This is the first in a series of articles I will post on my futures trading plan. There are number of topics I hope to cover, including entry and exits, position sizing, and money management. In this posting I will focus on my general strategy —- which is technical based rather than fundamental based. While I think a trader needs to have some fundamental understanding of the markets, little guys like me and you get the information so late, that its almost always factored into the market already. SO I am what could be called a momentum trader or trend trader. I am not sure the trend is my friend, but I can see a trend, monitor a trend, and act and trade on this.
My trend tracking system is not new. It technical analysis based. This is good spot to mention a couple good books…. Technical Analysis of the Markets or the newer Visual Investing –by John Murphy and Technical Analysis Explained by Martin Pring—- these guys have lots of other good titles too. If you are new or old to technical analysis these are good learning tools, refresher or reference materials.
The foundation of my system is a collection of three moving averages. I am presently using a 2-10-30 day exponential moving average, this is as old as commodities themselves. But I need to give some credit here, as my first exposure to this came from The New Commodity Training Guide by George Kleinman, another book I recommend for beginning futures traders and available as an inexpensive Kindle version.
Back to the initial trigger I use —- for a long position, I want to see two consecutive closes above the 30 MA, and the 2 above > 10 day MA. I have 2 other confirmations that I want to see, because I only want to get in on a trend and try and avoid the chop. The first confirmation is Williams %R, but I use a 30 day rather than the more traditional 14 day. This alteration to %R is something I picked up from Price Headley (BigTrends) , who has a momentum system for stocks that’s uses what he calls acceleration bands and %R. ( I do subscribe to service at Bigtrends – but that’s a different topic). For a long entry I want the %R to be greater than 80…. I want the future to be slightly over bought, I want it to be just starting a big move. The second conformation is the ADX (14), and this measures the strength of the trend. Here I am looking for a value above 20 and some positive slope.
And that’s the system. I call it The Wave. To recap for the initiation of a long position
2 day MA > 10 day MA
2 consecutive closes above 30 day MA
%R(30) > 80
ADX(14) >20 and moving up
For a short
2 day MA
2 consecutive closes below 30 day MA
%R(30)
ADX(14) >20 and moving up — same here as this is a strength of momentum indicator, not a directional indicator
One word on ADX — for some commodities I use a little more flexibility and I look at the historical ADX to judge the trend.
I have used this system for the past 6 months, I paper traded it for a few months, and then put real money to work starting in July. I have done reasonably well, but the commodity market has been trending… so winning trades in wheat (paper), cotton (paper), corn, beans, sugar X2, feeders, live cattle, bean oil, and a short in NAT GAS have been closed for a gain (part 2 will cover exit and stop losses — and the damage of improperly set stop losses –too tight can be as bad as too loose). But its not been all roses either. I got whipped out of beans, bean meal, OJ, live cattle and cocoa X2. But my losses have been mostly small. Right now I am long silver, and have a small position in the Euro and am short the dollar.
Part two can be found here
Always happy to hear from you — tradesmith@att.net
Until next time… trade patiently, be profitable.
