ZS-TMR : Thirty Minute Rule (Opening Range Play) Analysis : Now it is time for grains!!

My Development as a Commodities Trader: Thirty Minute Rule (Opening Range Play) AnalysisThere may be more meal in Grains TMR - especially in this volatile environment!

Few weeks back I did some preliminary analysis work on past 1 month data on Allan's TMR (Thirty Minute Rule - Opening Range Play) which was mainly based on trading E-Mini S&P500 during the opening range. Since then we are taking TMR trades on ES every day and it seems to generate good results and a profitable outcome. The discussions and results are summarised in the link above.

Taking on from that, I started investigating TMR on grains once I saw another smart fellow trader Quin talking about it. The results were astounding (**** past performance is no guarantee of future results ****) on past data analysis. Soybean has been very volatile lately and my analysis indicated that it would be quite profitable to apply TMR rules to Soybeans and other grains markets.

Traditionally Grains and Commodities, Bonds and Currency markets suit better for breakout plays (breakouts are not always fake-out - reserved for a future post sometime) and therefore it would seem logical that TMR might play better on Grains.

A word of caution here that Soybean has been very volatile lately and therefore the results could be bit exaggerated. However as commented on the original TMR post I have modified strategy which gives best possible Profit objective for 5 pt stop based upon past data. So I believe as volatility reduced, the profit objective will start reducing as well. Also I noted that it

could be best on Soybean markets to leave a runner on with trailing stops OR a fib/ATR based target in line of breakout. So by applying some of the "refinement techniques" the results from ZS-TMR can be enhanced further. I leave those to the individual trader's skills.

Results:

--------

a) Best results were achieved for 12pt Profit Objective 5 Pt Stop resulting in 45.7 pts per month with 43% success rate.

b) For a low pain quick trades, 3/5 generated good returns of 29.5 pts per month (with 81% success rate).

As always, TMR trading is bit boring and requires a lot of discipline. The reported results do not include slippage and commission which will eat into the profits and increase the loss. For

successful TMR strategy the platform should be fast to avoid slippage and commission should be lowest possible.

ZS TMR						Max P&L
Date	Open	30 Min High	30 Min Low	30 Min Range	TMR	5 PT	BEST EXIT
20-May	1182	1189.5	1176	13.5	S	16.00	1,160.00
21-May	1157	1172.75	1155.25	17.5	L	1.00	1,173.75
22-May	1184	1184	1170.75	13.25	S	6.75	1,164.00
26-May	1164	1167.25	1156.25	11	L	20.25	1,187.50
27-May	1195	1199.5	1189.5	10	L	1.25	1,200.75
28-May	1186	1195.5	1184.25	11.25	L	2.00	1,197.50
29-May	1192	1193	1185.75	7.25	S	10.50	1,175.25
01-Jun	1203.5	1219.75	1202.5	17.25	L	7.25	1,227.00
02-Jun	1215	1215	1209	6	S	8.50	1,200.50
04-Jun	1195	1199.75	1193	6.75	L	32.25	1,232.00
05-Jun	1213	1229.25	1211.5	17.75	L	4.50	1,233.75
08-Jun	1221.5	1235	1217	18	L	4.50	1,239.50
09-Jun	1241.5	1245.5	1232.5	13	L	3.50	1,249.00
10-Jun	1243.5	1254	1238.75	15.25	L	1.50	1,255.50
11-Jun	1260	1266.5	1256.75	9.75	L	24.75	1,291.25
12-Jun	1262	1262	1246.5	15.5	L	3.25	1,265.25
15-Jun	1221.5	1228	1213.5	14.5	S	16.50	1,197.00
16-Jun	1217	1219	1206.5	12.5	S	19.00	1,187.50
17-Jun	1197	1201.25	1188	13.25	L	13.75	1,215.00
18-Jun	1207	1213.25	1202	11.25	L	12.75	1,226.00
19-Jun	1219.75	1222	1201.75	20.25	S	26.25	1,175.50

WIN % 5 PT	PO	P&L 20 D 5 PT
24%	17	4.8
33%	16	40.0
33%	15	33.3
33%	14	26.7
38%	13	37.1
43%	12	45.7
43%	11	37.1
48%	10	42.9
48%	9	33.3
52%	8	36.2
57%	7	37.1
62%	6	36.2
62%	5	23.8
71%	4	28.6
81%	3	29.5
86%	2	20.0

Why MacAllan is giving me a headache and squeezing Orange Juice

General Markets

MacAllan* indicator - dedicated to the famous trader Allan who considers MACD as his other child - is a bit devious indicator for entering a position. But it is quite good at pointing out divergences and possibly indicating exit points (or tightening of trailing stops) once it starts showing divergences from the prevailing trends. 

I do not use many indicators in my trading, I mostly look at the price and moving averages but I have started watching MacAllan for some time after discussions on this subject at Oscar's premium room. I see that many a times MacAllan actually signals turning points in a trend. Especially if it is preceded by a H&S pattern in MacAllan with prices making new highs all along (opposite for short). This divergence would mean that prices are ripe for a turn down and if that coincides with my fib based projections or profit targets, I would look to trim or exit altogether leaving a minor runner or a limited risk option/butterfly position.

Since the turning point in March 2009, may markets have rallied without a pause, and that itself is giving me a cause of concern. On top of that now MacAllan is pointing to bit downside on these markets. It has caused me to exit most of my long term positions for the time being and in some markets I am actually reversing trade. Following is a brief review on markets where MacAllan is giving a hangover.

ZSn9 : 

Beans have had quite a run up and now looking exhausted, especially old crop (July) contracts. MacAllan has turned down as well after indicating the divergence. I am looking to actually take short positions in ZS for short term with stops above highs targeting 1102 at the first instance.

ZMn9/Zon9 :

Similar situation as bean but much exaggerated. Better short than beans. 

ES:

One can see H&S completed on ES MacAllan. It has still not turned negative but once it goes negative, it looks like a good short.

HG:

On a longer term perspective, HG MacAllan has formed H&S. It is still positive but once negative, I will look for a significant pullback.

OJ:

Orange Juice is now getting squeezed. I have taken a short position at 91.50 given MacAllan has turned negative after a distorted H&S. I will look for possibly 83 region on that short.

SB:

Sugar did not even make H&S on MacAllan. The run was extended in Sugar and therefore it is quite ripe to fall. I had started building position in 15 Puts and now I am taking outright shorts with stops above the high (16.05). 

KC:

Coffee MacAllan has turned negative but H&S is not formed. I am cautiously short on Coffee as of now via certain option positions. Run to 125 level is possible.

* MacAllan is nothing but our simple MACD indicator but it is more fun to call it MacAllan. It is also of course a famous Scotch whiskey. Try Mac 18 for best pleasure.

General Musings : Markets Review of key levels for position trades : 2009-06-07

My Development as a Commodities Trader: General Musings : Markets Review of key levels for position trades

I have closed or trimmed most of my long term positions at the start of June 2009 as commented on the previous post and I am now sitting on sidelines on most markets looking for new trends or setup to establish new positions. The market seems to be divided between two camps now. Those who got on the turn from March 2009 and now torn between hanging on or getting out and those who missed the whole turn and now waiting for second chance. The breakout from the ranges so far has been on the upside so that seems to be the prevailing trend but there are signs that the bull might be getting tired and may be setting up for a bear ambush. I am watching, safe from my perched up position before deciding on jumping on bulls back or joining the bear attack.

INDICES:

There is no doubt that equity indices have shown a great bounce from March 2009 bottom and in case of Asian Indices (HSI/China H Share/India) the bottom was marked in October 2008. The prevailing trend is still bullish and breakout have been on the long side of the range. That indicates that there is still a further run pending. Therefore I will still trade them from long side. 

HSI:

Based upon fib and Elliot waves, I feel we are possibly in middle leg (wave 3 of wave 3) of the bull move from March 2009 and I see that culminating at 23790 sort of level. HSI is likely to show stronger move compared to US indices given that HongKong dollar is pegged to USD but the economy is pegged to China/Asia. So a small pop in US can be a full blown bubble in HongKong (on the same like a small gust in US turns to a full blown typhoon in HongKong.

Current Position - Small Long

Bias : Add on dips or breakout.

Buy : Breakout of 19000 stop 1500 pt below or pullback to 17000-16000 region

Stop : Below 14000

Target : 23790 with 21300 res.

INDIA NIFTY50:

Indian markets have shot up a lot after the election results and held up strongly on those gains. That is a bullish sign and I am quite certain that India could be the first market to take out its all time high established at the peak of bull market. However in the current level, I am not able to come with a sensible risk/reward setup for entry. 

Current Position - Flat

Bias : Looking to buy small long on dips if other markets are holding up.

CHINA H-Shares:

The Chinese markets are in a short ambush zone and any wobble in world markets can derail current rally. However the fundamental trend looks strong and we should be able to see 14200-14600 if the breakout occurs from current levels. 

Current Position - Flat

Bias : Stay out and watch.

Short Korean Market can be good market neutral hedge if Long other Asian markets.

FTSE:

FTSE's attempts to breach out of 4500 have so far been thwarted by aggressive selling. The MacAllan is also not looking great in FTSE. For bullish trend to continue, 4500 needs to be convincingly breached. I would expect FTSE to see 5240 - 5280 upon breakout. But as of now, I am out.

Current Position: Small long with trailing stop (below 4250)

Bias : Wait for breakout above 4500.

ES:

S&P500 has at least broken to the upside consistently from its ranges and put on a good performance so far. However it is getting closed to ambush short levels and momentum appears to be getting tired. The rally from March 2009 is without a significant pullback and some players would be watching for that before the start of next bull wave.

Current Position - Small long via June 950/1000 Call options.

Bias : Stay out and watch.

NQ:

Of all US indices, Nasdaq 100 appears to be most strong and with strongest trend. I would remain on long side of NQ for sometime. MacAllan is in danger zone for long but still not turned negative so I feel there will be one more leg up, possibly to 1553-1642 level. 

Current Position : Long with trailing stops below 1437 and a large risk free butterfly to protect 1300-1500 range.

Bias : Trail stops to lock profit. Small add long on day trading basis with break even runners to build current position.

GRAINS:

With the fall in dollar since March 2009, commodities have taken off, especially Soybeans. Other grains complex is catching up with this bull move. All grains complex has now crossed 200d MA which is usually a bullish setup.

ZC:

Corn (and Oats) are the laggard of the grains but they are now above their 200d MA which is bullish for them. 

current position : Flat

Bias : Small long on dips. Wait for breakout of 450 for next set of longs.

ZW:

Wheat look a bit extended at current level and I would stay out or look for small time shorts. I will also watch 600 level. Any break below 600 could mean end of current bull run for ZW and possibly opportunity for some shorts.

Current position : Small long with stop (below 600)

Bias : On sideline with view for possible short.

ZS:

Soybeans are quite overbought and also into a medium term short ambush zone. The old crop contracts have shot up as if there is no tomorrow but new crop (nov) contracts are struggling and not participating. 

Current position : long spread (short July/long Nov)

Bias : on sideline and look for possibly short in July contracts.

I view Soymeal (ZM) in the same light. I am long biased on soyoil (ZL)

ENERGY:

The drop in dollar and perceived recovery in world economy has shot oil prices back up and built a sort of enthusiasm in the energy markets. However the current rally does not appear to be demand driven and the inventories are still high in oil markets. 

CL:

If the economies are improving or inflation increasing, the oil market is likely to go much higher. The near term targets are 80 - 90 within sight of current level. However the market can fall equally quickly. I usually play oil market as insurance policies to my other trading positions with very limited risk. If some drastic moves happen I will be happy. Otherwise I will lose my risk premium but would possibly make money on other markets.

Current position : small long via options (Dec'09 Dec '10 100 calls). Also some Dec'09 30/20 puts.

Bias : Long with short holding period (mostly 1 - 2 days)

NG:

Out of the energy complex, NG has been the poor cousin so far for inexplicable reasons. So much so that now every one seems to be talking about it. The chart has started showing important signals which swing traders like and take up long position.

I have a small long position in NG and so far I am looking for a big move up. I will evaluate certain option position or butterfly structures if I find good price.

Current Position : Small long

Bias : Buy dip until lows are supported. Possibly look for option positions in Dec'09 6.5/7.5/8.5 calls with a view to establish a butterfly (long 6.5/8.5 calls short 2x 7.5 calls).

RB:

Gasoline achieved my medium term target and I am out of this market for now. I still see possible move towards 2.11 but as of now I will look for a better entry point.

Current Position : Flat

Bias : Sideline 

CURRENCIES:

Since March, the play has been short dollar and buy every thing else. However start of June saw a shift change in that trade and a possible indication of change coming in other markets.

DX:

USD has moved down to achieve my first target level but it has bounced from a possible double bottom area. I would think that this reversal is for real and we could possibly see a move towards 82/84 region before taking next dip again. I am not overly bullish on USD and would see this up turn to establish some good position in other safer currencies.

Current position : Small runner long.

Bias : Short but wait for pullback to run through until 82/84 region. Day trade on long side during the pullback.

EC:

EUR fell quite hard and on weekly it appears to have topped. It is also in possible short ambush zone and dollar reversal seems to confirm that. I will be cautious on EC longs here and instead look for possible test of 1.37 - 1.33 area before taking next long term position. I do however believe that EC would be ripe for all time highs against DX sometime this year and I will watch for right entry point for that trade.

Current Position : Flat

Bias : Sideline. Watch dollar.

BP:

BP could be one to play the USD strength because the currency rose without much fundamentals and has much to fall in case of dollar strength. Need to watch any breakout below 200d MA. 1.55 - 1.50 area still remain support for the longs.

Current position : Short with risk free butterfly protection on top (1.5-1.65-1.8)

Bias : Trade on day/short term basis on short side. Generally on sideline and watch dollar.

BONDS:

Bonds have broken decisively to downside and this is the most important indication of the time to come. The long interest rates are definitely on the way up and it is generally not bad for markets, in fact inflation could be the cure for the debt burden of western society. However inflation like cholesterol is of two kind. Good and Bad. Good kind raises assets prices, bad kind raises consumer prices. I am not so secure about our governments ability to manage inflation in such a way that only the good kind filters through. And that will be the key for all my long term trades.

ZB: ZBU9

Current Position : Small Short and certain option positions.

Bias : Add shorts on day basis with runners and target 112 - 110 area. Keep tight stops as fed can still surprise the markets.

METALS:

GC:

Dollar rise has brought GOLD down sharply with nearly 2 20$ moves in 3 days. That is extreme. However in the high inflation environment, I prefer to keep gold as insurance policy. A good way to build position in Gold is via long dated options on such dips. I have built position in Dec'09-Dec'10 1500 - 2000 Calls and would add to them over the period for dips towards 920.

Current position : Long via options

Bias : Add on dips towards 940. Stop below 920.

SI:

Silver has been stronger than gold and Gold:Silver ratio has dipped all the way to 62.54. If metals remain in bull markets, this ratio is likely to be squeezed further down as silver is a much smaller market. 

Current position : Flat with Dec 09 risk free butterfly top (16-18-20)

Bias : Buy on pullbacks towards 14.50-14.00

Defence, Stop Loss and Position Sizing

Keeping the emotions out!

Say you have $20 k in your account. And you have a perfect trade strategy or a trading mentor whom you follow. All is going well and you seem to be on the roll. You have had 2 good trades already trading 1 lot and your account is now $22,000. You feel confident. Increase your trading size to 4 lots, waiting to end the week with another 20 pt win and plans to withdraw some cash out for the before the weekend. And now, all of a sudden, the 4 lot trade is going against you on a 15 pt stop. When the trade is down 10 pt, you add 2 more lots as "defence". Market bounces a little, briefly giving you break even on the combined position but you still wait for your profit objective. You feel the trade is finally working out. And then, boom, the next leg down starts and you get stopped out - provided you controlled the urge to move stop further away or remove altogether for that second chance to break even. You end the day with 4 * 15 and 2 * 10 pt loss ($4000 to be precise) and your account is now looking negative for the week! You are frustrated. If the trade which went against you was your own plan, you kick yourself, scream at your spouse or break few crockery. In extreme cases you punch the screen and cause a further $300 damage. If the trade was your trading mentors call, you go out and call him all sorts of names and bash him wherever you can. Basically you throw your toys out of your pram! Sounds Familiar?

Well many inexperienced traders suffer from this. There are several things at play here which determine the success or failure in trading - and it matters at each trade level as a single trade  can wipe you out if you are not careful and disciplined. 

A) Stop Loss Distance : 

The most frequent mistakes trades make is in calculating their stop loss distance. They want to risk $1000 on a trade. They want to trade 4 lots on each trade. So the stop is $1000/50/4 = 5 pt. Now that is rubbish! Markets are volatile and 5 pt is simply a "noise" in the market. You are more likely to end up seeing yourself stopped out and then the trade making off in your direction. 

A trade, however well planned, is still a play on the probability of success. A trade plan is not a guarantee of success nor being on a roll (having few successful streaks) makes the next trade more or less likely to succeed. Therefore each trade should be planned as individual trade with its own risk parameters.

A trader should always keep two stop loss points. 

One - the HARD STOP which has to be in the order book or with your broker. So if your computer breaks down or you are out on a walk and market moves against you, this is the level at which you will DEFINITELY want to get out.

Second - the soft or MENTAL STOP, a level once breached, you start wondering about the success of your trade. May be the market is not acting the way your trade plan asked for. May be something has changed in the analysis or fundamentals of the market. May be you should not worry about reaching your profit objective as per the original plan and instead worry about getting out break even or with minimal loss. 

The HARD STOP should be at least at point where a normal trading day is not expected to trade if your trade plan is right about market direction. In case of day trading, 0.5 - 1 * Average True Range can be a good start. If you are using 50% retracement type trade, the hard stop can be below the bottom of the move whose pullback you are planning to trade. Your mental or soft stop can be at a level of key support or say 61.8% retracement point. For swing trading the hard stop is much wider below key support level. Trader should pay utmost attention to hard stop level as a right stop level can dramatically change the performance of trader. The very tight stop, and chances of getting stopped out increases. A very wide stop and you cannot take sufficient size (see calculating trade size) and therefore reduces your overall profit potential.

B) Trade Size:

The size you trade depends upon your account size (or the capital you are willing to risk per trade) and the HARD STOP level for a given trade. The first question you need to ask yourself is "how much capital I am willing to lose on a single trade?". Usually deploying 2% - 6% of your account per trade is reasonable since the loss suffered by a single failed trade is not sufficient to cause significant damage to your account. As the account size increases you can trade bigger quantities. Remember to decrease the trade size when you are suffering losses. Ideally if your account falls by 25% you should reduce the trade size by 50%.

With a 4% risk level and 15 pt hard stop on S&P 500 futures, the ideal trade size for $20k comes as 20000 * 4% / 50 / 15 ~= 1 lot. That is what you should trade!

C) Defence:

They say - never add to a losing position. Or averaging has killed many traders. And I 100% agree. However, being experienced traders, you know that markets do not move in one direction and there are pullbacks and counter trend moves. Here the so called "defence" comes into play. Assuming that your HARD STOP was at a sensible place where markets were not "expected" to trade on a normal day and your mental stop was a close support level where markets are usually expected to bounce, you can use area around mental stop level to add to your position to defend. Please be clear that when you are defending you are basically giving up your original trade plan to reach your profit objectives and now you are looking out for a break even or small loss exit. You also have to be quick now as the counter trend pullbacks are usually short lived and the next leg down can do further damage to your increased position. 

The size of defence can be same of half the size of your original trade. Remember you are increasing the risk on the trade by defending and keep that risk into consideration while calculating your original position size in the first place.

Also you need to decide if you need to defend or not. Not every trade needs defending!

It is very important to follow a discipline about stop loss level, position sizing and defence to improve your chances of success in trading. You of course need a winning trade plan to start with but remember that you can still mess up if you do not apply further discipline to trading. That is precisely the reason why many traders still fail following the same/similar trade plan which other fellow successful traders are following.

HOME WORKS (JUNE 2009)

General Markets

The HW sharing experiment seems to work successfully. I cannot express how confident I feel about my trading plans when other traders come with similar/same numbers. Also it allows me to relook at my work if others have differing view. So lets do it again in June. 

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Happy trading.

VS