How to Trade Commodities Trends

stock exchangeMany commodity traders like to trade commodities instead of stocks. One reason why this is the case is because commodities tend to trend better than stocks. I tested this theory a few times a few years back. I actually tested about 30 different commodities and 300 different stocks and the stocks had much less choppy range bound trading action than the commodities did. I remember that the trends in commodities lasted much longer as well, including gold and financials that could potentially last several years.

How to Define Trending Market

Many traders ask me to help them define a trending commodity future market. There’s a few ways to define a trending market but the best way to do so is to be consistent. If you are going to use moving average indicators than stick to them and if you are going to use 40 day high’s then stick with them. What ever you do be consistent in picking a trending market.

One indicator that I like to use to define trends is the 30 day ADX filter. The average directional filter doesn’t tell you which direction the market is heading but it will tell you when the slope of the trend is fairly strong. If the trend is below 30 I would recommend you stay away from that market but anything over 30 suggests that a market is entering very strong trend conditions.

When applying trend indicators to your favorite commodities futures contracts contracts, I highly recommend you use daily data that’s back adjusted. Many trading systems can be tested with historic data but as long as the data is in fact backwards adjusted to compensate for the difference in the spread prices for different commodity months. Many traders like to use forward adjusted data but I recommend backwards adjusted data because it happens to be a bit more accurate.

There are many websites that help traders learn to trade but one broker called Trade Station  has a trading software that is considered the state of the art program for back testing trading systems and strategies. The only problem is the program is not that easy to use for advanced algorithms, its called easy language but it’s really not all that easy.

If you have programming experience, the program shouldn’t be very hard to learn but if you are a beginner, I recommend you hire someone to program your ideas and be done with it.

Next month I will discuss how to correctly manage risk and pick different money management strategies for your long term trading. Another aspect we need to cover is the ATR filter but we will do that next month as well.

Hope you do well!



Technical Analysis Compared to Fundamental Analysis

Technical techniques and fundamental techniques are the primary analysis methods in the trading world. As I previously discussed technical analysis techniques focuses on market swings and doesn’t take into account the underlying data such as reports and financial picture of the company.

How Do the Analysis Methods Differ?

futures tradingTechnical patterns begin their analysis by looking at chart patterns and fundamental analysts first look at cash flow and other techniques that involve the underlying supply and demand of the market.  Items such as income statements and cash flow helps analysts determine the value of the company. In a traditional sense, if the stock is trading below the price that the analysts conclude the stock should be trading at the price of the stock is considered low and if the analysts conclude that the value of the stock is higher than the underlying market value then the stock is considered too expensive. While this is a rather uncomplicated approach, the idea is to gain a good valuation of the company by looking at the economics of the company.

Traders who rely on technical analysis believe that all market data is already priced into the price of the stock and everything is already expressed by looking at the underlying price action of the stock. Furthermore, many technical traders rely on indicators and others rely on computer algorithms.

All in all, the difference between the two styles of trading is very big and many traders rely on both styles to compliment each other. Some traders rely on fundamental analysis for long term trading or investing while relying on technical analysis for futures tradingwhen markets move substantially quicker than stocks.

I even know many traders who use fundamental analysis as a starting point to get a feel or the overall direction for the market and then use technical analysis as a means to enter and exit the market.

As I previously stated, the two methods compliment each other and many traders tend to use both methods in their stock trading as well as future commodities trading.

There’s a great article about technical analysis compared to fundamental analysis and you can read it by visiting the site.

I hope article clarified some basic differences between technical analysis and fundamental analysis and will lead you to further research and experimenting with both analysis methods.



How to Use the ATR Indicator Correctly

commodity futuresMany traders have difficulty learning how to use the ATR indicator the right way. This tutorial will help you learn the basics of using the ATR indicator to measure volatility so that you know when to raise your stop loss orders and when to be a bit more liberal with your stop loss orders. One of the biggest pitfalls in trading is using stop loss orders that are too close to random market noise.

If you place stops too closely, you will miss out on major market moves that will have to occur for the trader to make up many small profits that will ultimately occur if the trader embarks on long term trend following style of trading.

Many futures and commodity traders rely on the ATR exclusively to help them figure out the risk level as well as the set their stop loss levels accordingly. The steps to take to achieve that goal involve taking a percentage of your equity and dividing it into your risk level. Then you can take the ATR in dollar values and plug that into the formula as well.

Once the positions are completely equal from a perspective of risk, you will be able to have several positions that behave in a similar way without having the same correlation problem that you have with stocks in the market.

Another major consideration is increasing positions and decreasing positions as volatility increases and decreases, remember you have to keep all the positions equally at any given time because we never know which position is going to take off. So the best way to accomplish this is to create a set figure based on your risk and create exposure equal to that for all your positions on a weekly or even daily time frame. Many professional hedge fund managers prefer to change the position size during the trading day so that they are always equal in every possible way.

I hope this provided a bit of clarity for traders who are looking to begin trading mechanical systems and need to figure out ATR levels before doing so. This is one of the most important aspects of trading and I highly recommend you learn as much as possible about following these tactics and techniques.

Good luck and Have a great one



How to Swing Trade for Beginners

Swing Trader and Technical Analysis

trading short termSwing trading is a style of trading financial instruments that locks in short term trading swings in the financial markets. The general period that you would hold the trade would be about 5 to 10 days. Sometimes this number is larger and sometimes this number is smaller but the typical holding time is about 1 to 2 weeks.

Most people who begin swing trading don’t care about fundamentals of companies. You shouldn’t really care much about the different services or products the companies sell. It doesn’t really matter what the name or the price ratio of earnings are or anything like that at all.

The decisions you make while swing trading are not based on fundamental analysis but instead are made using technical analysis.

Many traders get overwhelmed by the different indicators that are available to swing traders. There are chart patterns as well but many traders prefer to use mathematical indicators instead.

I decided to create a short tutorial about basic technical analysis

Technical analysis is the style of trading that analysis price action in attempt to measure the supply and demand of the market based on visual analysis. Many traders use different trading patterns that are created by the market repeatedly over and over again.

There are many different styles of trading within technical analysis. For example some traders prefer to use indicators while other traders stick to chart patterns and others use a combination of both. There are many indicators that traders rely on for technical analysis including oscillators and moving average indicators.

The basis of technical analysis are: Market prices everything in, Markets moves in trends and the past will repeat over and over again.

These three tenants make up the majority of technical analysis.

Also keep in mind that technical analysis can apply to stocks, futures, ETF’s and commodities. But the great fact is that you can apply indicators to different time frames as well.

My advice is to read several good books and visit good sites such as for daily technical analysis updates on different stocks and other stock swing trading strategy and analysis techniques.

If you prefer to trade options or ETF’s then I recommend you check out Market Geeks swing trading site because there’s lot’s of information there about different trading and analysis techniques.

All in all, if you are a swing trader or a day trader and want to learn a great way to analyze market action, technical analysis is the best place to start your learning process.

1. Easier to measure risk and reward per trade

2. Can figure out what other investors are thinking without looking at exhaustive fundamental reports

3. Can get great idea of the history of the stock or other financial market you are trading

4. Reinforce visual analysis and other patterns

I will continue providing updates when I spot some interesting stock swing trader strategies as I see review different courses and techniques available on line about swing trading.

How to Use Options to Increase Trading Profits

how to tradeOne of the most overlooked strategies is the combination of stocks or futures contracts and options to hedge yourself against losses. This technique is very usable for swing trading but many professional traders including hedge fund mangers utilize this technique when applying day-trading strategies and tactics to the markets as well. This strategy has been applied by many professional traders over the last decade. I read an article at this site that offers many such stories about mixing options and futures or stocks together to create strategies that can help hedge or offset.

You can think of this technique as a method of using stop losses but instead of protective stops the options offset the risk if the position moves beyond a certain level.

There was another article I read in Market Wizards book that explained it better than I can but basically if you are holding a stock long you would buy a put and if you are holding a stock short you would buy a call. This a rather simple technique but it works great for any time frame ranging from day trading stocks  to holding positions for over a month at a time. If you want to read an interesting article about this topic you can check out several different sites but I prefer to use Market Watch or CNN for the best options commentary. You can even see who’s trading which type of options and which options has which type of volume as well.

You have to remember that options carry substantial risk of loss, so be careful if you trade options. Don’t sell options because the risk is huge and you can really lose your shirt.

For more information about swing trading and day trading strategies check out this great link.