Wednesday  3 March 2010

To succeed in trading futures, or any market, one has to have some kind of an edge.  We have stated how
important it is to know the trend and trade with it.  The is the first edge one can have, price momentum.
What happens when there is no price momentum?  Many who trade have a hard time adjusting to non-
trending markets and can get chopped up from swings that turn with little direction, or just after it seems
a direction is under way.

We are showing a selection of charts to demonstrate how markets are trending less and less over the
past several months, and that increases risk exposure.  Anytime you see a market in a trading range, your
level of knowledge is at its lowest level...price can go in either direction, much like tossing a coin.  When
your odds of trading successfully are at 50%, there is no edge.  These charts reflect how price changes as
a trend seems to develop, but goes nowhere, or changes direction.

A lack of an identifiable trend is an anathema for having a higher level of knowledge about price direction,
and it increases risk exposure for less definable results.  The S&P had a labored rally for the last two
months of 2009.  Daily trading ranges were smaller and overlapping in a grind higher.  January appeared
to show a change in trend as price move sharply lower on wider ranges and increased volume.  Yet, there
was no follow-through after the 5 February low. 

Usually, a market will have a counter-trend retest rally, and the early February trading range stayed
within a down trend.  There was a quick, one day rally, and that led to another trading range.  There was
no reason to be long in a down trend, so buying into that rally did not make sense.  The way to trade was
to look for a selling opportunity.  What has been happening is yet another failure to stop in a normal
corrective rally, and instead, price has been holding, working higher.  Right now, price is at the level where
selling entered the market, 21 January, a level or resistance.  The daily trend is now marginally up, but
there was no real transition from down to up.

Another example is the Euro.  This is a 240 minute chart, used by currency traders.  A "pip" is used to
denote a tic move, so 100 pips is the same as 100 tics, or 1 cent.  In a somewhat narrow 350 pip trading
range over the past month, there has been 2,450 pips in price swings, almost 8 times the range.  Try
finding a trend to trade in that kind of environment!

In the currency markets, in general, many of the better moves occurred in overnight trade, and that only
served to increase the risk factor during U.S. trading hours.

The grains have not been any better.  The down trends stopped in February, but price has been range-
bound since mid-January.  It usually takes some sideways trading to develop a base from which to launch
a new trend, and grains appear to be doing that, but there has been no clear movement.  A lack of any
trend direction puts the level of knowledge for trading very low, and offers no edge.

One of the strongest markets has been gold.  The swings have been larger in dollar amounts, but you can
see that there has been no sustainable direction, and price is where is was at the beginning of last
December.  The risks in metals has been greater, dollar-wise, because of the higher metals value, making
the moves from day-to-day very expensive, and often erratic.  No edge there, either.

It is difficult to not trade, as most in the markets want to see activity, and expect it.  We have reduced
our trading as a consequence of this kind of market environment.  It is not a popular position, but when
market positions offer risks equal to, or greater than a perceived reward, it is an invitation to be in an 
environment to consistently lose money.

Markets go through phases.  We are in a such a transitional phase.

Caveat emptor.