Contango

Contango

 

Hilary Till, Principal
Premia Capital Management, LLC

 

Continuing the discussion of the Hilary Till study, the next interesting tool she mentions is the roll yield embedded in the term structure of futures contracts. In her own words:

In the past, even if spot commodity prices declined, there was an additional way that a commodity investor could have a positive statistical expectation of profit, and that was through the “roll yield” embedded in certain commodity futures contracts.

[...]

By term structure, we mean one should examine the relative price differences of futures contracts across delivery months. When a near-month contract is trading at a premium to more distant contracts, we say that a commodity futures curve is in “backwardation.” Conversely, when a near-month contract is trading at a discount to more distant contracts, we say that the curve is in “contango.”

...Going to the movies

This is a snap shot of Chuck LeBeau's latest little film; and it's related to the recent drop in crude prices. Unfortunately for Amaranth, they did not take to heart this basic lesson in trading...

Click here to watch this nice video.

Happy trading.

Giant footprints

Chuck LeBeau, author of a few trading books and a trader I respect very much, sent this promo video of his MarketClub, which I find quite instructive and entertaining...

He describes step by step his "Great Footprints" trading method; which in essence looks at the quarterly, monthly, weekly and daily charts of a security to confirm its trend.

Here's an example of the method applied to CL0609 crude oil:

The above daily chart shows the last 11 days on an uptrend,

Curl your toes...

...yes, you've got to curl back your toes to relax.

Stress is inextricably intertwined with trading.

Worth a pretty coin: assess your emotions while trading; then, jot down what would happen to your account if you trade a fade of your emotions...

But, that's not what I wanted to comment today. Lately, I've been wakening up with swollen hands; as a matter of fact, the swelling is not subsiding during the day.

As you may well know, trading is quite stressful; even when holding a winning position... Waiting to pull the trigger, risking all those G's, cutting your losses short, and the rest...

I googled this great article from John Carpi at Psychology Today: Stress, it's worse than you think.

As John explains, stress can be quite destructive to your mind and body; a slow killer...

Trend channels

As we previously saw with the channel breakout method, channels are a good source of support and resistance. But channels can also be used when prices are trending.

Channel Breakout

I wanted to share with you guys the channel breakout formation setup I see in GC0604.

First, channels are a natural extension of the high (low) hooks mentioned in our previous post. Think of them this way, the more times a high (low) resistance (support) has been challenged the stronger it becomes, and the harder it is for prices to break away from the channel top (bottom).

Originating from Joe Ross's channel breakout, I've set the following modified simple rules for this setup: 

• There are two conditions to enter a trade:

1) The channel is at least 40 days old, or the breakout will take a 40 day high (low).

2) Buy (sell) on a stop at a price set at a quarter of the height of the channel above (below) the ceiling (bottom) of the channel.

• To exit the trade on a failure:

Sell (buy) on a stop at the opposite band of the channel; bottom (top) when long (short).

For our example, the height of the October – November 2005 GC0604 channel is

$27.5 = $490.1 - $462.6,
then a quarter of the channel is $6.9 = 0.25 * $27.5,
and the stop order is placed at $ 497.0 = $490.1 + $6.9;
and the protective stop at $462.6.

Looking at this present GC0604 chart, we see a similar formation with a ceiling at $579.5 and bottom at $534.5; so we have a potential breakout trade if $590.75 is taken, from

$590.75 = $579.5 + 0.25 * ($579.5 - $534.5);

and a protective stop at $534.5.

(I would consider a $562.0 stop protection; $534.5 is too harsh for my taste…)

We’ll see what unfolds.

I love long legs

It's been a while that I've wanted to talk about legs - the longer they are, the more I like them...

Implicit learning

I wanted to share with you guys Brett N. Steenbarger's article Learning to Trade: The Psychology of Expertise, - it’s definitely a must read.

40 second Boyd

Colonel Boyd of the Air Force was a fighter pilot known for his challenge to fellow airmen. He allowed himself to be placed in a position of tactical disadvantage in an air fight and promised that, within 40 seconds, he would be on his adversary’s tail, ready for the kill. Col. Boyd was never known to have lost this bet, earning him the nickname “Forty Second” Boyd. 

During his career, Col. Boyd developed his approach to airborne combat into a comprehensive philosophy of military strategy.  He described combat decision-making as a function of Observing, Orienting , Deciding, and Acting (OODA).  These processes form loops, with new actions providing fresh observations and requiring renewed efforts at orienting and responding.  The goal of military training, Boyd stressed, is to accelerate OODA loops, becoming more efficient than the enemy. 

Its been a while that I've come to regard trading as a sports activity. It's not enough to know what to do which is hard enough in itself; but, one has to perform impeccably in a very competitive and stressful environment.

And, how can we achieve that?

In a nutshell, submitting ourselves to a harsher and more rigorous drilling of our own trading setups than we would encounter in everyday market situations to build our speed in the OODA process, and to build our confidence too.

A while back, Linda Raschke, Brett Steenbarger and Brace Barber combined their trading, psychology and military training backgrounds to setup a trading workshop based on the grueling military Ranger School.

An interesting article on this subject is found here.

Optimal f

So you've got an idea and you want to know how good it is...