Developing an edge...
- Thread starter mizhael
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Quote from NoDoji:
mizhael, I'm a strong believer in the concept that everything you need to know is reflected in price. As for day trading, fundamentals are meaningless, just follow the trend in your time frame and let price dictate the trades.
But even with swing trading or longer term position trading, the problem with using fundamentals to trade energy futures is the bigger picture is affected by so many different "fundamental" factors that can pull price back and forth in some wide swings: China tightening (reduces demand), oil nations' strife (reduces supply), PIIGS in trouble (reduces demand), US economic reports swinging from good ("make 'em pay!") to bad ("they're cancelling vacations!") and back every few weeks.
I've posted this on ET before: In the past I'd pay attention to news reports and form a bias based on them. The problem is that MY bias isn't what moves price; it's the bias (news interpretation) of the majority of asset managers and serious hedgers that moves price. So I'd see a bearish crude inventory report hit the wire and I'd watch for a short setup. Sometimes I'd sit and watch most of the day's session before a short signal appeared. I'd let 2 full points of up trend pass me by while I waited for price to reflect my bias. As a day trader my job is to trade price and extract as much profit from the price swings as possible. I should've been pocketing a good week's pay off post-inventory moves and I was sitting on the sidelines.
In the past few months I've traded into and through major news reports many times, knowing that price is all that matters. Price reflects what the majority of market participants are doing at any given point in time.
I also ignore Goldman and JPM making their oil calls, because I care more about what their energy trading desks are actually doing, not what they're saying price should do. Last week Goldman said the recent correction in oil was setting up a good buying opportunity, and price commenced to drop more than 6 points from there, closing the week at multi-month lows. I'm glad I didn't sit around only trading to the long side
You are talking about day-trading, of course then it's hard to use fundamentals.
And the fundamentals you mentioned are "macro" which are too hard to trade upon; maybe the "micro" fundamentals such as pipelines, refineries, products will help?
I agree with you that flow info is as important as fundamentals. Nowadays there are no pure prop-traders any more, but those market-making traders do take some risks on their book. But I think the size of these "prop-bets" is small compared to their client flows. Therefore, it's the big client flows that you should monitor.
There are lots of trading shops and energy companies eg Glencore, that are essentially doing the same thing as the banks. And they have less restrictions. Therefore they probably trade bigger size than the banks.
How do you know their flow? I don't know...
Any thoughts?
X2
We have been killing the grain spreads this year, and we don't calculate carrying costs and look at COT reports - we trade price models. The traditional grain traders crucify me for that approach, but one of my clients is 7 for 7 this year on the grains. I used to be a commercial energy trader, and I don't trade off anything but price these days myself. Markets are too efficient these days and information in the 21st century is so broadly disseminated that fundamentals are priced into the market immediately.
I would say it's quite a sure it's a possibility
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MrM;
Just wrote some Rich ''Turtle'' comments on ''edge''
Seek & ye shall find..............................................
I don't know their flow or how to monitor it, but I do know that certain setups in my time frame work again and again. They are trend-following setups and trend reversal signals.
I assume that if traders are willing to pay more or sell for less than the last group of traders comprising a price bar or price range in my time frame, that means algos may well trigger more buying/selling in the direction of the trend.
Look at crude oil today. My time frame is 5-min and I prepare to trade prior to the pit open at 9:00am ET. I look at the "story" leading into the pit open. Price hit new lows (~91.50) in the overnight session, pulled back, moved to retest the lows and found buyers off a higher support level (91.73). Price then closed above the 20-bar EMA, pulled back and found buyers again at a new higher low. Price is printing higher lows and higher highs and has now closed above a slightly rising 20-bar EMA. This is the definition of uptrend in my time frame.
I have no clue what the big energy traders plan to do during the ample liquidity of the pit open, but I don't need that information because everything I need to know is reflected in price and when price is trending up in my time frame I want to find a good price at which to take a long position. There are two ways I like to do this: 1) buy off a pullback to a key level, or 2) buy a demonstration of strength.
If price pulls back to the 20-bar EMA and finds support there, that tells me the trend is very likely intact. I could buy there, too, with a tight stop loss in case that level breaks. This would place me long around 92.30.
Alternatively, I can let the big boys take me along with them via a confirmed entry method. I can place a buy stop above the pre-opening bar high or above the previous resistance level in the move up. These methods would get me long somewhere between 92.50 and 92.56. Most of the time I prefer taking trades that are fully confirmed by the price action. I don't mind paying the extra $ to ride with the big boys because they know how to get things done right
Everything I need to know is reflected in the price action. Support is established at a customary trend-following support zone and a break of the pre-open range means buyers are willing to pay more than a whole bunch of previous buyers before them. This means all these traders believe price is going higher. I have 60-min price bar levels noted and I now watch to see if price tests and takes out, or tests and finds resistance at, each key level.
Price cuts through the first level like butter, breaks the second level by a few ticks and pauses. I move my stop several ticks below that initial target level, which locks in more than my minimum profit on a trade and gives me the opportunity to let a winner run. Price hardly pulls back at all before breaking through the next level. I now move my stop a few ticks below the second key level that was taken out, which locks in twice my minimum profit on a trade. The next pullback isn't quite as shallow, but it doesn't even come within 10 ticks of my stop. The trend is strong and it's on decent volume. Price is telling me what the big boys are doing.
Price then resumes the move up and stops 1 tick shy of the next key level. This is my signal to tighten my stop significantly and I end up taking profit very close to that failure. A deeper pullback is now likely.
So the average run per previous breakout (.20) in pre-market trade was quadrupled on this opening breakout. That's the benefit of trading with the trend at the point in time that the big players join the game.
I had no need for news, analyst opinion, inside information, or anything else, in order to make a very profitable trade.
For day trading, fundamentals are totally useless.
The best "hedge" is often to "realize" as much money as possible in the shortest possible time. Which means scalping like crazy.
The best thing is to use a folio, for diversified chances and "realize" as much as possible. Initially, if some instruments wants to run away against you, suspend temporarily trading it, in case and resume it when the realized is high enough to cover the investment.
Also work with local support and resistances to improve your chances of closing the scalps.
Tom
I believe the answer is 'yes', and I don't think that it necessarily requires you to trade directly on fundamental information.
Your formal (academic) background should give you the ability to develop a hypothesis based on factors such as the macro and micro-economic issues, industry structures such as deliveries etc., and then investigate that hypothesis using techniques such as regression. Subsequently you could build a quantitative model to exploit any biases or tendencies that you've uncovered.
Using this approach, at least if your tests reveal a positive expectancy you can possibly identify the true source of the edge; who is losing the money that you are making (e.g, non-profit seeking players such as commercial hedgers)
I would guess it's more likely that you can trade this approach via spreading, since there appear to be numerous products (contracts) available in the energy sector that represent different stages in production and delivery.
I've neglected the issue of your timeframe, of course. Possibly these sorts of opportunites require a longer trade length that won't be indulged by your prop shop.