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
Monday, September 17, 2007
How I am Swing Trading Futures
Tuesday, August 28, 2007
Another Turnaround Tuesday
Summary
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Characteristics of today's trend:
- The biggest pullback was about 5.5pts, making this trend very catch-able.
- Previous day was a gap down reversal of Friday's attempted breakout, resulting in a IDNR7 day yesterday.
- There were 2 low risk entries: the first was in the first 30min. of trading, and the 2nd opp. was just after 11a, when price put in a double top after spending 2 hours in a 4pt range bound consolidation. The double top at 11a was especially interesting as the market was actually attempting to reverse the morning's drop, but failed decisively as volume spiked up on the break below 1453.
- The best part of the trend occurred after 11a.
- The market dropped 13pts in the first 2 hours, then spent the next 2 hrs retracing 38.2% of that drop, double topped and dropped for the rest of the session.
- Trendlines were broken only during the midday 4pt consolidation.
Friday, August 24, 2007
Another Trend Following Friday
Summary
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Probably what enabled this trend day to occur was the fact that there were plenty of sellers to fuel short covering rallies when price broke above various resistance levels.
Notable characteristics of this trend:
- Previous two days were range bound days, ranging between 1456 and 1482.
- The time window of entry without suffering through any retracements in your position was in the first 15minutes of trading. After that, you would have to suffer through retracements of up to 7points if you were long.
- There were 2 low risk entries: the first was in the first 15min. of trading, and the 2nd opp. was just after 915a, when price broke above an ascending triangle pattern.
- The best part of the trend occurred after 1130a.
- There were no noticeable gaps to open the session. The market dropped 4pts in the first 10min of the session, then rallied 8pts to 1472. The break above this opening range confirmed the trend day.
- Trendlines were crossed, but the down moves were never sustained. At certain points (like the 7am reversal), sellers looked like they were going to gain control, but buyers came out of nowhere to perserve the trend.
- If you had bought the open, and sold at the close, you would have made 18pts.
There were two economic reports (Durable Goods @530a, Housing Sales @7a) which may or may not have played a role in today's trend day.
Tuesday, August 14, 2007
Turnaround Tuesday
Deconstructing another trend day....
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The SubPrime Lending Crisis delivers yet another trend day.
Notable characteristics of this trend:
- Previous day was marked by a gap up that faded into the close, but the gap did not fill.
- The time window of entry without suffering through any retracements was in the first 35 minutes of trading. After that, you would have to suffer through retracements of up to 14points if you were short and wanted to catch this trend.
- There was really only 1 low risk entry that would enable you to capture most of this move:
It was in the first 35min. of trading when there was a high volume break below 1455. There was another opportunity that came around 9a, after the price had retraced 55% of the initial first thrust down. You could have shorted the second tag of VWAP and hold for some 20pts into the close. However, you would have to endure many choppy, 5-10pt retracements along the way. There was also a 10pt move downwards available in the last half hour of the session, even though you missed out on most of the trend.
- The best part of the trend occurred between 7a and 805a.
- There was no shortable rally, no double top reversal to mark the start of the trend, as the market sold off right out of the gate. market dropped over 20pts in the first 90min, then spent the next hour retracing 55% of that drop, chopped its way down 7pts for the next 2 hrs, and accelerated the pump and dump for the remainder of the session.
- Trendlines were broken on numerous occasions, making this trend day hard to catch (despite the 30pt drop). In fact, it would be unrealistic and unreasonable to try and hold through a 14pt retrace not knowing that only an additional 6 pts of downside (from 1437) was available for the rest of the session.
Sunday, August 05, 2007
Trend Following Friday?
Taking a look at Friday's action one more time....
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I inquired whether Friday was shaping up to be a trend day. I noted the price level of 1469 because I thought that it was a key price level at the time I was watching the charts and the tape. As it turns out, ES did break above 1469, but what I've learned to be more important now is whether that break above can be sustained. Price moves almost at random sometimes, stops get taken out, shorts cover, etc. so touching a price point is not as significant as sustaining a price area. And, we see the reversal of trend @925a as a the strongest sign that the move above the 1469-70 area could not be sustained. That should have been the sign to look for as confirmation of trend day.
Friday's action must have left some more hedge fund managers spewing blood in the streets. Just when you thought it was safe to go long, we see another cliff dive into the close, trapping more bulls from Wednesday and Thursday.
In 1997, we had the Asian Currency crisis. I think I will call this latest downtrend the "SubPrime Lending Crisis." You heard it here first.
Notable characteristics of this trend:
- Previous two days were marked by massive rallies in the last half hour of trading.
- The time window of entry without suffering through any retracements was in the first 20minutes of trading. After that, you would have to suffer through retracements of up to 12points if you were short.
- There were 2 low risk entries: the first was in the first 20min. of trading, and the 2nd opp. was just after 11a, when price put in a double topp-ish looking lower high after the reversal of trend @925a.
- The best part of the trend occurred after 11a.
- The market dropped 17pts in the first hour, then spent the next 100min. retracing 75% of that drop, double topped and dropped for the rest of the session.
- Trendlines were broken on numerous occasions, making this trend day hard to catch (despite the 40pt drop).
Friday, August 03, 2007
Tracking Trend days
3 Trend days since July 24/07. Going forward, I will be tracking them all here.
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Starting from July 24, The first one was on July 24:
notable characteristics:
- previous day was a (relatively) narrow range, low volume day
- trend duration was just over 3hrs starting from 930a
- no 100% retracements after impulse moves. The biggest retracement was after the first impulse move, which retrace about 75%
- market opened gap down -10. Initial attempt to fill the gap produced a double top failure. Reversal triggered the trend.
- if you had entered short any time before the third hour of trading, you would have to suffer up to a 9 point retrace. The real Trend did not really start in earnest until after the third hour.
To avoid a 9point initial stop, you would have to recognize in real-time the formation of the double topping pattern. There were two low risk entries:
The first was when price reversed the second time at 1543.5, enter at 1541. The second Low risk entry was on the high volume breakdown below support at 1536.
The next one was on July 26:
notable characteristics:
- The biggest retracement was just before the final impulse move. There was a 83% retracement of the middle impulse move.
- 20MA was not broken for more than 2 candles.
- previous day was a high volume, choppy, range bound day
- trend duration was at around 4hrs, and accelerated in the afternoon
- market gapped down -12 to open, and the trend came from a failure of the initial attempt to fill the gap.
- if you had entered short any time before the third hour of trading, you would have to suffer up to a 9.5 point retrace. Trend did not really start in earnest until after 8am (PST).
There were two low risk entries:
The first was to observe the attempted gap fill, and enter on the reversal at 1512.
The second was on the high volume breakdown out of consolidation at 1506.
A borderline trend day on July 30:
notable characteristics:
- if you had entered any time before the first hour of trading was complete, you would have to suffer up to a 12 point retrace. However, if you had entered any time after the second hour of trading, you would only have to sit through a maximum 66% retrace. The moral of the story - it pays to be patient for a trend to clearly establish itself.
- there wasn't anything special that happened in the previous session which indicated even a hint of a trend day.
- market dropped 8pts in the first 10min. but then reversed for an equally impressive recovery. A subsequent test of the LoD reversed and started the trend in earnest.
- the real trend did not occur until after the third hour of trading. After that, the 20MA started trending up for the remainder of the day and was never violated.
- 19pt move over the course of 3.5 hrs.
There were three low risk entries:
The first was the reversal at 641am, enter on the break above 1464.
The second was the reversal after the double bottom was put in at 1461, enter on the break above 1463.
The third and last low risk entry to catch this trend was the break out of consolidation, enter at 1466.
Wednesday, July 25, 2007
Trend Days
Some of my own observations of trend days.
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I have an archive of the eMini S&P500 Futures intraday charts from the past three and a half months. I went back to review the charts to see how many of them were trend days.
Before I share the results of that research, I want to first qualify what makes a trend day. The Market Wizard Linda B. Raschke wrote an article about it. She characterizes trend days as follows:
To that, I would add the following additional characteristics:
- typically, either the 10 or the 20MA has not been breached for more than 2 bars during the life of the trend. At a minimum, it must follow a manually drawn trendline. This is paraphrasing LBR's point about minimal and shallow retracements.
- trends typically take 3 to 6 hours to run its full course, although I have seen nice trends start and finish within 90 minutes. From this we can infer that as the trading session progresses without any signs of a trend, then it becomes more and more unlikely that a trend will develop. The absolute last chance for a trend to develop would be around 2pm EST.
Anyways, my own review of the daily ES charts reveal 26 trend days out of the 86 trading sessions that I have archived. That means a trend day will occur 29% of the time. Just to be real conservative and unbiased, let's throw out the worst 10 of those trend days. Then that will reduce the frequency of trend days down to about 18.6% of the time. Well, guess what, that means on average, a trend day will occur (almost) once per week !!! Yes, believe it or not, a trend day occurs more often than you think. So, the implication of this is that each trading session that occurs with out a significant trend taking place actually increases the odds of trend day happening in the subsequent trading sessions.
So, starting from the acknowledgment that we will never truly be able to predict with 100% accuracy whether today will be a trend day or not, we can still gather pieces of information which will help give us an edge in identifying trend days.
In that same article, LBR outlines some tips to help identify which days will be a trend day. I want to increase the odds even more. Here are some additional things which I think will help me identify a trend day.
- economic reports. Nothing moves the markets better than a better or worse than expected economic report. Sometimes, these economic reports can trigger a trend day, especially reports that are released at the 530am or 7am(EST) times. Some of the more significant ones that are known to move the markets include the CPI, PPI, retail sales, and of course, the Federal interest rate announcements.
- breach of a significant support/resistance level. Breakouts fail as often as they succeed, but the ones that do actually succeed tend to set the tone for the day, and thus more likely to produce a trend day.
Ok, that's what's in my head at the moment, hopefully I can use this knowledge going forward to take advantage of upcoming trend days.
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