There's a danger of having too much stuff on your commodity charts. Too much useless noise is the problem to avoid. Analysis paralysis. It makes me laugh when I see those colored charts in the magazines with five oscillators, four moving averages, Fibonacci and Gann angles like spider webs, price projections, volume indicators, open interest lines, Bollinger bands, disco ducks, dual anchovies and high rise pepperonis. Gads! It’s too much noise. How could I possibly know what to do with all of these conflicting indications?
And yes, like many of you, I’ve spent a lifetime studying and practicing Gann, Elliot Wave theory, Fibonacci techniques, cycles and the like. I even spent money on neural networks trying every input combination known to man. GIGO still rules. It's simply optimized mush in the end. It all looks good until you trade it into the future in a real market.
My rule goes like this: The more optimized the results are, the more likely the odds are about to swing the other way in the future. It’s like optimizing a system to a raging bull market. You squeeze every historic data penny out of it. It’s 100% winners on paper. Then real time trading starts and the market goes into a chop. Now it’s 100% losers. If the trading system had been loosely designed to handle BOTH trending and chops, then the balance would have been better, but STILL a wash over time.
Probability has a way of evening things out over time. Streaks end and go the other way. Losing periods start and then swing the other way. No way to know. Well, enough of that. I’m hoping to save a few new commodity futures traders the time and heartbreak of searching for that elusive trading system and software that does not exist.
Just get yourself an old copy of TradeStation 4.0 [with a security block] for $150, or something that will let you CUSTOM write your own indicators and methods. That’s all you need to compete computer-wise. You need to do things the majority hate to do. You must act differently and think differently from the trading crowd. This is one piece of commodity futures trading folklore that is correct.
The next step is fun and of utmost importance. It's accumulating market patterns. I still do this every day after the futures market closes. You need to set up a 1-minute bar, 5-minute bar and 60-minute bar chart of the E-mini. Use Open-High-Low-Close bar prices. No need for complex stuff like candlesticks, but use them if you feel it gives your brain more info. It’s not critical at all. Have the feed and plotting set for 24-hour futures contract data. You will have your proprietary indicators plotted on the future charts. I will get into these later.
Now, with a second computer word processor or pencil and pad, you type or write down every pattern you see. There are hundreds of general patterns that repeat over and over in the S&P 500 futures contract market. And there are many variations of these. I’m not talking about the common chart price formations, like head and shoulders, triangles and stuff like that. I’m talking about situational set ups. These take time to find and make sense of. These are patterns that have a series of events linked together that forecast a price turning point and a potential sharp move. We are trying to identify specific turning points to minimize risk of entry.
I try to look for futures trades that will last between 30-60 minutes. No scalping for me. As of December 2006, you must get winning futures contract swings of at least three points minimum to cover your expenses and produce a profit overall. Losses should average no more than 1- 1.5 points if possible. If you do your homework, you will find many trades will go your way right from the start. If the market starts to break the low you just bought, be ready to average in once or hit that mouse for an exit, reevaluate and look to enter again at a better price if the set up still holds.
You might average down a very high probability trade once or twice. Otherwise, let it go. There is only ONE situation where you can risk reversing your position to chase the market. I’ve coined it a “snuff.” I’ll write more on snuffs later.
Part Three of Four Parts - Next
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. Get FREE, his complete 44+ lesson, "Thomas Commodity Trading Course" and weekly TimeLine commodity newsletter by visiting: http://www.thomascapitalmanagement.com/commodity/welcome.htm It's brand new and a fun reading "street-wise" e-course. Main site: http://www.ThomasCapitalManagement.com