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One of the key trading skills we strive to develop is one that generates a consistent and achievable income. In our advanced studies at Safety in the Market we also combine the skill set of analysing potential time periods for a change in trend. These skills take commitment but neither of them necessarily lead to a profitable outcome, especially when the second skill gets in the way of the first.
To illustrate this point, let’s take a look at the Natural Gas futures market. The recent moves provide an interesting insight into trading and/or forecasting. Now let’s be clear: forecasting pressure dates that work is damn hard. And it’s even harder to trade them for a profit. Sometime I wonder if my bias in the forecasting aspect makes my trading more difficult. I guess it did in the early days but these days I am more relaxed about letting the market tell me what’s happening, and not the other way around! I am still firm in my opinions but I am happy to change when prompted by my trading skills.
First, some background on this market to help with the discussion. I 2012 the Ultimate Gann Coaching group I was lucky to work with over 12-weeks helped establish a pressure date for Natural Gas around 27 February, 2013. This date has far too much analysis to list here. Sufficed to say, we liked that area for price, time and time and price reasons.
Chart 1 illustrates the price action around this date. This was a challenge as we were expecting the price action to be somewhat higher and with a more significant top. As you can see, there had been lower highs and higher bottoms distorting any real sense of direction in this market.
Added to this, we had some price balance at 50% of the range - a place that works well when looking at tops. Further, the time in trading days was mostly balanced with 13-up-days followed by 7-up-days, producing a 50% harmony.
Chart 1 – Natural Gas Daily Bar Chart
click chart to enlarge
So we had a set up for a short trade: a big picture date followed by some small pattern harmonies. The signal day on 27 February i.e. an outside reversal day that was also a key reversal is great on pressure dates for signals. So, in my mind, a case for shorts was warranted.
Chart 2 shows the next few trading days. The short trade certainly did not push away as we would have liked. The following day, 28 February (or Day 2) was a down day by the rules but not really convincing. On this day the concern levels started to rise. Day 3 presented an up day and hope of a lower swing top. Patience is so important in entering and holding trades but at this stage you are getting nervous, as the market has not pulled away.
Chart 2 – Natural Gas Daily Bar Chart
click chart to enlarge
Chart 3 shows the next few trading bars. Day 4 starts to signal that the bulls are in the ascendancy and that it may be time to quit the short, or potentially stop and reverse. Here is where you need to show the courage of your convictions as a trader, as we had set our minds for a top. If we stop and reverse, we are not admitting we are wrong (which is ok) but do we have reasons just yet?
For me at that time, this was a ‘no’. I was thinking that if the short positions got stopped out, then we may just be seeing a false break. Potentially having another go at shorting could be on offer.
Day 5 saw the short trade closed at a loss. What to do now? With the low close, there was a case for another short if the market formed a down day on Day 6, which it did.
Day 7 confirmed the break out to the upside as well as a higher swing bottom. In this case a stop and reverse for the short was in order, or a breaking of multiple bar chart highs for a long entry.
Chart 3 – Natural Gas Daily Bar Chart
click chart to enlarge
The rest as they say is history. As we see in Chart 4 the price action spent all last week rallying higher. The long setups would have covered any short losses and be sitting on a tidy profit with the potential for even more upside.
Chart 4 – Natural Gas Daily Bar Chart
click chart to enlarge
There are a number of ‘moving parts’ in this analysis and there could have been another three or four different management styles based on your own psychology and mindset. This was just one.
Forecasting is a great skill in which to invest time, energy and effort. But trading is the key. When it’s time to make money, we have to put our trading hat on, even if this means trusting that our pressure date is good, even though it was a bottom, rather than a top and vice versa.
Good Trading
Aaron Lynch |