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Prop Trading Futures

Jan 4 – 2016 – Special Situations 5/5 (1)

MARKETS IN PLAY

Futures, currencies (and, occasionally, stocks) that have completed 10+ week chart formations (Head and Shoulders, Triangles Cup and Handle, Rectangle or Wedges) by means of decisive breakout.

Markets that are in Play are moving toward their measured move target and never had a serious pullback to the price range prior to the breakout.

Within these markets I’m looking the daily charts with the aim to:

  • build a position trade of expected holding period equal three or more weeks;
  • engage in swing trade of expected holding period equal to two or less weeks;
  • build a combination of the two above.

HOW TO APPROACH A MARKET IN PLAY

A market that breaks from a 10+ week long chart pattern gives to traders two edges:

  • A follow through from from the breakout trigger price in the direction indicated by the chart pattern.
  • A follow through of subsequent breakouts from smaller chart patterns in the same direction.

The probability that each single trade plays out in the favour of the trader is 50% and the result of each trade is unknown to the trader (no matter the amount of time and the quality of his or her analysis).

SCAN MARKETS AND PICK SHARES, CONTRACTS AND PAIRS

I do believe that successful discretionary trading has more to do with correctly scan markets and find the right picks than with trade management. Good traders usually come up with much smaller watchlists than novice ones. The latest tend to have too much tolerance for less than ideal setups. Chart analysis is a skill and as such it requires practice and time. A master trader sees things that a good trader cannot see (unless guided). While scanning through markets, is true the adage according to which the less (positions pass the filtering eye of the trader), the better.

CAPITAL ALLOCATION TO EACH SINGLE TRADE

It is at trader’s discretion to assign capital/risk (variable from “zero” to “max risk”) to each single setup. Over the long run this is a key ingredient of discretional trading success.

While systematic trading foresee some fixed money allocation rules, a discretionary trader relay on its intimate knowledge on a given market to determine how and when press “the pedal to the metal” and when be more risk averse.

CURRENCIES – EURO

If we look at the big picture we can clearly see that the EURUSD pair is at a critical juncture. I expect that in 2015 this market will test lower lows. At that point it would be interesting to see how buyers and sellers reacts. Based on charts I do expect a move below 0.900.

CURRENCIES USDBRL

I’m expecting the Brazilian Real to weaken more and more in the year heads. The long term target for its inverse (USDBRL) is above 6.5. A three month continuation Head and Shoulder could launch the next leg up.

COMMODITIES – SUGAR#11

I’m long and looking to leverage the existing position on a move above $16. A move above December highs would completed an Inverse Head and Shoulder bottom with a measured move target above $20.

CURRENCIES – CHINESE YUAN

The long awaited decline of the Chinese Yuan may be just in its early phases. So far chart patterns have been extremely useful to “interpret” the price action and create an operational framework to manage a long position and its risk.

COMMODITIES – ZW

After 3 touches of the lower trendline of a multi-month Descending Triangle, there are high chances that Wheat will break below $450.

CURRENCIES – AUDCAD

There are three patterns that I’m looking at in AUDCAD. The first the downsloping channel that was broken on the upside last December. Since then the rate rallied without hesitation. The second is a Head and Shoulder failure top that could get completed in the next couple of weeks. Then there is the long term price history that has “rotating” within a multi year Rectangle. The second two patterns are still not in play, but they can spur a meaningful rally.

DEVELOPING PATTERNS

These markets are not trending (in the sense that are NOT in “in play”, as per the definition in the previous paragraph). In this category are included all markets that I believe have the potential to start to trend and be “in play” in two weeks or less.

A regularly (in my case, once a weekly basis) review of developing patterns not only allow a trader to be prepared and do not miss eventual breakouts, but will also allow to build anticipatory positions and, finally, to train the eye to the price action.

ANTICIPATORY POSITIONS

Anticipatory positions are build in those markets where simply buy or sell the breakout would not be the best thing to do (either because of the structure of the market – i.e. in case of patterns with sloping trendlines – or because of the size of the position that one wants to build within the limitation allowed by his/her risk management rules).

Trade anticipatory positions means to place a bet in the “chaos” of a directionless market. In 90% of the case I’m against building anticipatory positions because they are based on the wrong assumptions that the trader “knows” in which direction the market will breakout and also when.

USDMXN

USDMXN made a big move in late 2014-early 2015. The measured move target of the launching pattern, a 6 year Triangle, was reached in 2015, but the whole bull move seems not not be over. In early 2016 look for the 4-month continuation Head and Shoulder pattern shown in the second chart below, it could launch a rally of this rate up to a minimum target of 18,000.

FINANCIALS -S&P

I do not see any actionable chart pattern in play (or developing) in any of the major US Stock indexes.

That said, a chart that I’m watching with some interest is the one of the S&P; a chart that provides 2 major insights, one positive and one negative of the index:

  • BULLISH (first chart): The S&P is trading in the lower part of February-July 2015 range; for three times in two months it tried to break below 2039, but in following 1-2 days it was back above it. This is bullish;
  • BEARISH (second chart): There is an open gap at 1951 (a gap that is more clear if we look at the SPY ETF). These gaps – soon or later – tend to be closed. There is a high probability that, at some point in the future, SPY will move down to 195.11 again.

FINANCIALS – EURODOLLAR GE7

Watch for a break below 98.18/GE7 for an early sign the a bull market in interest rates (bear market in bonds and Eurodollar) is started.

FINANCIALS – 5 YEAR NOTES

This market has gone nowhere for the past 1.5 year and could be near to resume the downtrend. Watch for the completion of the Rectangle by a close below $118.

COMMODITIES – GOLD

Difficult action to interpret, but the precious metal is trading near an important trendline that could act as a support and support a reversal from these levels. By the way the long term measured move target for gold (long term chart now shown here) is below $1000.

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