Friday, 27 May 2011

Five Fatal Flaws of Trading written by Elliott Wave International

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit - and more importantly, do it consistently. How do they do that?
That's an age-old question. While there is no magic formula, one of Elliott Wave International's senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading? We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy's Trader's Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy's report, How to Use Bar Patterns to Spot Trade Setups, free.

Why Do Traders Lose?
If you've been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn't seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can't seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 - Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won't work over the long run. If you don't have a defined trading methodology, then you don't have a way to know what constitutes a buy or sell signal. Moreover, you can't even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn't matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can't fit it on the back of a business card, it's probably too complicated.

Fatal Flaw No. 2 - Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 - Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it's difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader - 50%, 100%, 200%? Whoa, let's rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them - and achieve them - you will fend off the Hand.

Fatal Flaw No. 4 - Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you're a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it's easy to feel like you're missing the party if you don't trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don't worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you'll miss small."

Fatal Flaw No. 5 - Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn't even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the 'aim small, miss small' movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you're out all together.

Break the Hand's Grip
Trading successfully is not easy. It's hard work ... damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I've outlined, you won't be caught red-handed stealing from your own account.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy's free report, How to Use Bar Patterns to Spot Trade Setups.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting package.

Saturday, 21 May 2011

Gold Prices "Go Nowhere", Silver "Comes to a Standstill", But Asian Bullion Demand "Off The Charts"

Gold Prices broke back above $1500 on Friday morning, adding 0.6% for the week, but barely changed from a fortnight ago, while stocks and commodities also rose.

"Market is dead quiet today," said a Hong Kong bullion dealer on Friday, adding that the Spot Gold price has "basically gone nowhere" this week.

Gold Prices have now traded in a tight range within 2% of $1500 since May 6.

"Silver has [also]come to a standstill," a dealer in Singapore told Reuters. "That's a pity, but allows time for us to focus on gold... I heard there's not much movement in Hong Kong and there isn't gold scrap flowing through there. Basically, the Hong Kong supplies are one-way traffic into China and there's limited selling out."

Chinese demand to Buy Silver is also "off the charts", a senior Tokyo precious metals executive privately told BullionVault on Tuesday.

"Despite the ongoing volatility in the Silver Price, [Indian] investors appear to not only be holding on to their silver but also looking to add to their existing pool of metal, keeping the Indian market in net investment," says Gargi Shah, analyst at precious metals consultants GFMS, in its latest quarterly newsletter.

The SLV iShares Silver ETF – the largest Silver ETF in the US – saw a net outflow of 330 tonnes of Silver Bullion in the week ended Thursday. The SLV's silver stock has dropped 10% since it peaked on April 25.
Silver Prices were heading for a flat close on the week Friday lunchtime in London, at around $35 per ounce.
Away from Asia, the US Federal Reserve has "a considerable way to go" to meet its dual mandate of full employment and price stability, according to William Dudley, president of the Federal Reserve Bank of New York.

The Fed "will exit [its asset purchase program] in a timely way," said Dudley on Thursday, adding that the Fed would "make sure" its asset purchases would not become a source of inflation.

"Substantial policy accommodation continues to be appropriate," reckons Dudley's Fed colleague Charles Evans, president of the Federal Reserve Bank of Chicago.

The first round of quantitative easing, QE1, began at the end of 2008 and saw the Fed buy $1.75 trillion worth of assets, mostly US Treasuries. QE2 – worth $600 billion – began in November last year and is due to end next month.

"I don't see how QE cannot go on in some form [after June] because who's going to be left to buy the Treasury debt if not the Fed. It's hard to believe that the Fed would just shut down," says Leo Larkin, metals equity analyst at Standard & Poor's.

Over in Europe, the yield on Greek 10 Year government bonds hit a record high Friday, at 16.5%, implying investors see Greek bonds as even riskier. The previous peak was 16.3% on April 27.

"The big headline of Greek debt reprofiling is really what defines the whole story," reckons Ioannis Sokos, London-based interest-rate strategist at BNP Paribas. "It's not a matter of if there's a reprofiling. It's a matter of when and how significant it is."

The European Commission this month forecast that Greece's budget deficit will reach 9.5% this year, exceeding the 7.5% target set by the EU as part of the €110 billion Greek bailout.

The bailout "won't remain on track without reinvigoration of structural reforms," Warned Poul Thomsen, the International Monetary Fund's deputy director Europe, on Wednesday.

On Thursday, Greece's Economy and Competitiveness minister Michalis Chrisochoides announced that government would freeze rents for cinemas and theaters, while state-owned hotels will see their rents cut.

Legal disclaimer and risk disclosure 

(c) BullionVault 2008 Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

Trading Sideways Markets

Markets do not need to trend higher or lower to trade if you trade both from the long and short side. Inside day in Crude oil as prices should close down approximately 1.50%. As we said yesterday prices could go either way; a trade below $96 would likely signal lower ground and a trade above the 100 day MA at $101.65 would likely signal higher trade. Natural gas is lower by nearly 5% in the last three sessions ...clients are down on their longs but will stay the course as we do not expect much more downside. Until we get a settlement above the 20 day MA or below the 50 day MA in the indices we would recommend the sidelines. Those levels in the June S&P futures are 1342 and 1320.

Lower low and lower high in the dollar index today as prices appear to be rolling over...our target is 74.00 on this leg. The play would be in our opinion to be long the Euro or Pound. Live cattle traded to a fresh 2011 low...not exactly a bull market. But we feel the 12% slide in recent weeks is far too exaggerated. Clients have started to bet long August and December via futures and options and are currently under water on their trades. Gold remains in no mans land as prices could go either way. The fact that we could not muster a rally with dollar weakness is not a bullish signal. Silver closed above the 100 day MA again today...we have advised light bullish exposure with clients via September bull call spreads in recent sessions. With dollar weakness it appears cocoa is forming a sold base so we advised clients to start gaining long exposure today.

Our suggestion was to purchase out of the money calls or to get long futures and sell at the money calls, both trades were done in September contracts. Sugar was hit today...on a further sell off we would be looking to re-establish longs in October contracts for clients that exited July yesterday. Coffee has lost nearly 15% i the last two weeks as chart damage has been done, do not rule out a trade to the 200 day MA, another 12% lower. Take profits on all longs in agriculture and look to get back in at lower levels. This mainly pertains to traders in new crop corn and soybeans that are carrying profits. Major price swings generally happen at a market that what happened in Treasuries today...time will tell. Some clients are positioned short 10-yr notes, 30-yr bonds and Euro-dollars.

Risk disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Friday, 13 May 2011

Gold Stocks Stuck in Consolidation

Though Gold and Silver were able to make new highs in recent months, the gold stocks (as evidenced by GDX (large caps) and GDXJ (larger juniors) never did. We wrote of their relative weakness and how it was a warning sign for the sector. The shares failed to breakout and have fallen back into their consolidations at a time when the sector tends to consolidate and correct.

Below we show GDX and GDXJ. For each chart we show the 300-day MA and support and resistance points.

We also have a chart from, which tracks the assets in Rydex’ Precious Metals Fund. It is a sentiment indicator.

Note that both the assets in the fund (nominally) and assets relative to other sectors are way below their highs. In fact, they are closer to their lows.

The financial media, day trading types and retail crowd have now forgotten about the sector. Should you? Absolutely not. This is when the real professionals make money and when the average Joe’s struggle.
The typical trader and investor loves to buy strength. There is nothing wrong with that. However, gold stocks are a different animal. There are numerous false breakouts and false breakdowns. For example, GDXJ gave us a false breakout last month. In 2010, GDXJ had a false breakout in May. The best strategy for a volatile sector in a bull market is to use the volatility to your advantage.

Let’s use GDXJ as an example. The market is at $37 with support at $33-$34 and resistance at $39-$40. If you have some patience, you can can buy at $34-$35 and wait for a potential breakout. If the market breaks below $33, you can sell. However, if you wait for a break of $39-$40, then you are already missing out on some upside. Need we mention that a buy at $34-$35 carries less risk because it executes at technical support and likely when sentiment is not positive.

Apply this to your favorite large and junior gold stocks. Identify points of support. If the precious metals follow their typical seasonal pattern, odds are you will have a few chances to nab your favorites at a time when others are panicking and you see articles about a crash or an end to the bull market or, excuse me, the “gold trade.” If this analysis interests you then we invite you to a free 14-day trial to our premium service.

Good Luck

As Good as Gold?

Today's Idea

Although Gold prices have fallen below the $1500 level, the longer-term trend still appears to favor the bull camp. Some traders looking to get long Gold futures may wish to explore buying August mini-Gold futures, which are currently trading at 1497.00 as of this writing. There is chart support at the May 5th low of 1464.10, below which would be an area to explore placing a protective sell-stop. The upside target would be a test of the previous high at 1577.70.


Gold futures have held-up reasonably well during the recent commodity-wide sell-off, with some of this relatively "strong" performance tied to Gold's unique status as not only a "commodity", but also as a currency alternative. This "safe haven" status that Gold currently holds has muted some of the volatility seen in the precious metals sector, especially in Silver, which many traders see as more speculative in nature. The recent rebound in the U.S. Dollar has been a major catalyst in the commodity-wide sell-off, as a stronger Dollar makes the purchase of commodities priced in Dollars more expensive for non-Dollar users. However, the continued concerns over the state of the Euro have kept a "bid" in place for Gold from investors looking for a store of value outside of paper currencies. Some analysts cite the continued tightening efforts by the Chinese government as a potential negative for Gold as the world's most populous nation continues to try to control inflation. However, the Chinese are also in the process of diversifying their huge foreign exchange reserves, and one of the major investments expected is the purchase of Gold. China currently holds just over 1,160 tons of Gold, which makes the country the 6th largest holder of Gold. Though this is a huge Gold holding, it only accounts for less than 2% of its total reserve holdings. If the country were to only double the amount of Gold it holds, it would amount to a huge amount of buying and has the potential to keep a "bid" in place during any major sell-offs.

Technical Notes 

Looking at the daily chart for June Gold, we notice prices holding above last week's close, as prices fell by over $100 per ounce from the contract high made on May 2nd. Though prices remain below the 20-day moving average, which would normally be a short-term bearish indicator, we have seen several failed attempts to take-out the uptrend line drawn from the 2011 low made back on January 28th. This trendline should now act as near-term support for the June contract. After moving to overbought levels last week, the 14-day RSI is now reading a more neutral 51.7. Trading volume has also returned to more normal levels after a huge surge in volume on last week's sell-off. The May 5th low of 1462.50 should act as strong support for June Gold, with near-term resistance found at 1526.80.

Do not Ignore the Greenback By Mathew Bradbard

The dollar has appreciated 4% in the last week but has the easy money been made on longs? Crude oil should to close about 0.70% higher in today's session but we would like to see a settlement back over the 100 day MA before thinking this correction has run its course. Aggressive traders are buying retracements as we think a $5 run higher is feasible in the coming weeks. Hedgers are using the recent set back in the distillates to leg back into their fall hedges...wade back in though as a 15 cent move either way would not shock me. A trade lower failed but I think it is still premature to be bullish natural gas...stay tuned. For the second day the indices failed to penetrate the 50 day MA...we advised clients who were short to move to the sidelines at a slight profit to re-evaluate...stay tuned.

The dollar once again traded above the 50 day MA but failed to hold onto those gains. At this point we think the easy money on longs has been made and we expect sloppy two sided action and would have no fresh currency exposure until next week. We remain on the sidelines in livestock with most clients but based on the chart formation forced into the market we would rather be long than short. Next week we will likely be buyers of July lean hogs and December live cattle ...stay tuned.

Gold held the same support trend line that held last week and managed a marginal gain as we remain neutral at the moment. Silver touched a trend line that has been in place since August of 2010. We will need to re take the 100 day MA at $34.50 in July futures into the weekend to feel that the near 35% correction is enough. We have advised clients to start wading back into longs via future, bull call spreads and selling puts under the market. This is not a trade for everyone as the recent daily range is approaching $15-20,000 per futures contract.

Cotton traded down the daily limit today...if and when we get a rally we will likely be sellers for aggressive clients. Coffee remains on our sell list even as prices are approaching over sold levels. Sugar bounced nearly 2% today...continue to buy dips in July and October contracts. Hold off on any wheat purchases but continue to buy new crop corn and soybeans,. We advised clients to offset their soybean meal at a scratch as to concentrate on their corn and soybean trades. You know the story in the debt complex as clients are holding onto losing trades in 10-yr notes and Euro-dollars looking for prices to roll over...nothing has changed in our view.

Risk disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Saturday, 7 May 2011

Video: Silver Bubble 2011 Bursting

In this commodity trading video you’ll see the silver bubble of 2011 dissected. The author of the video explains different stages of the bubble — from the very beginning (so called Stealth Phase) till the end of the bubble (Blow off Phase). Another topic if this video is a Bull Trap — a special sub-phase of a bubble, where it looks like the commodity is going to return to its super-rally but eventually ends up falling farther. Silver was (and probably still is) a favorite public investment asset, second maybe only to gold. Despite the bubble burst, silver is still trading well above its initial pre-bubble levels ($15-$17 per troy ounce).