inc., Zachary Oxman is dedicated to meeting and exceeding his client's needs. Through the use of mechanical trading systems and technical/fundamental analysis, Zachary provides a complete picture of the markets and how they can work in your personal portfolio. As a client of Zachary's, you are part of an elite group that benefits from his dedication to customer service, knowledge of the futures markets, prior experience in the high-technology industry and his exhilarating energy.
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For
Our Fast Break Readers
Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
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Focus on the Technicals in the 4th Quarter.
-Zach Oxman
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