october 2009 - your markets monthly
DESCRIPTION
General magazine cover trading in financial markets, recommendations, technical analysis & trader psychologyTRANSCRIPT
October 2009Volume 1, Edition 11
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In this edition:
• October wrap up - Analysis by Philip Dooley
• How to Trade the Crush Spread - Guest Contributor: Guy Bower
• Introducing Commodity CFDs - available now through the eBridge Trader platform
• Technical Indicator of the Month: Rate of Change (ROC) - by Jason Achjian
• Recommendation Program update - Commodities Basket Recommendations - William Chien's CFDs - Seasonal Spread Trading
05-Nov-09
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Analysis by Philip DooleyOctober wrap up
DOW
After having achieved a fresh high by September 25th as forecast in July, my forecast several days later was that the Dow would exceed that high and I expected a fresh yearly high by November 24th. Despite it falling in recent days, it did push on, recording a fresh high on October 21st. My view is that it will continue to surprise on the upside.
GOLD
As to gold my long term forecast since early March has been that there would be a broad rally over several months up to late December and I highlighted this again in my last article in late August when Gold was trading at $949. Since the low in early April at $865 that broad rally has unfolded and is continuing to do so with current levels around $1090. In a report to my clients in July I placed a proviso on the rally namely that it overcome resistance I expected in October. That resistance came in at $1070 in mid October and in recent days has been broken.
To receive the PCD report written by Philip Dooley send an email request [email protected]
1300 73 66 11
AUSTRALIAN DOLLAR
In my last article I repeated my forecast in July when the Aussie was at 0.7930,that it would be on a fresh yearly high by September 14th. That occurred with the Aussie reaching 0.8670. It has since rallied higher to 0.9330 and subsequently retreated however I expect it on a fresh high by December 18th .
OIL
In a report to clients in mid September I wrote that I was expecting Crude to be on a fresh yearly high by around November 27th provided it stays above support at 67.12 and overcomes resistance expected in mid October. The support at 67.12 was broken but retaken as crude rallied to be on a fresh high of $82.00 by October 21st which has since not been overtaken. I remain with earlier forecast and expect it higher by November 27th as originally forecast.
How to Trade the Crush Spread Guest Contributor: Guy Bower
One offshoot from the extreme volatility that came with the GFC is that many private traders are now looking beyond the simple strategies such as buying shares. While all traders are still looking for healthy returns there is also a greater awareness of risk.
Trading in futures and FX have been placed at the risky end of the scale mostly, if not completely, given the leverage factor. However there are strategies that offer a reduced risk profile while maintaining excellent profit opportunities.
Enter ‘spread trading’. Futures spread trading has been around for a long time, but it is gaining popularity among the smaller traders looking for something new.
A lot has been written on the basic definitions of spread trading, so here we’ll only offer a 10 second definition (below). This article takes things one step further and looks at what is called the soybean ‘crush’ spread.
The 10 Second Definition
Futures spread trading involves the buying and selling of related contracts simultaneously in an effort to profit from a change in the price differential. An intra-commodity spread involves going long in one expiry month and short in another in the same – long December Corn and short March Corn for example. An inter-commodity spread involves going long in one market and short in another: Long Corn and short Wheat for example.
What is the Crush Spread?
Crushing is the process applied to raw soybeans to derive soybean oil and soybean meal. Think of squeezing a hand full of soybeans. What drips out is the oil and what is left in your palm is the meal. A crude example, but you get the idea.
On the CBOT we have the three contracts available: Soybeans, Soybean Meal and Soybean Oil.
Soybeans by themselves do not have a lot of use. Soy meal on the other hand is used as a source of high protein livestock feed. Soy oil has industrial and food uses. It is the difference in usages between these three contracts that creates fluctuations in the spread and hence the trading opportunity.
Most discussions on futures spreads involve two parts or “legs”: a long side and a short side. The crush spread on the other hand involves positions in all three soy contracts. It’s just that little bit more complex, but easy to understand when you break it down.
The crush spread involves buying soybeans and selling its products: oil and meal. Think of this one from the point of view of a processor or ‘crusher’. The crusher will buy physical soybeans, crush them, and then sell the meal and the oil in order to make a profit. The whole idea is the price of the meal and oil will be greater than the price of the raw beans. That’s what is called a profit margin!
The reverse crush spread is just the opposite of the crush spread. It involves buying the products – the meal and oil futures – and selling bean futures
Source: eSignal - www.esignal.com
Contract Price (P)Soybean Meal 307.3 2.2 676.06Soybean Oil 36.55 11 402.05Soybeans 999.00 - -999.00
79.11
Conversion Factor (C) Converted Price (=P*C)
Crush Spread (SM+BO-S)
Larry Williams
Tom Scollon
Daryl Guppy
Calculating the Spread
Calculating the spread price is a little tricky given soybeans are quoted in cents per bushel; meal is in dollars per ton; and oil is in cents per pound. The conventional method is to convert everything into cents per bushel.
The following table shows the process along with conversion factors
Think of the 79.11 cents per bushel as the profit margin for a crusher.
There is no need to go too deeply into this calculation as there is one already done for you. In eSignal, the code is BCX followed by the month & year codes. The December spread therefore is BCX Z9. While this is a futures code, it does not actually trade as a standalone contract. To initiate the spread, you still need to transact in the three contracts.
Ratios
The poor man’s spread is simply a 1:1:1 ratio. A crush spread would therefore involve going long one soybean contract, short one meal contract and short one oil contract. The proper ratio however is 11:9:10. That is 11 soy meal, 9 oil and 10 soybean contracts. The margin discount for this ratio is a significant 90%.
Guy Bower
Catherine Davey
Sari Mustonen-Kirk
Trading the Spread
The laws of supply and demand act to keep this spread within a rough upper and lower limit. At the lower end, if the spread price gets too low, crushers tend to slow production thereby seeing a drop in demand for beans and less supply of the processed products. This supports and/or widens the spread.
At a higher spread price, increased crushing activity means stronger demand for beans and greater supply for meal and oil. This works to narrow the spread. Naturally speculative interest also helps keep the spread within a range.
Overall, this makes for a good market to trade using relatively simple technical analysis. Things such as oscillator divergences at extreme spread values can offer relatively low risk spread trades. The two Stochastic divergences shown are good example
Seasonal Data
There are fundamental differences in the underlying products. That is, the supply and demand factors are different for each soybean, meal and oil. For the fundamental trader, it is essential to understand these differences to understand the spread.
These differences also work to create tradable seasonal variations in the spread. In fact this year’s Nov/Dec crush spread (SX9, SMZ9 and BOZ9) followed the 15yr seasonal pattern very closely. The same can be said for the Nov/Oct spread (SX9, SMV9 and BOV9).
The seasonal influences on the spread does not have the volatility (risk) of the underlying contracts making it a good instrument to trade in longer term positions
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Contributor information:Guy Bower is professional futures, options and spread trader. Guy is the author of two books:
Options: A Complete Guide and Hedging: Simple Strategies
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Energy Metals GrainsUS Crude Gold NY Coffee CornUK Crude Silver NY Cocoa Wheat
Heating Oil US Copper NY Sugar #11 Soybeans
US Gasoline
US Natural Gas
Soft Commodities
Trade Commodity CFDs onlineCommodity CFDs are the new and easy way to trade commodities markets. Now investing in oil,grains, softs, energies, gold and other precious metals is as simple as trading any other CFDproducts. CFD Commodities give traders and investors direct exposure to the underlyingcommodity with the trading features of a CFD.
A simple alternative to Futures tradingInstead of trading on the Futures exchanges – with sometimes prohibitive lot sizes and highcollateral requirements – investors can now access leveraged commodity trading with reducedcollateral through Commodity CFDs. For instance, the lot size of a US Crude Oil CFD is 25barrels, compared to the Futures contract size of 1,000 barrels, which means easier and moreflexible trading.
Benefits of trading Commodity CFDs with StoneBridge· Standard margin is 10%· Smaller lot sizes compared to futures for increased flexibility· Easy-to-understand single-unit pricing· One-click trading of oil, gold, grain and other major commodities· Simple cash settlement in line with the underlying Future· Easy portfolio diversification and new hedging opportunities· No commissions on Commodity CFDs aside from Bid/Ask spreads· Short selling is fully supported.
Access the world's most liguid commodity marketsUp to 20 CFD Commodities will be available online to trade. Each CFD is derived from anunderlying futures contract but does not carry the same name or symbol as the future.
Commodity CFDs – a new investment choiceFor Forex or Equity traders looking for a simple way to diversify their portfolio or seeking newways to hedge their investments, Commodity CFDs offer a new investment opportunity.Commodity CFDs allow powerful, leveraged trading on the Futures market, with lower levels ofcollateral needed. This reduced entry level, combined with lower trade unit sizes, means flexibletrading across the global commodities markets.
AVAILABLE ON ALL PLATFORMSCommodity CFDs will be available through all of StoneBridge’s integrated trading platforms; theweb-based eBridge Trader, the downloadable eBridge Trader and the eBridge MobileTrader,which allows trading on BlackBerry® smartphones, iPhones and other suitable mobile devices.
Commodity CFDs now available on the eBridge Trader platfom contact Jason Achjian to have Commodity CFDs added to your eBridge account
Email Jason Achjian to have commodity CFDs added to your eBridge Trader online trading platform
RATES AND CONDITIONS
COMMODITY CFD LOT SIZES ARE A FRACTION OF THE FUTUR ECommodity CFDs are denominated in smaller lots than the underlying future. For example, theUS Crude CFD is 25 barrels of oil, rather than 1,000 barrels. Each CFD is quoted as 1 unit of theunderlying contract (e.g., 1 barrel), but there will be a minimum trade size.
GREATER LEVERAGECFD margin requirements set at 10% of exposure
NO COMMISSIONS ON COMMODITY CFDsA commission is not charged, but there is a spread included in the price StoneBridge derives foreach CFD. This derivation means that whilst the CFD prices track the underlying future they arenot exactly the same.
COMMODITY CFDs EXPIRE EACH MONTHLike futures, StoneBridge’s Commodity CFDs will expire each month and will be cash settled onthe expiry date of the underlying future. Front month (current contract) and back month (followingcontract) will be offered to enable clients to manually roll positions from one contract to the next.
EXPIRYThe specific expiry date and time for individual Commodity CFDs can be found in the tradingplatforms on either the Trade or Order tickets plus the Instrument Information pages.Trading will cease at the specified time. Clients should pay attention to when the Last Trade Daywill take place as it differs from contract to contract and month to month.Currently we do not support the automatic rolling of positions from one month to the next. Anypositions still open at the close of trading on the Expiry Date will be automatically closed at theclosing price set by StoneBridge and cash settled.
SUPPORTED ORDER TYPESLimit, Market, Stop, Stop Limit and Trailing Stop orders are supported. In addition you are able toplace If-Done and One-Cancels-Other (OCO) orders.
OTHER INFORMATION· StoneBridge will always quote the current expiring month’s contract and the followingcontract for trading. There will always be at least two contracts available per commodity.· Commodity CFDs give clients exposure to the underlying commodity without theconfusion of physical settlement. All Commodity CFDs transactions will be cash settled.· Commodity CFDs are over-the-counter products with a price established by StoneBridge.Commodity CFDs aim to reflect the value of the underlying commodity future, but theactual bid and ask price may differ from the actual future.· Prices shown to clients in the trading platforms reflect the underlying future with theTarget Spread applied. It is important to understand that the spread quoted is inaddition to the spread in the underlying market.· Trading Commodity CFDs will not incur any overnight financing charges. All costs arefactored within the trading spread.· Whilst all Commodity CFDs are priced in single units, often a minimum trade size willapply. However, clients are able to reduce an open position to below the minimum tradesize. Should you be left with such a position then it should be closed via either theAccount Summary or by contacting the trading desk.
Technical Indicator of the MonthBy: Jason Achjian
Rate of Change (ROC)
WhatThe Rate of Change (ROC) indicator is a very simple yet effective momentum oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price n periods ago. It is similar to the momentum indicator in that it directly measures market movement. The advantage of the percentage change calculation is that it is not sensitive to different absolute price levels. We are in fact measuring the percentage change, not the absolute change.
HowRate of Change = ((Price c / Price c-n) * 100) - 100
Price c = close pricePrice c-n = the close price n number of periods prior n = a period specified by the user
WhenThe indicator is an oscillating indicator and can therefore be used as an overbought and oversold type indicator as it peaks. Traders must exercise caution however as a trending market will result in the indicator remaining in an overbought or oversold state for an inordinate amount of time, depending on the direction of the trend. It is therefore suggested that this indicator be used in conjunction with another indicator that will determine if and when the market is actually trending or trading sideways.There are a few ways that traders use this indicator. One is as an overbought/oversold indicator. Another is to use it simple as an indication of change of direction. Yet another is to use the movement through the zero line as a trigger to buy and sell. That is to buy when the indicator moves from below the zero line to above the zero line and sell when the indicator moves from positive to negative.
Matt Kirk
Jason Achjian
Click OK once you’re satisfied with the settings. You will now see the Rate Of Change indicator added to a new pane below your chart.
You can later adjust settings by clicking the ‘ROC’ at the top left of new pane and then clicking on ‘Properties’, you can also delete the indicator from this menu
If there is any feature of eBridge Trader that you’d like covered in next months newsletter please email your request to: [email protected]
How to add this to your Charts in eBridge Trader
Whilst in your workspace viewing a chart, click this symbol at the top of the chart, then >>> Oscillators >>> ROC: Rate Of Change...:
The default fields that appear can be adjusted at this point for this indicator; you can also adjust them later if you wish. You can also adjust colour and the weight of the line:
To open an eBridge Trader account or get further information on adding technical indicators to charts using eBridge Trader please contact Jason Achjian by Email: [email protected] or Phone: 1300-73-66-11.
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William Chien
Philip Dooley
Recommendation Perfomance
Conditions
William Chien: [email protected]
William Chien: CFD Recommendation Service
*Balance is in AUD based on minimum quantities and is net of all commissions. Results are unaudited.Updated COB 30-09-09
Trading Objectives Trader Profile
This program focuses on trading CFDs on ASX shares with a short term view (less than 8 weeks in most cases). William Chien uses technical analysis to zoom in on potentially profitable opportunities and then forwards email recommendations to his distribution list. William is very conservative and will generally do no more than 4 trades in any given month. When conditions are not right William will not trade at all.
Traders with a relatively high risk tolerance and who also want a degree of involvement in their trading decisions would be best suited to this approach. No positions will be entered or exited without prior confirmation from each individual client. If you disagree with Williams view on any particular trade you are under no obligation to enter or exit the position.
If you receive but do not take advantage of 3 cons ecutive trades you will be removed from the email l ist. A minimum starting balance of $20,000 is required for this service.
To register your interest, open an account or reque st further information about this service please contact us: 1300-73-66-11
Please refer to toptraderthinking recommendation discalimer:
http://www.toptraderthinking.com/toptrader/marketnews.asp?id=288&action=viewarticle
Jason Achjian: [email protected]
Pro-Trader - Seasonal Spreads in Futures & Options
Commissions / Conditions
In Brief Trader Profile
Pro-Trader is a recommendation program designed to take advantage of historically high probability seasonal opportunities in a wide range of markets using futures and options spreads. On average, one trade per week is generated and the length of time in each trade is approx. 2-3 weeks. Stop losses are based on closing prices i.e. exits are made the following day if the market closes outside of the stop level.
This program suits those who want to take advantage of opportunities in stock indices, interest rates, currencies and commodities markets. Traders with a relatively high risk tolerance and who also want a degree of involvement in their trading decisions are best suited to this approach. No positions will be entered or exited without prior confirmation from each individual client.
To register your interest, open an account or reque st further information about this service please contact us: 1300-73-66-11
Please refer to toptraderthinking recommendation discalimer:
http://www.toptraderthinking.com/toptrader/marketnews.asp?id=288&action=viewarticle
Recommendation Perfomance
*Last updated COB 30-08-09. Balance is net of commissionsPast performance is no guarantee of future results
The brokerage rate charged is US $15.00 per side of each trade (+GST). If you receive and do not take advantage of 3 consecutive trades you will no longe r receive fully detailed email recommendations. Min imum starting balance of $15,000 is required.
Please contact the Futures dealing desk for further information on recommendation programsPhone: 1300 73 66 11 Email: [email protected]
RECOMMENDATION PROGRAMS – UPDATE
PRO-TRADER (SEASONAL SPREAD TRADING)
MINIMUM ENTRY LEVEL $A20,000
OCTOBER 2007 TO SEPTEMBER 2009
MINIMUM ENTRY LEVEL $A10,000
WILLIAM CHIENS CFD RECOMMENDATIONS
UP 152.12% NET OF COMMISSIONS
JUNE 2008 TO SEPTEMBER 2009
JUNE 2006 TO SEPTEMBER 2009
NOTE: RESULTS ARE UNAUDITED – PLEASE CALL OR EMAIL TO REQUEST SUPPORTING DOCUMENTATION IF YOU ARE CONSIDERING PARTICIPATING IN ANY OF OUR RECOMMENDATION PROGRAMS
COMMODITY BASKET RECOMMENDATIONS (CBR)
MINIMUM ENTRY LEVEL $A15,000 UP 23.56% NET OF COMMISSIONS
UP 61.13% NET OF COMMISSIONS
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