Trend Following Discussion

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Rico
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Trend Following Discussion

I am a student of the style of trading known as "trend following".  In my experience, this is where the outsized trading profits are made.  

While I enjoy the PTC thread, and will continue to participate there, it is devoted almost entirely to day-trading strategies, so I thought I'd start a complementary thread, to satisfy anyone's interest in trend trading.

This is all about price action! Please don't:

1) Post predictions of any kind.  "PM guru" related material is especially irrelevant.  General macro information is fine, in order to give context, but not to make price predictions.

2) Post about scalping/day trading--that's what the PTC is for.  This is for trend following discussions of entry, exit, position sizing, trading systems, etc.

It's possible that no one here (besides me) is interested in this sort of thing, so I'll just start posting thoughts that occur to me on this subject, and see if anyone else cares to join in.  I hope we all learn as much as possible!

Edited by admin on 11/08/2014 - 06:08
Rico
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The markets I trade are SI,

The markets I trade are SI, GC, PL, CL, and NG.  I have tried my hand at various others, like ZC, ZW, CT, the indexes (ES and TF), and I'm willing to look at most anything.  I do not trade currencies, because I just haven't studied how to do it.

For the past while, I have been using a straightforward 7, 21 MA crossover system, to generate signals.  I use it in all timeframes, but the motherlode of trend following lies in the daily/weekly timeframe.  I also place great value on MACD and RSI, where I use a broad 20, 80 as my limits.  I like to feel like I know where the valuation extremes are.  I don't care what the rest of the system says, I will not go long at a RSI>80, or short <20--it has never proven to produce high-probability entry points for me.

Right now, I am long GC, PL and CL futures.  If I like an idea, but for whatever reason, a futures position seems like an excessively risky trade, I will follow it by buying an ETF, or take an option position.  Jesse Livermore's admonition that he has to have his money on the line to engage his full focus is why I do this.  It also buys me MUCH more flexibility in terms of money management.

I am going to post the monthly results of my main trading acct, as the year progresses.

firstsilver
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Good idea

Rico,

I post infrequently on Pailin's thread, but mostly lurk. I do some single-day trading with ZSL and DZZ to hedge my bullion holdings. I don't like holding ZSL or DZZ for very long due to the ridiculous decay.

But I do think the way to invest is neither buy and hold for years nor to try to trade minute-to-minute. I've read several books on trend following and try to employ the philosophy.

Along that line, I am one of those who wonder aloud how low nat gas can go. So far, the answer is lower and lower. UNG, again, is an unacceptable way for me to play it because of the decay, meaning you can be right and still lose money.

I am handicapped in that most of my trading capital sits in IRAs and I am precluded from futures. So, I have been trying to ascertain my best nat gas play and am still looking.

Hopefully this thread will throw off some nuggets that I, as well as others, can use to get in on trends via individual stocks or ETFs.

Good luck with your thread.

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@firstsilver, Welcome to the

@firstsilver,

Welcome to the thread, and thanks for posting.

Re NG, that is indeed one hell of a negative trend, and TF theory would say to keep following it down, as nobody knows where the bottom is.  Personally, I'm too chicken to jump in on the short side here, but it sure will be interesting to follow.

Re your IRA, I think CHK may be getting ready to just collapse (I would say very briefly), so maybe you could target catching a bottom there.  It won't take much signs of life in nattie to send it back to the mid-20s.  I'm certainly looking at that potential set-up.

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RE CHK

I've had my eye on CHK off and on for years. Really liked when CEO kept buying, buying and buying.

Then it all went bad and the company bailed him out -- I believe by buying his art collection or some such ridiculous stunt.

I live in PA and the state is going crazy for Marcellus Shale fracking wells, even though some reports are that companies are losing money on each of them.

If CHK does, indeed collapse, might be time to go shopping.

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Short natty gas explorers is

Short natty gas explorers is the trend right now. That said, I'm a believer in the export LNG trade. That's why I'm always going on and on about LNG (well that and it's the perfect channel trading stock, ride it 7% up and 7% down). Short the CHK's and long the LNG could be a good trade ratio.

Next up: Solars. They've been murdered. I may be too early in this trend, but they will rally again. Oil over 100 gives this sector a boost. I daytrade HSOL.

Last the miners. Yes, they will recover. They might already have. Possibly re-test 480 on the HUI, but then the race is on again.

Hope this site takes off, Rico. Good idea.

donpaulo
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Nat Gas is certainly an

Nat Gas is certainly an interesting market.

What I find interesting is how quickly prevailing in situ nat gas resources can drop to zero eroei with little to no advanced notice which is quite unlike liquid petroleum.

Further the manner in which reserves are calculated are quite varied

Add to this equation is that fertilizer and hydrogen are primarily sourced from Nat Gas

It makes a pyramid of energy complexity in a world with finite energy resources which I find intriguing

My last point is the amazingly high levels of energy required for LNG processing and transportation, not to mention the vast sums of financing needed to construct an LNG facility. For example a 7000 mile LNG transport circuit burns off 15 of the gas just getting to market. Anyone care to speculate on the cost to construct a LNG facility ? I am sure its off the charts.

donpaulo
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donpaulo wrote:Nat Gas is

donpaulo wrote:

Nat Gas is certainly an interesting market.

What I find interesting is how quickly prevailing in situ nat gas resources can drop to zero eroei with little to no advanced notice which is quite unlike liquid petroleum.

Further the manner in which reserves are calculated are quite varied

Add to this equation is that fertilizer and hydrogen are primarily sourced from Nat Gas

It makes a pyramid of energy complexity in a world with finite energy resources which I find intriguing

My last point is the amazingly high levels of energy required for LNG processing and transportation, not to mention the vast sums of financing needed to construct an LNG facility. For example a 7000 mile LNG transport circuit burns off 15 % of the gas just getting to market. Anyone care to speculate on the cost to construct a LNG facility ? I am sure its off the charts.

edit time ran out on me. I forgot to emphasize that 15% of the LNG is burned off in the transport to market

as far as the silver play goes, I am a stacker/hoarder and have no plans to "trade" it in. Well I suppose given the right circumstances I would trade it for some investment property in Tokyo which is a fairly resilient rental market.

Or if the ratio of silver to gold ever comes around to its "true" number of approx 12:1 ... well thats another story.

trends are an interesting topic that I admit I don't follow much so it will be interesting to understand it better

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Average True Range, or R

I mentioned that I will often trade an ETF when I like an idea, but am either unwilling to commit to the intensity of the futures market, or want to add a less volatile adjunct trade to the futures trade (like when I think something is a really good idea).

One such situation developed in the waning days of December, with the last SI beatdown.  I was so worked up, I pulled a "trifecta": futures, ETF (AGQ), and some calls!  The futures and most of the calls are history, but I kept the AGQ, as I wanted to stay exposed to silver, while I concentrated elsewhere.

That AGQ position has done just fine, and I was pondering its status this AM:  how well has it done?  where am I going with this?  That sort of thing.  This led me to think about the concept of R, which many trend traders use.

What is R?  It's the Average True Range.  OK--what's that?  Well, go ahead and Google it, but it was initially developed as a measure of volatility, but it is now most often used as a measurement of trade efficacy.  That is, how is this trade doing?  For example, we've all heard about risk:benefit ratios in trading, with 1:3 often given as a good starting point:  risk 1, to gain 3.  1 what?  Why, 1R, of course.

In the AGQ example, at the entry time, the price was 41-42, and the R was ~2.8 (on the daily chart).  Using the above logic, I would want to exit/tap out if AGQ  went down to 38-39.  Happily, it went the other way, and we are now ~55.  So how successful is the trade, so far?  $13/2.8=4.6R.  That ain't bad.

So where's the exit?  Well, this is about trend trading, so I want as much juice as I can get--gotta have some big winners to pay for all the little losers, so I gots to let this winner run.  A 1R trailing stop would be very common, which means an exit upon returning to ~52 (mental stops, fellas--don't enter them in the market).

Anyhow, that's Average True Range.  This is actually a subtle and complicated trading tool, with limitations, as well as advantages.  Everyone should read Van Tharp's book Trade Your Way to Financial Freedom (which is a bit of a slog, I know...), but which covers this stuff far better than I can.

MisesFan
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Much obliged....

Rico.  Excellent posts.  What tools/How do you recognize a reversal in the trend's direction?

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Donpaulo, The export LNG

Donpaulo,

The export LNG terminals will not be built from scratch; rather,existing LNG import terminals (hard to believe these were ever built) will be/are being converted to export facilities. Cherniere (LNG) is already reconfiguring. In fact, Cheniere is already approved  to export more than 2 billion cubic feet daily from its Sabine Pass LNG terminal in Louisiana--  and that represents about 14 percent of the natural gas produced in the United States (so says the Houston Chronicle).  LNG has the contracts signed. The U.S. needs to think of the frack gas as our tar sands. Export baby. From a trader's perspective, LNG trades in a channel that ping pongs 7% with news (positive and negative) breaking the channel on a regular basis. It's my number one money making trade.

Other big LNG players include BP, Southern Union and Freeport LNG.  Sure there are more (can't remember all the names). Louisiana seems to be ground zero on the export side, but import  terminals now being converted to export are found on the east coast too, (there is a huge one just outside of Baltimore). 

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@Mises, It's really the

@Mises,

It's really the shorter timeframe MA moving back over the longer MA.  This really needs to be on a daily chart (or longer), although I will follow much shorter timeframes in anticipation, and to try to absorb what the price action might be communicating.  The MACD and RSI help confirm.  An even better entry is a crossover, followed by a successful re-test/bounce off the longer MA.

Just remember--if it's a fakeout, get out, and try again!

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Good stuff. I looked up ATR

Good stuff.

I looked up ATR and found a few YT vids that go over it. Nice tool.

Rico - do you put any weight into Fib retracements on a mid/longer term time frame?

And how about bollinger bands?

I'm trying to weed out my trend filters, if you will. I have so much shit on the screen sometimes, I get all confused and my brain hurts. Not sure if I need like 5 or 10 to make the best bet decisions or maybe just 3? Not enough experience to know better, I guess. I used to by a 'buy and hold' "investor" until I finally realized that's a really good way to lose money in casino.

__________________

Got GIABO?

"It's called the American dream, because you have to be asleep to believe it." ~George Carlin

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I think it's all useful, if

I think it's all useful, if it works for you.  I know what you mean about the overload part--that's why I like my general system described above, because there's not too many moving parts.  You just have to play around with stuff.  Try it all, then pare away the stuff you don't need.

Looking at price over multiple timeframes is a huge help for me, for sure.  It gives me more confidence in my decision-making.  Plus, there's stuff I would try to do/incorporate when I was starting that would just confuse and frustrate me, and now I look at it, and it's perfectly clear (most of the time...).

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Hey Rico/My system

I am doing this trading too.  Right now focused on trading gold, silver, S&P, and oil.  I usually use mini contracts.  My current system sounds similar to yours.  I am using MA 5/13 crossovers with MACD and slow stochastics (similar to RSI).  If I get a positive or negative crossover with both slopes UP or DOWN (for a short) and the price is at or over the MA5, I go in.  I set my stop to the previous day's MA 13 (rounded down).  Most of the time this won't stop you out.  

If the daily candle is entirely over the MA5 then I use the MA 5 as the stop.  I notice that candles like that tend to either keep going or if they are doji-type candles they may signal a change.  Finally if I blow past the bollinger bands (I use them too) by 1% I want to take profit, then wait to re-enter either at a lower price using the MA13 stop or at about the ma5 level.  So far been doing ok using this.  

I look at the other signals too as confirmations, such as the slow stochastic going out of oversold/overbought, or being past a BB, to help determine where I want to go.  I also may take some more risk and buy an option on a MACD crossover where I may have a momentum trade.  I can ride out the ups and downs w/the option more so than with the future.

Looking at the various charts this does not appear to be useful for currencies and some of the other commodities.  For currencies mostly have been doing a trade here and there when I get some good ideas from other traders but also using just a trend and 21 day MA/stochastic as a point to get in either long on a pullback or short on a rally.   Right now I just don't know I think the euro has more legs and the dollar is now looking weak, but that could change fast so I don't feel confident in entering that arena.

Also trying to trade some stocks, still trying to come up with something useful.  Right now using Ichimoku cloud (which once I got past the seeming complexity is actually pretty simple) for daily (along with stochastics and the ADX) and for weekly I look at 10 week/30 week moving crossover.

My biggest issue is not being great at seeing these various "formations" - I get the concept, have read up on some, but I have trouble seeing anything like that in the chaos of real prices.

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Natty trend

Was at the Vancouver show today and one of the speakers, who was discussing cycles in resource stocks, was asked where he saw natural gas going.  He prefaced his answer saying he was a trained geologist who was involved in natural gas exploration all over the world and in the last decade the identified gas deposits has gone from 40 years global supply to somewhere around 200 years and large producers, like Chesapeake, were cutting back production and he didnt see the sector doing as nearly well as others moving forward.

http://www.star-telegram.com/2012/01/23/3681339/big-natural-gas-driller-chesapeake.html

Rico and co., the guidance and tips are appreciated. 

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noted

Just noted that a fair bit of the natty discussion was fleshed out over on Pailins trading thread.  However a candid"inside" opinion can be interesting and the whole idea that the glut of natural gas is so great when we apparently have only a 6 month of supply of silver, at current demand, makes the fundamental trend in Ag much more interesting from this angle.

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SSK, I didn't know about

SSK, I didn't know about "retrofitting" thanks for the info

I was getting my info from KBR who broke down the relative costs as follows;

gas treating 9%

fractionation 3%

liquefaction 28%

refrigeration 14%

utilities 20%

offsites (storage, loading, flares) 27%

site prep 1%

source: http://www.kbr.com/Newsroom/Publications/Technical-Papers/LNG-Liquefaction-Not-All-Plants-Are-Created-Equal.pdf

the old fallback wikipedia states "The construction of an LNG plant costs at least USD 1.5 billion per 1 mmtpa capacity, a receiving terminal costs USD 1 billion per 1 bcf/day throughput capacity"

This is also under the false assumption that LNG is a black swan free zone, which clearly as a human endeavor it is not. I think it was Jim Rickards book that mentioned the possibility of a terror attack on an LNG facility and the damage it could do... anyway just more potential costs thrown into the equation.

and all based on rock bottom pricing.

I am enjoying this thread very much. Thanks for starting it

my final point is that if one assumes that NG is in fact a major source of America's future energy "independence" then why in the lords name are we exporting it ? I know that profits can be derived from such an endeavor but when it comes to energy security it would seem to indicate that the US should not develop its abundant reserves for export but rather should import as much NG at rock bottom prices and wait for other sources of NG to run out, the price to rise and then go into the NG export business.

Obviously this would call for decades long vision but I think the profits would be well worth waiting on. Then again this thread is about trends... sorry to jack the thread

SSK wrote:

Donpaulo,

The export LNG terminals will not be built from scratch; rather,existing LNG import terminals (hard to believe these were ever built) will be/are being converted to export facilities. Cherniere (LNG) is already reconfiguring. In fact, Cheniere is already approved  to export more than 2 billion cubic feet daily from its Sabine Pass LNG terminal in Louisiana--  and that represents about 14 percent of the natural gas produced in the United States (so says the Houston Chronicle).  LNG has the contracts signed. The U.S. needs to think of the frack gas as our tar sands. Export baby. From a trader's perspective, LNG trades in a channel that ping pongs 7% with news (positive and negative) breaking the channel on a regular basis. It's my number one money making trade.

Other big LNG players include BP, Southern Union and Freeport LNG.  Sure there are more (can't remember all the names). Louisiana seems to be ground zero on the export side, but import  terminals now being converted to export are found on the east coast too, (there is a huge one just outside of Baltimore). 

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Remember the 1R stop-loss

Remember the 1R stop-loss idea?  Probably just a coincidence, but PL was driven down sharply this AM to its 1R stop-level fom its recent high--then started t0 reverse back up, after a few minutes...

I'm not saying that the above was an example of this, but the Big Boys' Algorithms (BBA) know damn well how speculators trade, and are specifically programmed to separate you from your money.  

It's critically important to remember that commodity markets are a zero-sum game: every dollar won on one side of the trade, means a dollar lost on the other.  When you go long, someone is specifically short that same contract.  This is not true of equities or bonds, where short interest might be 5% at any given time, thus creating bullish skew.

Risk management and position sizing are the game.  Get those right, and the profits will take care of themselves.

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Lousy morning for the metals,

Lousy morning for the metals, but they are not even close to breaking their upward trends, so here I sit...

CL has been a real pitched battle, the last few weeks!  I would love to be hanging out with a big-time oil speculator, and actually see how those guys operate.  My guess is they probably tear their hair out as much as we do.  Oil is not trending, at the moment--I have lost more money trying to trade non-trending markets than any other way, so don't get suckered.  This is where the algos live...

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Trading Unit

A little AM weakness in PMs and oil, shaking up the day-traders...

PM, in descending order of strength: PL>GC>SI.  GC and SI sitting near the short MA, PL above.  Still nowhere near a trend change.

I am re-reading a recent book by Peter Brandt, which is full of excellent (if hard-nosed) information about commodity trading.  One very important concept he discusses is the concept of the Trading Unit.  This is not something you're going to see mentioned on the popular trading/brokerage platforms.

At its heart, the trading unit is a key concept in position size and risk management. In Brandt's system, his trading unit is $100K.  What this means is that he requires $100K of equity in order to trade one contract.  In his view, this is the only way to provide a sufficient "cushion" to provide robust risk management, virtually eliminating risk of ruin, and yet still enables him to achieve very high annual returns on his equity (consistently >30%).

I think one can see that, with this level of rigor, there will be contracts that simply can't be traded (SI comes to mind), and also gives one a much better understanding of the analytical thinking behind margin hikes (and reductions), by the exchanges.

In case one thinks this is just being "too careful", there are many CTAs that require a minimum of $500K to achieve the same ends, so Brandt's system is on the aggressive side.  In commodity trading, you are either careful...or dead.

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