Monday, September 17, 2007

How I am Swing Trading Futures

Natural Gas is my vehicle for taking a stab at swing trading futures.

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I had been monitoring Natural Gas (NGV7) for much of last week, and when it busted out of its mini-resistance level @6.4 earlier this morning, I entered a long position on a pullback.

I went long QGV7 @6.465, and got stopped out @6.43.

So, after that I got a bit frustrated. I stepped back to take a look at what I was doing wrong. I took a look at the chart from different time frames (daily, 60min., 15min.). I think what happened was that I had the right idea to buy on a pullback, but I was using too tight a stop. Natural gas swings around wilder than a gorilla in heat.

I knew Natural Gas was going to make a move sooner or later, so I devised a plan to best prepare for that move.
First I did some research to prepare for the big trade.

Planning and Preparation
I went to the seasonalCharts website to confirm that indeed, Natural Gas is bullish during the months of September. In fact, both Natty Gas and Crude are bullish for all of September.

Then I went to check the daily chart of the Crude Oil to Natty Gas ratio. This ratio just touched the high end of its 1 year range yesterday, so there would be a bias for a reversion back down to the average ratio at around 10.
Then I went back to the daily chart to ascertain support and resistance levels. I noticed that the 50d EMA was sitting at around 6.40, but NG never made it down to that level today !
Another thing that I noticed on the daily chart was the Mirror Image Formation.

So the daily chart was looking encouraging. But what about the hourly chart?

The hourly was looking pretty sweet as well. One thing that I noticed was a double bottom @6.28 that was put in near the end of last week. That just reinforces the uptrend.

So, it is easy to see that there were actually a lot of things working in favour of an run-up in natural gas. The time of year, the daily, and the hourly were all lined up for a run-up. It broke above the 50d EMA, and had a Mirror Image Formation to back it up. I took a second look at the Natty Gas volume chart and noticed a box play formation setting up.
This was starting to look like real sweet, juicy, and compelling low hanging fruit to me. The only question was to plan out how much I was willing to risk in order to let the trade work out.

Trade Psychology
There is a bit of a mind game at work here (inside my head, that is). I have always dreamed about swing trading futures, but never had the courage to do so. Probably I was scared off by the high leverage - a couple of 10pt stop outs and your account will be hurting. And it has been a while since I have swing traded anything, let alone a futures contract. Am I scared? You bet. So that is why I had to do all this research to overcome my own fears. I had to convince myself that this is a good risk-reward scenario, and worth the risk of the wider stops that I would have to employ for swing trading. I tried to imagine getting stopped out on a 10pt stop and tried to imagine how I would feel about that loss. I had to become comfortable with the idea of losing that much money.

Trading Plan
So once I convinced myself of the opportunity, it was just a matter of waiting for a setup. The setup came with a box play pattern that was shaping up. In retrospect, it wasn't really a true box play pattern (since there wasn't at least two distinct rejections the same defined resistance level). But there was also a descending triangle pattern, which kept testing the 6.42 level. Each time, it would find buyers who pushed it back up. I then realized that I could use that level as my stop loss point. Now it was just waiting for an impulse push up. As luck would have it, my impulse push up occurred 5 or 10 min. after I had identified the 6.42 stop loss point. Everything was set, so when I saw the whoosh up, I went to market with a long position. I got a bad fill @6.47, but I did not care, since I was planning to hold this position overnite.

So, I am currently long QGV7, entry @6.47, initial stop @6.42, target = 7.0. I have since raised that stop to 6.54

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