Running with the Bulls

As I’ve mentioned in some recent articles, we are focussing more on delivering current trades at all of our seminars and workshops. The trades are found by using a variety of basic scans we have set up, scanning across stocks and futures. By scanning across the hundreds of available markets we can end up with a broadly varying list of trading opportunities. While most clients find it relatively straightforward to get their head around the mechanics of taking a stock trade, a trade on an unfamiliar futures contract can be a very different story.

One of the most popular and anticipated sessions at the Trading Tactics Seminar is the lesson on futures. We look for potential trades on at least one futures contract using current data. At the recent Sydney Trading Tactics Workshop we came across a short trade on the daily chart of the Live Cattle Spot 1 (LC-Spot1) chart. Spot 1 implies that the contract being charted on this ‘continuous’ chart is the contract next in line to expire, the ‘spot’ month.

A part of any ABC traders’ analysis before committing to a trade on the daily chart, is to consider the direction of the weekly trend. When we took a look at the same LC-Spot1 chart using a weekly perspective it immediately became apparent that not only was this short trade against the weekly trend, but against a potential ABC long trade on the weekly chart. With this powerful insight into the direction of the major trend (weekly) we scrapped the idea of considering the short trade on the daily chart and planned to take the long on the weekly chart. I’d feel it a fairly safe bet to say that nobody in the room had ever traded the Live Cattle contract before the seminar. That would be a different story today. We needed to find out a just a few basics about the contract before we were in position to take this trade.

• What exchange is the Live Cattle contract traded through?
• What are the contract months and which contract is the next to expire (Spot 1)?
• What is the minimum point size (tick)?
• What is a tick worth?
• What are the hours for the pit traded session of Live Cattle?
• Can you afford to take this trade and stay within your money management rules?
• Live Cattle is deliverable, so we need to be aware of the contract expiry conditions.

The quickest way to find out the answers to these questions is to phone your broker. Just ensure you have the list of questions already written out and are ready to just fill in the blanks when you call. This should keep the information gathering process down to just a couple of minutes. You will then need to go back and do the final calculations and order preparation. We discovered the Live Cattle contract is traded on the Chicago Mercantile Exchange. The next contract to expiry is June and we had about 4 weeks to go before needing to be out of any open positions, before being liable for 40,000 pounds of Live Cattle per contract! The minimum movement or point size is 0.025 and that has a value of US$10. Armed with this information we can now work out how much risk is associated with taking this trade. This is not the risk associated with taking delivery!

Chart 1 shows the most up to date weekly chart of LC-Spot1. Late last week the market reached the 100% Pressure Point and has abruptly reacted off this level, a clear illustration of the power of Milestones. Entry for this trade occurred at 83.7 (that’s 83.7 US cents per pound). The market powered through the 50% Milestone on the first week and this was a good sign for things to come. The plan was always to take profit at the 100% Milestone (92.35) which was achieved during the week ending June 10.

The profit for this trade was 92.35 – 83.7 = 8.65. With the smallest price movement (tick) 0.025, this was equivalent to 8.65 / 0.025 = 346 ticks. At US$10 per tick the total profit per contract for this trade was US$3,460. The entry limit required for this trade was 33%, but that was fine in this case as our A to B range was expanding.

Until next week......

Noel Campbell