Commodity Futures Trading – What Is Your Trading Edge? – Part 3

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Finding your very own unique commodity trading edge is a worthwhile goal. Without one you are lost in the masses, struggling to push your head above the sea of expenses. Trading edges do exist, though for short periods of time. Psychological edges are more permanent. You need many. Read on to find how to go about finding yours.

It?s breathtaking to watch a certain trading method working well and then see the market find a way to destroy these same participants in one sharp move. An example is when commodity option traders are writing (selling) options over an extended period of time. They?re taking in premiums like fat cats. Happy. Quiet market. The percentages can be upwards of 90% accuracy selling way out-of-the-money futures options in a dull or choppy market. The profits are small, but consistent.

Then the day of reckoning arrives and a move way out of the standard deviation spikes like a lightning bolt. They drag some option writers out by their boots. A well known example was in 1998 when a famous money manager was selling thousands of out-of-the-money S&P 500 puts. The market took a free fall dive. He lost a big chunk of his $100 million+ managed commodity fund in a few days. I remember it well because a partner and I were long an eighty-lot of put options on the other side of his trade. We made the biggest score of our lives. But it had much to do with luck and being there at the right time. It happens at least once to everyone. Heck, just being born is the longest shot going.

Right now I love the S&P 500 futures contract (e-mini) day-trading game. I?ve traded it actively for the last twelve years. It pays to focus on one or two commodity futures markets and learn it well. This is the key to getting an edge when day-trading. Some day-traders can spread themselves out and apply similar techniques to many commodity markets. God bless them. But I find I need to learn all the patterns, habits, and idiosyncrasies of one market to be competitive. Just like doctors who specialize.

Can you imagine a heart surgeon trying brain surgery, or even doing plastic surgery? It?s the same with markets. The more you focus and specialize, the better job you can do competing against the best minds in the commodity world out there. I have some methods I will suggest in later articles to focus and better learn your favorite futures market. This doesn’t mean you can’t hold long-term positions of other commodities while day trading. You can do both, but for day trading itself, you should focus on only one or two markets.

As I?ve said before, it’s so important to train your brain to intuitively and subconsciously identify likely turning points as they occur. With practice, you will find signals going off in your body. It?s different for everyone. Your body will let you know when it?s time to put on or take off a commodity trade. But, it takes training and looking at the right indications with a trained mind. More to come in future articles.

Good Trading!

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.

Trading Stocks Using The Rsi Indicator

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The RSI (short for Relative Strength Index) is a popular technical indicator with traders and investors because it is quite effective at showing overbought and oversold positions in a particular security. But how effective is it in reality and can it really be relied upon to trade stocks with any accuracy?

Well as with any technical indicator it should not really be used in isolation because it is only one indicator, but on the whole the RSI indicator is quite effective at indicating both overvalued and undervalued stock positions. There are, however, times when it is more effective than others.

For example, from an investment point of view an RSI that is indicating an overbought position, ie over the 70 level, doesn’t really mean too much when a share is strongly trending upwards because it could easily pull back slightly before accelerating even further ahead and becoming even more overbought. However an oversold RSI, ie below 30, on a bullish share that’s trending strongly upwards often acts as an excellent entry point.

Similarly when a stock is trending downwards you should be very careful about oversold RSI signals because just look at the recent market and you will see that prices have dropped substantially despite all the oversold RSI signals we saw on the way down. In a bearish market it’s a better strategy to look for overbought positions in weak stocks that are in a strong downwards trend and take short positions.

Overall I think RSI is a very useful technical indicator in general but it can be rendered useless in the face of a strong trend. If you are looking to catch the bottom of a stock you’re interested in buying that’s in a strong downwards trend, your best bet is probably to consult the longer term weekly or monthly charts. That’s because if the RSI is oversold on these time frames, then it’s a better more reliable signal than an oversold position on the daily charts. It also provides a better entry point for anyone looking to invest in a company for the long-term rather than a few weeks or months.

Of course you should also look at the fundamentals of the company in question as well including the financial accounts and earnings forecasts, PE ratios, etc, because you may find the RSI is oversold because the company is going bust so the price will fall even further. However once you’ve identified a good quality profit-enhancing company, the RSI can provide you with a strong entry point when in oversold territory, particularly if the stock is in an upwards trend.