schecter85x asked:


Can someone please explain the basics behind trading a commodity like natural gas? Is it possible to trade natural gas at the current market price that you see day to day or is the only way to trade commodities through futures? and what is the correlation between the current day market value of natural gas and the futures value?

traderjimusc asked:

This video delves into several questions about futures and options from one of our recent Commodity Chats at chat.uschartco.com.

Not all conventional commodity trading folklore is correct. Some is and some isn’t. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling “comfortable” is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations:

“When the e-mini futures price trend matches the A-D line, (advance-decline line) always wait to liquidate a position into a climax with big volume.“
The e-mini futures market has the strongest move (impulse wave) with the main trend. Watching the A-D line bias can usually identify the main trend. The e-mini futures market has a tendency to make higher highs and higher bottoms in this same direction.

The key here is to expect the move to end in fireworks with the same magnitude as the clean-out before. In other words, if a previous move down was slow and sluggish with a single bottom, don’t expect too much for the climax move up. But what if the previous sell off took out a weekly low with a big panic sell off, and formed a triple bottom that took all-day to build? In this case, you have good reason to expect the following up move to end with a bang.

It’s a matter of keeping the context of the move in mind. You can be in a choppy e-mini futures market for a day that goes nowhere, but maybe the previous day had a huge clean-out. So somewhere along the line expect an up move that continues. It’s all about keeping in mind what previous top or bottom the e-mini market is working against and what kind of move it can support.

Always be ready to bail out if your scenario does not work out. But there’s a danger in bailing out too quickly. Looking back at some of my S&P 500 futures trading notes from the mid-90’s makes me laugh. The theme throughout is, “If I only held my original position!” “Stopped out again at the exact low because I moved the stop up too soon.”

“Over-managing” a good trade is a symptom of fear. Some fear is healthy to keep us out of serious trouble. But when an e-mini trade is working out, by moving stops up too quickly, or simply starting out with too close a stop is a big mistake. We think we are smart because we can trade with such close stops and small risks, but this is a false sense of security that massages our ego.

To prove this to myself, I once did an e-mini futures contract computer study on averaging down four times. You would buy every spike that went one full point lower, until you had four lots. Then you liquidated everything if the e-mini went two more points after that. The worst scenario loss was six full points from the start. The win/loss ratio was very high, like in the 80% area. It almost seemed workable until I modeled a few one-way days. Then the method got slammed. If we could side-step those days by using say, a 2:1 or greater A-D line filter, then it might be a workable method.

By the way, the e-mini trading exits were a scale out affair too, similar to the entries. I eventually tossed out the idea after coming to the conclusion that I could not handle the pressure of adding to a loser more than once, plus I thought more highly of my ability to call a turn on the first or second try.

My e-mini futures trading method has evolved to averaging down only once during exceptional set ups and that is it. In fact, if it breaks the second low, the move is probably evolving into a “snuff” and all hell is about to break loose, so why hang around? (“Snuffs” are covered in this series of articles.

Part Two of Five 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.

By: Thomas Cathey

About the Author:

As traders all we really need to know is when a market is going to stop moving in one direction then turn around and head in the other. The rest is noise. I try to concentrate most of my energy on identifying these times. The day trading information presented here is applicable to longer term position trading. Read on to learn what a market requires to make a turn.

Observations From Trading Notes:

“Previous day’s close in upper range.”

When the e-mini futures market is stabilizing and trying to find its legs, a close in the upper range is positive. (daily chart) It must be viewed in context. It can be bullish if it’s coming off a panic bottom. But it can be bearish if a new down leg has just started. Bear markets have a tendency to get slammed in the day and rally back to the midrange at the close. They then gap down and break into new lows the next day. Know the difference and always look at indications in perspective and context. Patterns mean different things depending on where the e-mini market is within its bottom, advance, top or decline cycle.

Observation:

“A clean-out has occurred in the last 2-3 days on the five minute chart. It broke out of its down channel. This includes a double snuff of momentum. After snuff, momentum gets in sync – all on the last day.”

There’s a few indications wrapped into one pattern. A clean-out is always good, especially if the e-mini futures break out of the normal channel range that you use. Channels are channels. Use whatever contains price MOST of the time and breaks out when a panic occurs. A “snuff” is my unique term for when a normal e-mini futures cycle fails to bottom, and breaks down to go twice the distance in time.

For example, lets say the S&P 500 or e-mini futures contract has been running in 30 minute advances and 30-minute declines over the last few days. Timing will never be perfect, but on average, you can see what the e-mini wants to do in normal advances or declines. The traders using optimized momentum often get ****** into these repeating and smooth reversal patterns and suddenly a large, unexpected move takes place.

Instead of the e-mini market declining for its normal 30 minutes and then rallying, it will decline 30 minutes, pause for 10 minutes and then ***** wide open to the downside in a panic liquidation. The cycle will often become a 60-minute total decline to the bottom and break out of its price channel. This is a so-called “reverse energy” move. It catches off-guard the traders who got use to the repetitive cycle.

To look for snuffs all the time is a mistake. They come only about 10% of the time in normal e-mini markets and maybe 40% of the time in strong trending markets. The key is that they pause and then break the previous low made 10 minutes ago or whenever time frame you are using. They work on all time frames from one minute to monthly. Snuffs are the commodity market’s way of hogging time to accommodate the cycle of next larger degree.

You will find that when a daily e-mini move of say, three days down is in progress, the smaller hourly and 15 minute cycles become distorted and stretched out on the downside. I realize everyone has their own pet theory for this, but whatever one you use, be aware the move is fast and sudden, catching momentum-type oscillator traders off guard. You can make a whole day’s pay in a short time if you recognize what is happening.

Be aware that the e-mini futures market can disappoint many traders by breaking through an important support or resistance. It becomes a doubly important indication if a “snuff” gets involved. It’s something like a chess game, but perhaps more like a detective doing a forensics analysis. You look for many different scenarios that could play out from the evidence presented.

Never get stuck with just plan A; have a plan B also. There’s many times when I’ve worked out a scenario based on current indications only to find that it was a fantasy in my mind. I saw things that I wanted to see. My point is that when the e-mini futures market does the opposite of what you expect, be ready for it. Be quick to change your interpretation to plan B.

These plan B trades sometimes become big winners because they catch other e-mini futures traders who thought like me but were already positioned. I like to think of myself as a sophisticated trader but believe the more “sophisticated” you are, the bigger mistakes you are capable of making due to ego. Supposedly, the most sophisticated traders out there are controlling the largest positions, so things can get out of hand quickly and panics occur.

So when you see a big set up take place with huge buying and that later fails, know there are probably some big guns involved that may end up gagging on thousands of contracts. These are the types of panics you want to be riding on the correct side.

Part Five of Five 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.

By: Thomas Cathey

About the Author:

Not all conventional commodity trading folklore is correct. Some is and some isn’t. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling “comfortable” is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations: PART4

“The following e-mini futures action turned into a big chop, then a big rally the next day: After a clean out decline, wait for a series of bottoms with big volume buying activity. Wait for the sell-off to a bottom and sharp rally and then the volume dies. This is the safest place to buy. This was the forth bottom and the previous three bottoms had bearish volume patterns. The forth bottom changed – it had bullish volume patterns and then price rallied to the close.”

It pays to step back and view the e-mini futures market in context. My notes keep repeating it’s a mistake to buy the first panic spike. I’d gotten good at buying spikes and wondered why I always broke even or even lost doing it. Most of the time a huge e-mini futures climax is followed by several tries to test the bottom. It’s easy to get chewed up in these bottom tests since they can last for several hours before a big turn.

The single spike low that holds and supports a big move was popular in the 90’s, but it seems to have been replaced by a series of double, triple and quadruple bottoms. Throughout the bottoming area, you will see a bearish volume pattern until near the end where it turns bullish within the formation. It’s often profitable to stay bearish and continue to sell rallies and cover at the bottom area. In fact, EXPECT big bottoms to be tested.

If you are early buying a bottom, don’t let these tests fake you out. If you are positioning long, expect them and even average in some more as long as the bottom area reasonably holds. The e-mini market may even spike the original low by one-half to a full point, but any more usually means a major break down and you want to be gone.

Remember that “major” e-mini day-trading lows occur only every 3-5 days or longer, so be selective when positioning for them. Personally, I have found big turning point positioning to be a waste of time and money from a day-trading point of view. It often leads to overnight holds and a bad next-day gap surprise. It’s better to let the longer term futures traders beat themselves up and get the occasional rewards. Playing these large, range-bound formations from the short side until they finally end is the best advice.

When the e-mini futures market starts trending, use this larger frame of reference (the recent bottom) to pick up a bias in a certain direction. Then simply buy the dips and exit at the climaxes over and over. After identifying a big turnaround, don’t try to outsmart the market by shorting or reversing your position against the trend.

This is a difficult idea to adhere to, because the e-mini market will always be having minor corrections and try to fool you into believing it’s turned back down. But after the minor correction is done, the market will move to new highs in line with the accumulation that took place in the last couple days.

Part Five of Five 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.

By: Thomas Cathey

About the Author:

As traders all we really need to know is when a market is going to stop moving in one direction then turn around and head in the other. The rest is noise. I try to concentrate most of my energy on identifying these times. The day trading information presented here is applicable to longer term position trading. Read on to learn what a market requires to make a turn.

Observation From Trading Notes:

“Higher lows on the five minute chart.”

This is the obvious and classic rule to define an uptrend. Sometimes in our wish to buy the bottom of an e-mini futures move, we fail to see the market is still making lower tops and lower bottoms. But isn’t that what we want to see? No. We want to be buying a correction within a bigger uptrend. If the one minute bar chart is making lower lows while the five minute chart has already established itself as an uptrend, that’s what we want to see.

The market might continue down after we buy,. but that’s what taking risk is all about. There are few perfect set up outcomes. If we wait long enough for perfection, we will hardly ever trade. And when we do, the e-mini futures market has a way of taking the best set ups and going the other way to take out the followers of this “perfect” technique.

I’m convinced all commodity futures markets are simply live organisms that do whatever they need in rotation to beat up every participant they can. The e-mini futures market has clever tricks to beat up the trend followers, the break-out guys and the counter-trend traders. It will sometimes even take out a few different types of traders at the same time.

Ever see a “search and destroy” move? That’s when the previous high gets spiked, then the previous low gets spiked, then the market goes back into a middle chop. At that point, it’s disappointing no matter what technique you used. Just grin and bear it and keep watching for your next set up. If you survived with a small loss, you were successful. Remember, you don’t have to be perfect to make money – just better than most.

Observation:

“Daily chart is UP. The last 2-3 days was just a correction.”

This is a repeat of the last point. It’s the same basic pattern, but on a larger scale. When looking to go long the e-mini, you want the main trend to be going up, while the minor trend is correcting. A 2-3 day daily bar correction can look devastating on a 15-minute bar chart. That’s why it pays to continually scan all your time frames to put things in perspective and be ready for the big turns. “Don’t wish it to happen – don’t want it to happen – just let it happen.” (quote from the movie, “The Untouchables”)

Observation:

“The bearish advance-decline line has improved throughout the last day. The A-D numbers were better than 1:1 and bullish at day’s end.”

When the A-D line starts out one-sided, but improves throughout the day, add this to the indications that MAYBE a big change of trend is about to take place in the e-mini futures contract. The bigger the price clean-out that has occurred, the more likely its indication is true. There’s nothing like a gap opening and negative A-D line below 3:1, with multi-bottom chopping and the A-D line improving. You may not see the e-mini futures market make its big move up that same day, but if it opens higher and holds firm in a flat price plateau the next day, this is another indication that it wants to rally.

Part Four of Five 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.

By: Thomas Cathey

About the Author:

RLP THE QUEEN OF HEARTS asked:


OBAMA – In June 2005, Obama and Rezko purchased adjoining parcels in Kenwood. The state’s junior senator paid $1.65 million for a Georgian revival mansion, while Rezko paid $625,000 for the adjacent, undeveloped lot. Both closed on their properties on the same day.
Last January, aiming to increase the size of his sideyard, Obama paid Rezko $104,500 for a strip of his land.

HILLARY -On October 11, 1978, the future First Lady, a neophyte investor with an annual income of $25,000, opened a commodity-futures account with a deposit of $1,000. Her first trade was the short sale of ten live-cattle contracts at a price of 57.55 cents a pound: a commitment to deliver in December of that year 400,000 pounds of cattle with a market value of $230,200. One day later, she bought the contracts back at a price of 56.10 cents, just 0.15 cent above the low of the day, pocketing $5,300 for a return of 530 per cent.

Kelvin Y asked:


If a Hong Kong resident setups a BVI to trade commodity futures in NYMEX, what tax does he pay? profit tax?

Theresa asked:


I’m a graduated student about business administration . Now I’m looking for some futures trading courses with commodity seminars and day future trading seminars from renowned professional futures traders.Do U know where teach options trading courses that will give me the trading mindset of being a pro-trader ?

Canuk asked:


If you are a commodity trading organization trading futures and the brokerage needs a margin requirement — how is that accounted for in the financial statements? Is it an expense in the income statement?