A view on commodities

Discussion in 'Commodities' started by DSM, Mar 16, 2014.

  1. DSM

    DSM Well-Known Member

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    Trading commodities :

    Am creating a thread on commodities, as of late, I have been trading these more than stock derivatives. The purpose of this thread is to discuss generic ideas and information pertaining to trading commodities. So basically, this will include post on the following :

    Precious commodities - Gold and Silver
    Energy - Crude and NG
    Base metals - Copper, Nickle and others
    Others - Agri commodities (maybe if any trading ideas are seen there)

    Appreciate input from all commodity traders. And good luck to all.
     
  2. DSM

    DSM Well-Known Member

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    Crude oil futures - weekly outlook: March 17 - 21

    http://www.investing.com/news/commo...utures---weekly-outlook:-march-17---21-272111

    Excerpt :

    New York-traded crude oil futures ended higher on Friday, as traders returned to the market to cover short positions ahead of Sunday's closely-watched referendum in Ukraine’s Crimea region. U.S. oil futures were likely to find support at $97.55 a barrel, the low from March 12 and resistance at $99.60 a barrel, the high from March 12. Investors continued to monitor events in Ukraine, where tension over moves by neighboring Russia in the Crimean region have heightened demand for safe haven assets. Tensions between Russia and the West remained high ahead of Sunday's referendum in Ukraine’s Crimea region, now controlled by pro-Russian forces, on whether citizens want to join Russia. The U.S. and Europe have said they would impose economic and diplomatic sanctions on Russia next week, if the vote takes place. Oil prices received an additional boost after the International Energy Agency raised its forecast for global oil demand this year. The IEA increased its forecast by 95,000 barrels to 1.4 million a day, citing stronger economic growth.

    Despite Friday’s gains, U.S. crude futures, also known as West Texas Intermediate or WTI, fell 3.59%, or $3.69, on the week amid concerns over a slowdown in demand in the U.S. and China, the largest and second-largest oil consumers. Oil prices fell sharply on Wednesday as weak economic reports from China raised fresh concerns over the strength of the world’s second-largest economy. On Thursday, Chinese Premier Li Keqiang warned that the economy faced "severe challenges" in 2014. Fears over problems in China’s financial sector also sapped risk appetite following the country’s first domestic bond default this month.

    In the week ahead, investors will be looking ahead to Wednesday’s monetary policy announcement by the Federal Reserve amid speculation the central bank is likely to continue to scale back its stimulus program. The Fed is also to publish its economic forecasts and Fed Chair Janet Yellen will hold a press conference.

    Data from the Commodities Futures Trading Commission released Friday showed that hedge funds and money managers reduced their bullish bets in New York-traded oil futures in the week ending March 11. Net longs totaled 328,095 contracts, down 5.3% from net longs of 346,469 in the preceding week.
     
  3. DSM

    DSM Well-Known Member

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    Gold gains on Ukraine unease, soft U.S. data

    http://www.investing.com/news/commodities-news/gold-gains-on-ukraine-unease,-soft-u.s.-data-272100

    Excerpt :

    Gold prices traded higher on Friday as escalating tensions in Ukraine coupled with soft U.S. consumer sentiment data sparked demand for the yellow metal.
    Gold gains on Ukraine unease, soft U.S. data On the Comex division of the New York Mercantile Exchange, gold futures for April delivery traded at $1,377.80 a troy ounce during U.S. trading, up 0.39%, up from a session low of $1,368.30 and off a high of $1,388.80.

    Futures were likely to find support at $1,328.20 a troy ounce, Monday's low, and resistance at $1,393.80, the high from Sept. 8. Friday's data reminded investors that the Federal Reserve will take its time dismantling its monthly bond-buying program, which weakens the dollar as long as it remains in effect, thus bolstering gold's appeal as a hedge.

    Kerry was set to meet with his Russian counterpart Sergei Lavrov on Friday in a last attempt to defuse tension between Moscow and the West. Meanwhile, silver for May delivery was up 0.92% at US$21.392 a troy ounce, while copper futures for May delivery were up 0.90% at US$2.949 a pound.
     
  4. DSM

    DSM Well-Known Member

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    Understanding Dollar Gold relationship :

    http://www.smarterwithmoney.in/Article/Is_there_a_correlation_between_gold_prices_and_the_US_dollar

    The prices of gold and the US dollar share different relationships in different circumstances. Here's throwing light on some of them. Gold is considered to be a hedge against inflation, recession, and other times of uncertainties, especially due to its high demand and finite supply. This precious metal was, for a long time in history, used as currency, and is still a safe haven for investors. Consequently, most central banks around the world invest more in gold to preserve their assets during volatile economic conditions.

    On the other hand, the US dollar is widely accepted as an instrument of global currency exchange. Hence, most central banks also invest their funds in the US dollar.

    There is an intrinsic co-relation between gold prices and the US dollar. When the demand for the US dollar falls, banks as well as investors around the world invest more in gold. This measure helps them protect their money and hedge against uncertainties. The demand, and consequently the value of gold hence increases. Similarly, when the US dollar appreciates, an increasing number of investors shift their investments from gold to the US dollar. This fall in demand causes the value of gold to depreciate. This behavior of investors creates an inverse relationship between gold and the US dollar.

    However, it would not be appropriate to conclude that the price of gold and the US dollar always move in opposite directions, mainly because other external factors also impact the prices of these two instruments. Some people, for instance, might invest heavily in gold during a recession, whereas others might consider the US dollar to be a safer investment. In such a situation, the value of both these options might go up.

    From elsewhere :

    The reciprocal relationship between gold and the dollar is often not evident on a daily or weekly basis, but is almost always evident during periods of 12 months or longer. However there are exceptions, when in 1993, Dollar and Gold moved in the same direction.

    [​IMG]
     
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  5. KWR

    KWR Active Member

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    wah thanks DSM sir for starting this thread:thumb::thumb::thumb:
     
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  6. DSM

    DSM Well-Known Member

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    Excerpt from an interview with Peter Brandt — a 30-year veteran trader with 41.6% annual compound returns.

    http://www.mercenarytrader.com/2011/03/interview-with-a-trading-legend-part-i/

    Part I - Mental milestone

    Trading based on charts made sense to me, but just saying this does not start to explain the amount of work that was ahead of me. I just started systematically figuring out the charts – by this I do not mean the simple recognition of patterns, but rather the practical challenges of trading in real time. It’s fine to be a chartist, but what does it mean to be a chart trader. Analyzing charts and trading the charts are two entirely different challenges. Do I trade one-week patterns? Two-week patterns? Reversal patterns or continuation patterns? Where do I place protective stops? How do I enter a trade? Working through the process just took time. In fact, this process continues to this day.

    You just keep working through the mechanics of how you conduct the process of trading. What’s your game plan? How do you get in, how do you get out? Then obviously you go through periods when the market spanks you and you’re wrong four or five times in a row. And you start questioning whether you need to change something.

    So you go through that process enough that you begin to figure things out over time. Then, just about the time you think you have it figured out, your adopted approach gets challenged by the markets. But that challenging by the markets is good. Enough challenges force you to say “I don’t care, it’s just part of the process.” The continual challenges brought forth by trading also forces a trader to refine, refine and refine his or her approach.

    ***

    For me, one of the biggest things was realizing I was not going to be right 80% of the time, or even 50% of the time. I would be right about 35% of the time – but that was over an extended period of time.

    That figure of 35% was and still is true over an extended number of trades, where N as the number of trading events was a large figure. I began realizing that over 10 or 20 or even 30 trading events, the win/loss ratio deviated considerably from the norm – with a win/loss ratio that could go as low as 10 or 15%.

    ***

    I went to the statistics department at Northwestern University, sat down with a professor and said: “Figure out for me what the odds could be of being wiped out betting different amounts of my capital on every trade. I knew the answer would resemble a bell curve, but I wanted to know what things looked like to the far right and left of the hump. And the professor created a model based on probablities involved in rolling a single dice. And he said, “A dice role of the numbers one or four are your winners, the other numbers are your losers. Now let’s just go through a very long series of dice rolls and see what happens.”

    The professor ran a computer program and produced a distribution table and bell curves that gave me a considerable amount of insight into the random distribution of winners and losers given various win/loss ratios. I began to realize that risking 4 or 5 percent of capital in a program that was right on 35% over an extended number of trades, but with a high probability of being wrong 80% or 90% of the time over shorter numbers of trades, was a recipe for ruin.

    And that’s how I came to the conclusion that I should generally not risk any more than 1 percent of capital because I realized, based on the mathematical probabilities, that it was inevitable if I risked even 3 percent of my capital per trade each time, I could seriously harm my capital base to the point I would then have to change the way I traded the markets. And that’s exactly what I didn’t want to happen.

    That starting point on risk led me through the whole process of learning leverage, and how leverage is built. I think back on a lot of the stuff I had to learn and it’s often because I took a hit on a trade and realized “I hadn’t thought about that,” or “That was not a part of the equation I thought was right.” And so I was continually forced to go back and rethink an aspect of the trading process all over again.

    Of the new people who start trading today – so many have no clue of the learning curve. I mean this is a steep mountain. And you’ve got to be willing to really, really go through a lot of learning – and you learn by mistakes. You learn by getting sliced up by the markets. You don’t come in, have a hot three months, and say, “Man, I’ve got it figured out.” You learn when when you realize, “Oh, I’ve been wrong 8 trades in a row, and now I’m getting another signal, or, I’ve just lost 20 or 30 cents in a 10 cent trading range,” and so on. And I just went through these situations again and again, and these were the challenges of the game for me.

    ***

    I had a lot to learn. Any approach you take is complicated. So it was 1982, and there was the big move in the currencies that launched me – but then it was just a process of learning more about the markets, myself and my approach, making even more mistakes, feeling better about it, going through drawdowns. You go through a big drawdown, and your first temptation is “I’ve got to change something.” And actually I think the best response is not that something has to be changed, although that may also be the case, but something has to be learned.

    ***

    Trading is an ongoing education. But like all other forms of education, a tuition has to be paid. When you make money, that’s great. When you start losing money, that’s the tuition you pay to learn. And the market gets to determine the tuition, you don’t get to determine it.

    Let me add something very important about trading and drawdowns. There is very little material printed or online for the beginning trader on the subject of drawdowns. This is very unfortunate, because drawdowns are a harsh reality of trading. As a result, beginning traders have false expectations of the trading environment. Drawdowns are a fact of trading, and how a trader deals with drawdowns will determine the end game. It is like the word “drawdown” is a subject that is off limits and seldom discussed. Given that every trader deals with drawdowns and asset volatility, it is sad these subjects are not discussed with more transparency.


    ***

    You find out after the fact that the biggest mistake you can make is changing your trading style based on your previous trade or series of trades. Attempting to optimize a trading approach based on a recent series of trades is just idiotic to do. You’ve got to think not in terms of results of a trade, but principles. Not just did I make a mistake but, for example, “Do I need to be more conscious of trend.” If so how do I determine and measure trend. Do I determine it with a moving average or with some other means? And in a drawdown you even start playing with that. I reduce my risk even further when I start to lose. If I get hit a few times, well, then it’s going to be three quarters of a percent, or half a percent, down to maybe a quarter of a percent on a trade. Then you start winning again and you build up the size of the bet.

    ***

    My formula is really easy. I look at a chart – I’m a breakout trader, and I’ll tell you, over time I have had to learn over and over again to resist the temptation: “This thing is going to go up, I need to get in before it breaks out of this pattern.” I’ve lost so much money in trading ranges. So much money trying to jump ahead of a trend because I didn’t wait for the breakout. So that has been a hard lesson for me to learn. Intellectually I realize that the correct approach for me is to just stick an order in for a breakout and have a computer-based alert system so that I can know when I get filled instead of having to watch the prices all the time.

    So I get in and I have a rule for where I set my stop. I want to set my stop based on the chart, not based on a dollar amount. I want the stop to make technical sense. So I know my entry, I know where my exit is if I am wrong, I can figure out the dollar risk per contract, so only then can I calculate out my leverage. So it may be that I’m risking 12 cents. Or maybe I can get away with risking 4 cents. I don’t want to force that number. I want the market to tell me, based on how it breaks out, where my stop is going to be.

    ***

    I am amazed when I talk to novices who tell me they risk as much as 10% of their capital on a trade! Well I did that too. Back in the late seventies I did that, and I can tell you it doesn’t work! Risking 10% of capital on a trade is a well traveled road to ruin.

    ***
     
    Last edited: Mar 17, 2014

  7. DSM

    DSM Well-Known Member

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    Am posting snippets of info. on commodities and their co-relation to other investing assets. The purpose is to be acquainted with the principal that drives the prices of different commodities and understand and their nature and behavior patterns individually as well as relative to each other. Once we know the rational behind the movement in commodity prices, it becomes easier to trade them. Charting then can provide additional confirmation and validation of trades.

    Let's consider the relation of Gold to Stocks. Specifically S&P. By the very nature, stocks are considered 'Risk on' assets as is in my view other commodities such as crude, and other base metals such as copper. The reason is that traders and investors are betting on the economy to do well, and they are willing to take risk of investing in them. As against this, Gold is considered as a 'risk off' asset. In times of uncertainty, war etc. investors usually dump the 'risk on' assets such as stocks and invest the funds in what is considered as 'safe assets' such as gold. So in principal gold should be inversely co-related to stocks. So generally if the price of stocks are going up, gold should go down and vice-versa. This is of course the general idea. But this may not happen always. For e.g stocks may be up on good economic data, while at the same time, due to geo-political tension, gold may also move up in tandem with stock prices. Another factor that is in present times distorting the relationship between assets is that commodities such as crude and copper and precious metals such as gold and silver are treated as 'investing assets' largely due to the billions of ETF money that is tracks these funds. More later.
     
    Last edited: Mar 17, 2014
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  8. DSM

    DSM Well-Known Member

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    Posting a chart on crude. It is 20 Day, 60 Minute with Supertrend setting 10,2. The beauty of trading commodities is that besides the technical aspect, there is news which drives the prices one way or other. Viewing the charts on a higher timeframe, one can gauge the trend. Was reviewing charts, and thought this was apt to post. While I have been trading commodities actively, I have refrained from taking overnight positions, due to the fact that as can be seen on this crude chart, it has overnight gaps on news which though 4/5 times has been favourable and once adverse and against the trend, I need to be more familiar trading commodities and trade them longer before I swing trade.


    [​IMG]
     
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  9. spiritunit

    spiritunit Well-Known Member

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    DSM,

    Great thread to start on commodities.

    I recently started trading on Crude as well. I trade only with technical analysis, but sometimes important news like RBI Policy announcement that affects in Stock market. Is there anything like for Crude I have to watch for, any particular dates etc..?
     
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  10. DSM

    DSM Well-Known Member

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    Thanks spiritunit. Do check the crude chart, which incidentally was posted at the same time as yours. What needs to be watched in commodity trading is :

    * The USDINR pair which impacts the price on MCX (Thanks to Tamil Trader's notes on this)

    * Watch live charts on investing dot com.

    * Follow the news on the same site. International events do have an impact on commodity prices.

    * Importantly there is data release. Wed. is inventory data. It has a huge impact on crude.

    * Other important data for Crude, Gold, Silver and Copper will be NFP (Non Farm Payroll data etc)

    * All the important events affecting the commodities are posted on the economic calaender.

    * Santosh2010 has posted on important economic events impacting commodity prices. Will post the same here.

     
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