The Objective Filter for an Oscillator
by Sam Seiden - Mar 17, 2008

We all know emotion can be the devil in your trading career. Often, it is emotion based decisions that keep people from even having a trading career longer than a few months. While emotion often has you buying signals way after a move higher in price which is likely near resistance which almost ensures a losing trade, there is another culprit that leads to the same losing behavior in trading. It is the misuse of indicators and oscillators.

Understand that the movement in price in any and all free markets is a function of the pure laws and principles of supply and demand. Opportunity exists when this simple and straight forward relationship is out of balance, period. What most people don’t understand is that when you ignore a governing dynamic that has been around longer than man has walked the earth, you are almost guaranteed a losing trading strategy. You can spend a lifetime attempting to come up with the perfect set of indicators and oscillators with the perfect set of inputs with hopes of attaining all the worlds’ wealth and get nowhere. There is a reason for this which is the one thing you need to know about indicators and oscillators: They have NO IDEA there is an ongoing supply and demand relationship at work every second in every market at every price level. They are simple math calculations derived from price. Most are averages of price which means they lag price. Any indicator that lags price adds risk and decreases profit margins in your trading which is not ideal. Don’t get the wrong idea, this is not another article beating up the indicators. My goal is to expose the flaws associated with using them and also show you a very astute way to use them in all your trading.

Moving Averages and Trend Analysis (PIC)

Above we have a chart with a 20- and 200-period moving average. These are widely used moving averages both in the trading and investing community. Notice the slope of the 20-period MA at the area labeled “B”. The slope of the 20-period moving average is down in both cases suggesting a downtrend is underway. During this period however, the low risk/high reward buying opportunity is greatest and right in front of you as “B” is the time price is revisiting the objective demand levels “A”.

Those who use a MA as a trend filter would never buy when the trend is “down.” This group of illusion-based traders and investors would likely conclude and say; “I don’t want to buy now, the MA tells me this is a downtrend.” The illusion created by only using a MA to determine trend ensures you will ignore the lowest risk/highest reward opportunity to buy (or sell) each time it is offered. Furthermore, this illusion is likely to encourage a trader to take the opposite action of what the objective information (reality) suggests he or she should do.

Moving Averages lag. They are averages of past data. They can only turn higher after price does. Let’s focus in on the 200-day moving average. Specifically, notice the area “B” that is below the 200-day MA in. Most traders and investors either see the 200-day MA on a chart or hear about it from some financial news TV program. They perceive the mighty 200-day MA as some magical line that when crossed suggests some valuable information. As we can see, waiting for prices to rise above the 200-day MA before buying ensures three things. First, risk to buy is high, as one would be buying far from the supply/demand imbalance (our demand level from “A”). Second, profit potential is decreased. Third, those who wait until prices have crossed back above the 200-day MA to buy will likely provide profit for the reality based trader/investor who bought at “B,” the low risk/high reward entry area. The objective supply/demand imbalance is at “B,” and the 200-day MA has nothing to do with it. When a moving average lines up with true demand or supply, the moving average will appear to work. Believing that the moving average actually has anything to do with a turn in price is an illusion.

Let’s now explore reality through the eyes of objective logic. The areas labeled “A” are objective demand (support) price levels. How can I claim they are objective demand price levels? It’s simple. While prices are trading sideways, supply and demand are in balance. In both instances, prices rose dramatically from those areas of balance. The only thing that can cause a price rally from an area of “balance” is when the supply and demand equation becomes “out of balance.” In other words, there were many more willing and able buyers at “A” than there were sellers. The laws of supply and demand simply tell us this is true.

The areas labeled “B” represent the first time prices revisit these two areas of “imbalance.” In other words, prices have declined to an area where we objectively know there are more willing buyers than sellers. “B” is the low risk/high reward opportunity to buy. Buying in these two areas ensures three important musts in trading and investing. First, your protective stop must be as small as it can be which offers a trader proper risk management/position sizing. Second, your profit potential, which is the distance from the entry to the supply area above, is as large as it will ever be for this opportunity. In other words, as price moves higher from the objective demand level, it is moving closer to the supply level (target) above, decreasing your profit potential. Third, the probability of success is highest because supply and demand are out of balance.

The Moving Average Cross (PIC)

In this example, the circled areas on the chart represent the times when price is declining into our predetermined and objective demand (support) levels which is where we would want to buy. We want to buy here because the risk to buy is lowest and the reward is highest. The black vertical lines on the chart right next to the circled areas show when the moving averages cross, which is a buy signal for most people. Notice how late they cross. Price has moved significantly higher already which means high risk and low reward for the buyer. In both cases, when price is into our demand level and a low risk buy is right in front of us, the MA’s have not even begun to turn higher. If you use a moving average cross as a buy trigger, be very careful.

(pic)

In this example, “B” is the first time price is revisiting demand level “A”. “B” is the time we want to buy. “C”, however, is when the moving averages finally cross and give the conventional buy signal. If you accept that invitation to buy, you are actually buying right at the supply (resistance) level “D” which will almost always ensure a quick loss. Only a novice trader buys after an advance in price and into an objective supply level. That is what the industry calls “dumb money” and in trading, if you can’t see dumb money coming into the market, you are dumb money… Ok, enough negative talk here, let’s get some answers and solutions to this issue…

As I mentioned in the first part of this piece, when an indicator or oscillator gives you a buy signal when price is also at an objective demand (support) level, that buy signal is likely to work. The key is to only take those buy signals and ignore the rest. In doing this, we are filtering an indicator through the laws of supply and demand and this is the key in using any indicator or oscillator, including the not so obvious things like Fibonacci and Elliot Wave.

The Answer (pic)

In this chart of the Dollar/Yen, notice CCI on the bottom and the demand level I put on the chart. While CCI gave you many overbought and oversold readings, the oversold signal that occurred as PRICE was also at demand was the buy signal to take. Exactly how to do this is something I focus on plenty in our courses at Online Trading Academy but hopefully this concept will help you out here. Also, while this is a Forex chart, the rules and concepts that I write about are applicable in any and all markets and any and all time frames.

In this example, we again have many overbought and oversold readings from CCI. They are not wrong. CCI is doing exactly what it is supposed to do. Whether these readings turn into profitable buy and sell signals is another conversation, this is what most people learn the hard way. Back to the chart… When price initially drops from the supply level, notice that the CCI goes oversold right away and stays oversold, giving the trader buy signal after buy signal as prices are dropping. Yikes! Again, if you only take the overbought and oversold readings from something like CCI (or any indicator or oscillator) as a buy or sell signal when PRICE is also at a supply or demand level, you are then filtering out most of the losing buy and sell signals and keeping most of the winning signals. Here, when price rallied back up to the predetermined supply level, CCI was also overbought and this was the sell signal to pay attention to.

KEY NOTE: CONVENTIONAL TECHNICAL ANALYSIS MUST BE FILTERED THROUGH SUPPLY AND DEMAND.

optiondragon
Posted May 3, 2008 at 11:58 am | Permalink (Edit)
APPROACHING MORNING GAPS.

http://www.tradingacademy.com/lessons/lessons20080225.shtm

Trading the Morning Gap
By Sam Seiden - Apr 28, 2008

Whether I am trading or instructing a stock, futures, or options class at Online Trading Academy, our lowest risk and highest reward trade each day is typically the opening gap entry. As soon as I suggest the trade to the class, someone always says: “I was told we are not supposed to trade the open because it is not for the novice trader”. That is not exactly what we say at Online Trading Academy. What we say is that the open is not for the novice trader. It is, however, a fantastic opportunity for the astute trader who knows how to identify a novice trader. Most of the time, our entry is within seconds to minutes of the opening bell. There is a reason for this…

Why do prices gap up? They gap up because there are more buy orders at the open than there is available supply at the prior day’s closing price. They gap down because there are more sell orders at the open than willing demand at the prior day’s close. Therefore, market prices are almost always at price levels where there is a supply and demand imbalance (opportunity) at the open. Never forget, the successful market speculator simply finds markets where price is at levels where supply and demand are out of balance and trades them back to price levels where supply and demand is in balance. I started in this business on the floor of the Chicago Mercantile Exchange, handling institution and retail order flow. Watching that order flow made it easy to see where prices were going to turn. For example, if we had 10 buyers and 5 sellers at a price level, as soon as the 5th seller sold, price had to rise. Having the orders in your hand makes this easy to see. Knowing exactly what this picture looks like on a price chart makes it even easier.

This week in the markets represented obvious opportunities related to gaps and order flow. We took advantage of them in class here in Chicago each day. We will do the same thing in Boston next week as two things never change. First, order flow works the same way it did 100 years ago and never changes. Second, novice traders are always present and are only growing in numbers. Here is how it all works…

Below we have a chart of the S&P as seen through the SPY, the ETF for the S&P. “A” represents a resistance (supply) level. We know this because price could not stay at that level, it had to fall because there are more willing sellers than buyers at that level. “B” is a day this week where price gapped right into that resistance (supply) level at the open. Here, the novice trader buys and the astute trader sells to that buyer. Remember, a supply level is a price level where there are more sellers than buyers. The last thing you want to do is buy at that price level and that is exactly what the novice trader did that morning on the open. In class here, we sold to that buyer and profited on the decline in price. We know this is a novice buyer because only a consistent losing trader would buy a gap up, after a rally in price, and into an objective supply level. The very next day at the open “E”, price gapped down into an objective demand level “D”. Only a novice trader would sell a gap down, after a decline in price, and into an objective demand (support) level, “D”. We simply bought from that novice seller and profited nicely on the trades. The very next day at the open “C”, price gapped up right into an objective supply level, “A” and “B”. That short entry at “C” was very low risk and high reward but you had to be trading at or near the open to get that low risk short entry which was true for all the gap entries for the week.

The key is to not look at candles on your screen as red and green pictures and patterns. You must understand what is happening behind the scenes. Whether you’re trading stocks, futures, options, or forex, the logic and rules never change.

Again, the market imbalances are greatest at or near the open of trading in all markets. By the end of the first hour of trading each day, a large amount of novice trading capital is simply transferred into the accounts of the astute trader. If you can’t see the novice trader in markets, you likely are the novice trader.

A few weeks ago I happened to be in LA instructing a stock class and on the 19th March, a morning opening gap in the US stock markets offered us a very low risk and high reward opportunity. Our morning prep work basically consists of finding stocks that are opening at price levels where supply and demand are out of balance in a large way and then simply trading them back to balance. Once the traders understand the whole supply (resistance)/demand (support) concept and the rules, we use two sources to find these opportunities which typically present themselves right at the open of trading or shortly thereafter. One of our sources offers us the morning broker upgrades and downgrades. An upgrade that jumped out at us was Citigroup who was upgrading shares of Imclone (IMCL) with a “Buy” recommendation. While we are trading real money in class, you might think we would want to listen to this upgrade and do exactly what it is suggesting to do as Citigroup is one of the largest banks in the world and we are just 20 people in a trading class in LA. Well, it really depends on your point of view. Citigroup likely had good fundamental reasons to upgrade the stock and looking at the chart below, MANY people listened with both ears and bought IMCL on the open which is what caused that gap up in price. If your point of view is that of a smart buyer and seller of anything who has an understanding of the laws of supply and demand, not only were you not buying like everyone else was, you were selling to that huge group of buyers (at least we were).

(click to enlarge)

Notice the price action on 3/7. There was a dramatic price decline from the $45-$46 price level. This can only happen because there is much more supply at that level than willing demand. When this happens, price must decline. The dramatic rate of decline suggests a strong supply and demand imbalance at that level. Now, notice what happens the morning of the upgrade on 3/19. Citigroup upgrades the stock and price opens right into that supply level. While the rest of the world is buying in a strong way, we had our plan in place well before the open that told us to sell to anyone who wanted to buy at that level. Why? Because we knew that if we sold to the buyers at that price level on the gap up, we would be selling to novice buyers who likely are consistent losing market speculators. How do we know this? Only a novice would buy AFTER an advance in price and INTO a price level where supply exceeds demand. Our job is to find this novice trader and simply take the other side of his or her trade.

When you enter markets at price levels where supply and demand are out of balance in a big way, especially at or near the open of trading, moves in the market are typically very fast. There were many other stocks this day that did the exact same thing and those who did the 15 minutes of morning prep work that we do each day were rewarded with low risk/high reward gains.

This trade and the thoughts and rules that went with it are not meant to impress you. I mean to impress upon you the importance of looking at markets for what they really are which is simply an ongoing supply and demand equation. Opportunity exists when this simple and straightforward relationship is out of balance. Everything else in and around markets is just “noise” that is meant to invite you into markets at the wrong time and in the wrong direction. As an educator, I say that is unfortunate. As a trader, I love it - the more noise the better!

http://www.bloomberg.com/apps/news?pid=20601109&sid=akLt5fJKQNr8&refer =home

Iran Doubles Oil Stored in Tankers, Bolstering Rates (Update3)

By Alaric Nightingale

May 2 (Bloomberg) — Iran, OPEC’s second-largest oil producer, more than doubled the amount stored in tankers idling in the Persian Gulf, sending ship prices higher as demand for some of its crude fell, people familiar with the situation said.

The 10 tankers hold at least 20 million barrels of oil, equal to about 5 days of the country’s output, said the people, who asked not to be identified because the information isn’t public. Rates for tankers have more than tripled since April 8, based on data from the Baltic Exchange and ship-fuel prices.

While oil rose to a record $119.93 a barrel on April 28, Iran has a glut of its sulfur-rich crude as refineries that can process the fuel shut down for maintenance. The discount on Iranian Heavy crude compared with Oman and Dubai petroleum has more than doubled since the start of the year, according to data compiled by Bloomberg.

“There’s not much demand for heavier crudes such as those from Iran,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “It’s the peak of the refinery maintenance season in Asia, and Iran also sells oil to Europe and the Mediterranean, where some refineries are having turnarounds,” or seasonal shutdowns for repairs, he said.

Freight derivatives that traders use to bet on, or hedge, swings in the benchmark price for shipping oil to Asia climbed 2.5 percent to the equivalent of about $100,500 a day for May cargoes as of 10:08 a.m. in Oslo, according to Justin King, a broker of the contracts at Imarex NOS ASA.

Available Supertankers

Iran’s use of ships for storage cut the supply of available supertankers, owned by companies including Hamilton, Bermuda- based Frontline Ltd. and Euronav NV, based in Antwerp, Belgium. The number of double-hull very large crude carriers, or VLCCs, available to rent within the next 30 days dropped to 28 from 56 a month ago, according to Paris-based broker Barry Rogliano Salles.

Frontline, the world’s biggest operator of VLCCs, climbed 13.5 kroner, or 4.8 percent, to 297 kroner in Oslo. The shares earlier rose to a record 298 kroner. Euronav, Belgium’s largest tanker owner, advanced 34 cents, or 1.3 percent, to 26.74 euros.

The benchmark tanker rental rate for voyages to Asia from the Middle East is $148,000 a day, compared with $44,300 on April 8, according to prices from the London-based Baltic Exchange and a formula from Oslo-based RS Platou Shipbrokers A/S.

Iran previously stored its Soroush and Nowruz heavy crudes in state-owned tankers because the sulfur content made the fuel too difficult for refiners to process. Previous buyers of the oil include SK Corp., South Korea’s biggest refiner, and Reliance Industries Ltd., India’s biggest company by market value.

Processing Capacity

Limited domestic processing capacity in Iran requires the country to import about 40 percent of its gasoline because national refineries can’t make enough. Lighter crude with less sulfur is costlier as it yields more profitable products such as gasoline.

Iran typically keeps two or three supertankers on standby to deliver crude, Per Mansson, a tanker broker at Nor Ocean Stockholm AB, said by phone. “There’s a lack of on-land storage and this enables quick supply” to buyers in Europe and Asia, he said.

Soroush and Nowruz crudes contain about 3.5 percent sulfur. Syria’s Souedieh, at 3.9 percent, is the only grade in the Middle East with more, according to data from New York-based Energy Intelligence Group.

Crude oil for June delivery rose $3.03, or 2.7 percent, to $115.55 a barrel as of 11:36 a.m. on the New York Mercantile Exchange.

Heavy Crude

The discount for Iranian Heavy crude relative to lighter Omani and Dubai oil is at $3.25 a barrel, compared with $1.49 in December, data on Bloomberg show. Saudi Arabia is the largest producer in the Organization of Petroleum Exporting Countries.

The VLCCs, each designed to ship about 2 million barrels of crude, have been idling at either Kharg Island in the Persian Gulf or the nearby Soroush terminal for at least a week, according to AISLive data compiled by Bloomberg.

State-owned National Iranian National Iranian Tanker Co. is also hiring vessels in the single-voyage, or spot, market for contracted shipments for the national oil company, the people said. Normally, the shipping line would use its own vessels, they said.

The following is a list of VLCCs whose last reported location was Kharg Island or the Soroush terminal and when they were due to arrive. It normally takes 24 hours to 48 hours to load a cargo of crude and set sail.

Ship Name Expected arrival Last reported
in Iran destination
Noor Dec. 15, 2007 Kharg Island
Najm Feb. 20 Kharg Island
Hengam March 11 Kharg Island
Nesa March 28 Kharg Island
Noah April 2 Kharg Island
Huwayzeh April 3 Kharg Island
Damavand April 11 Kharg Island
Hoda April 14 Kharg Island
Daylam April 23 Kharg Island
Nabi April 24 Soroush Terminal

optiondragon
Posted May 3, 2008 at 11:50 am | Permalink (Edit)
http://www.bloomberg.com/apps/news?pid=20601109&sid=ajV4TWY6kQb4&refer =home

FCX, PCU…

Chilean Activist Cuevas Brings Codelco Copper Mines to a Halt

By Matthew Craze

May 2 (Bloomberg) — Cristian Cuevas used to serve meals to miners at Codelco, the world’s biggest copper producer. Now he’s serving up trouble for Codelco management.

Cuevas, the 39-year-old head of Chile’s Confederation of Copper Workers, orchestrated the sometimes violent strike that has shut down production at three of five Codelco mines. Jose Arellano, Codelco’s chief executive officer, said this week the walkout has cost the company almost $100 million in lost production since it began April 16.

“It seems management prefers to lose millions of dollars instead of resolving an issue that is of national interest,” Cuevas said April 24 at a Santiago press conference, wearing a green military jacket and jeans. “The big companies and multinationals earn money here, but workers earn miserable wages,” he said in an interview later.

According to the confederation, the contract workers on strike typically receive 250,000 pesos ($544) a month, compared with 1.5 million pesos for regular Codelco employees, who aren’t taking part in the walkout. Codelco has about 30,000 workers employed by subcontractors and 17,000 staff employees. A Codelco spokeswoman said the company doesn’t disclose wages.

Copper futures have risen 21 percent this year to $3.6945 a pound yesterday on the Comex division of the New York Mercantile Exchange. The metal hit a record $4.045 on April 17, on concern the walkout might thwart Codelco’s efforts to reverse a three- year drop in output.

`Finely Balanced’ Market

Cuevas, a member of Chile’s Communist party, also led a strike last June and July that contributed to a 6.6 percent decline in Codelco production for the year and a 5.9 percent rise in global prices. Codelco accounts for more than 10 percent of the world’s copper.

The bearded Cuevas, who sometimes wears a Middle Eastern kaffiyeh headdress around his neck, worked for a catering company that sells food to Codelco workers for eight years before leaving in 2004 to pursue his union work. His clout has climbed as global copper stockpiles monitored by the London Metal Exchange have fallen more than 44 percent since January, fueled by growing demand in China.

“Anybody who gets up there and controls that kind of power is bound to have some influence,” said Alex Heath, the head of base-metals trading at RBC Capital Markets in London. “The market is so finely balanced that any disruptions of any supply anywhere in the world has an impact.”

More Violent

The current walkout is more violent than previous labor disputes in Chile, according to Tomas Flores, director of research at Santiago-based research group Libertad & Desarrollo.

Protesters armed with rocks and sling shots have clashed with riot police, blocking access to Codelco’s El Salvador mine in northern Chile and the Andina mine in the central part of the country, according to company officials and press reports.

One Codelco employee was injured April 21 after demonstrators at a third mine, El Teniente, threw a metal object. Two more were hurt April 24 when rocks were hurled at a bus in the city of Rancagua.

“The union movement never used to be characterized by this type of violence,” Flores said in an interview.

Codelco said April 27 that six men broke into the control room and stole computers and equipment at the Salvador mine, slowing production and causing delays.

Cuevas says his group isn’t responsible for any of the violence, or the break-in and a fire at the Salvador mine.

`Cowardly’ Attacks

“We haven’t asked for this fight,” he said in an April 23 press conference in Santiago, flanked by lawmakers including Isabel Allende, the daughter of former President Salvador Allende, who died in a coup in September 1973 that led to the 17-year military rule of Augusto Pinochet.

Codelco has criticized the confederation’s tactics and has refused to meet with Cuevas, saying it has abided by an agreement reached after last year’s strike.

“They have no right to attack people in a cowardly way,” CEO Arellano said in a speech to employees on April 21. He said this week the strike has cut output by about 19,000 tons, or almost 1 percent of its production last year.

Cuevas, one of 11 sons of a Chilean coal miner, says his work as a labor activist was inspired in part by the hard times his family fell upon when Chile shut down its coal mines. “I was committed to social justice from my infancy,” he said.

He now wants to draw other contract employees into the fray, Cuevas says, and he has called for nationwide protests by such employees at supermarkets, salmon farms and vineyards.

“He’s very passionate and he never gives up,” said Andres Leal, one of 15 regional confederation leaders. “It wouldn’t surprise me if the union experience propels him to other things.”