Where is Oil Headed (Continued) 7/25/15 ?

Where is oil headed? I am not a typically contrarian investor. I follow technicals and am willing to shift my position based on the way the mood shifts in the technicals. My current charts on OIH and USL is posted below.

Right now the technicals show a downward trend and that we are at another juncture of support. A breakdown of this support will generate even lower prices and a better bargain for bottom fishers. I for one like low oil prices as it means less pain at the pump. It also fuels travel and business. Without pontifying about the world economy and other matters where there are enough articles out there on the net, the situation currently on oil is down. Only question is will it find support or keep going down?

I will consider up only when my technicals change and show the signal change from down to up and the price is above the Supertrend line..

Making Money with Automated Trading – My “Smart” Trade-bot 7/19/15

Is it possible to have an automated trading program running on an algorithm would make me money consistently? After 9 months of development work on weekends, I think I have come one step closer to achieving that. Using Ninja Trader software with Bloodhound I have created an algorithm that will run less than 2 hours a day and will trade Nasdaq e-mini futures (/NQ) generating 100%+ returns in a year per the back test. I tested the system from end of June last year to end of June this year. The test shows that it would have generated a little over 120% return. I prefer to have an exit based on the trading logic but also using a wide take profit of 160 ticks and a trailing stop loss of 120 ticks. I figured in trading commissions and a 1 tick slippage. If my assumptions are optimistic, and we had 2 ticks slippage it should still be very positive.

Here is the equity curve generated by the program based on trading 1 contract of NQ… it looks good but the drawdowns can be 25% and maybe worse in real-time. The win rate is about 55% and that means this will generate 8 losing trades in a row of about 3% loss on average per trade, some time in a year. Money management is a key and one cannot be over leveraged. The equity curve is based on 1 contract. Multiply it by a larger number of contracts and the returns start looking even better. I believe it is possible to trade this with an account of $10,000 per 1 contract traded.

The big question is how useful is a back test going forward? I ask that all the time. Yes, the future is unlikely to be like the past. But when the markets behave in a more volatile fashion is that not a time when randomness is left behind and you have bursts of more predictable behavior? And if I take out my emotional participation and let the trade-bot run on its own then I should have a more objective repeatable result.

Next steps is to run the program using a paper account using real-time live data and see what the results are over 3 months. Using real-time data and forward testing the program I will have another piece of information before going to real money. The equity curve needs to show similar behavior over time in forward testing. There are many pitfalls to doing automated trading. I wish I had a giant hedge fund who would allow me to move this fast forward but I intend to make this happen either ways and will not stop learning and testing other systems in case this does not pan out.

401K Monthly Analysis – The Greek Vote “YES” or “OXI”

Although it is my month end 401K monthly analysis time, the word is Greece this weekend. The Greeks are going to the poll on a historic national referendum to decide whether they will say “yes” to accepting the EU austerity program for money, or whether they will say “no” (OXI in Greek) and support their leader to negotiate a better deal, assuming that is possible. I hear that there is a generation gap in the vote. The young want to say no to austerity and the Euro while the old are fearful that they will lose all that they have and are willing to give some to keep some by saying yes. I don’t envy the Greeks either ways. I hope the US will never reach that stage where we cannot manage our debt. I am afraid we too have to face some levels of austerity down the road as more and more countries are flush in debt. Borrowing cannot go on forever without having to pay the piper.

This blog site is apolitical. My focus is on blogging about trading, investing and making money. SPY is signaling down (S&P 500 ETF). Chart shown below. See the stellar returns SPY has shown over many years. Hidden in that is the gut wrenching drops that the recession created but the strength of the US economy has recovered all those losses plus more.

  https://www.spdrs.com/product/fund.seam?ticker=SPY

Given the exogenous events (as one of my Mcubed friends puts it) and that SPY is pointed down, I am out of the markets in my 401K and resting in money market funds. Markets dislike uncertainty and we have that in spades now.

In my current employer’s 401K choices, Fidelity Growth Strategies, Fidelity Div Intl and Fidelity Blue Chip Growth are the strongest funds. If one were to stay invested throughout then these would be the ones I would be in.

In my previous employer’s 401K funds, the best choices are T Rowe Price Intl Discovery, Vanguard Explorer Admiral and Fidelity Contra fund. These are the strongest. Fidelity Div Intl is also a good candidate. International funds are looking strong despite the Greek vote. Perhaps it is due to the weakening of the Euro?

My current investments are small and hedged in options trades. I own put options on the QQQ and vertical call spreads on the DIA (my wife is bullish on the DJ30 and while she is contrarian in her choices and likes to pick up dips, she is right more often than wrong). We will have to see if she is right or Cramer who says don’t buy this dip…. Me – I just want to follow the technical.

Ask a Market Maker Q&A on Currency trading… 6/27/15

An interview with Elliot Mayerhoff Market Maker and Mark Coe

A Risk disclaimer for currency trading with leverage:  Consider the risks associated with increasing your leverage. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit; this may work against you as well as for you. You may sustain a total loss of initial margin and you may be required to deposit additional funds to cover a short margin position.

Do Market Makers gun for stops?
Buy or sell orders with stops go into effect after the stop level price is crossed. This is how stops are used – Market Makers (MMs) are able to see these stops and also have a good idea where traders place stops. The concept in the retail trader’s world is that Market Makers (MMs) gun for stops. This is particularly prevalent in the Forex currency trading world. There is a bid and an offer. Professionals and larger buyers will say to buy it at bid or do the best you can. MMs in the big banks are not too concerned about going after the retail traders specific stops. That does not mean the MM will not go after certain specific levels. Euro has a very good liquidity and it is traded very tight. 1-2 ticks. 150 (million) euros would normally not move the market; but who has that order may be of interest. Banks and traders want to know whether that is a Fibonacci level. The bank trader wonders - Is there a cluster of stops at that level? The more stops at a level and he may want to buy ahead of those levels and formations. Who is giving me this order? Most traders are paranoid. If it is from a large bank he may be wondering – does the person placing his stops know something I don’t? Maybe he will start running the stop. There are a lot of variables. Who is leading the order?  Is it smart money? The bottom line is MMs are not going after any one stop.

Do bank traders use fibonacci levels?
Definitely. You want to combine different time levels and see where the fib levels fall. For example using daily, weekly, hourly and if you have a fib level around the same area, then that is stronger.

Is the MM controlling the market? The answer is yes; unconditionally, yes. But there is competition out there. He is not able to get around to do something unscrupulously to profit. Right now MM is the house. If I call up a bank and the MM and tell him “I want 1.1377-79 as a buying price range… he tells you 1.1387-89… I say “I think you meant 1.1377-79…” No… the MM/bank is saying “I am a buyer. Why shouldn’t I have the right to make the market”? If you wanted to sell at 1.1387-89, you can. MM can show him any market he wants. MMs do not have days to set things up however…  MMs no longer have deep pockets. To a certain extent the MMs do control the markets.

Liquidity in the FX markets - Is FX really the most liquid markets? What happens during announcements? Non-farm payroll … 8:30 am EST they stop quoting. Only desk levels are open. Whoever leaves a stop, they would call and check if you want a stop… it could go 50 points through your market stop.

If you sell or buy outside of the US there is going to be the need for a hedge.  MM has to hedge out options. MMs just want to play volatility and not direction of the market. Before you had the FIX at 11:00 am EST.  Bigger banks would get in a chat room. It is small world with MMs. MMs and Traders could sell using a chat room and reach a deals with a buy and sell privately for large quantities. If they all have a lot to buy, then they would discuss how they will collude. They arrange amongst themselves and the customer gets s*&%#%d. They drive the price up higher but have been buying it earlier… This is the 11 O’Clock fix. How do you buy 5 Billion dollars in 1 sec? That is a lot of money at any time. This is however no longer the case as banks are looking at chat rooms.

Do the big, smart people get it wrong sometime?
You only hear about the success. No one talks about all the failures in professional sports, just the successful ones. There are many hedge funds going out of business. John Paulsen made a lot of money in the sub-prime, getting it right … $1 Billion… but many of his customers lost a lot of money after that. You don’t hear about that. The percentages are much worse than 30% winners. You only hear about the winners. Not the losers. Many hedge funds went out of business.

MM got to see both sides of the deal. What did the successful ones do? 

Traders all have their own style. Everyone has to understand their own style. MM would say that the guys who were more successful were the ones that were looking for a longer point of view. People that understood risk management and riding the trend did better. People who had more staying power did better. They rode a trend that was playing out in the market and those were the ones who were most successful.
There were a lot of successful people. There was one who traded every day in the morning. He traded the USD/Yen. He always came out every day on the right side by trading 3-4 hours in the morning. A trend following trader will do well when it is trend trading. He will get killed when it is going sideways. But the better trader are the ones who have good money management. High frequency traders are short term traders and they have kept volatility down… They are the algorithmic traders. There are more algorithmic traders who are trading on a very short term. Many are successful. 

401K Monthly Analysis – Sideways Shuffle 6/5/15

This is my monthly 401K post. The chart of the S&P500 (SPY) remains moving sideways with an up signal. That in itself is remarkable as the talk of gloom and doom has far outpaced the actual performance of the US markets. The bond markets are definitely showing pain. This is demonstrated on the chart of TLT, long term treasury funds. PIMCO Global bond fund is pointing down. And so is IYR Real estate funds ETF… one is left with a gloomy picture and I have succumbed to it by going to cash. The technical should have me in stock funds… but which ones?

In my current employer’s 401K the strongest funds to be in are Fidelity Invst Div Intl, Fidelity Growth Strategies and Fidelity Blue Chip growth. Bond funds in the 401K are currently losing money. International is still holding up although it seems to be starting to turn down. Forget Real estate funds right now… the Growth strategies are strong is also reflected by the QQQs treading sideways. So the strong funds are going sideways, and the weaker ones are swooning… not a comfortable time in the markets.

In my previous employer’s 401K the strongest funds are TRowe Price Intl Disc, Fidelity Invst Div Intl and Fidelity Mt Vernon Growth. Once again the international and growth funds show strength.

This is a time that if one is invested, it might be time to pare down. But if the market breaks through the resistance, investors will pile on in a hurry.

Where is Oil Headed?

Sunday morning. Its Memorial Day weekend. I had breakfast with a friend of mine visiting from Michigan. Nice crowd at IHOP as we discussed family, friends and investments. My friend is a contrarian investor. He said “take a guess as to where I am putting my money”… I replied Greece? Russia? The Ruble? He said “no… something in the US… Oil”.

After breakfast I went home and as I sat down to watch the Chelsea versus Sunderland, Premier league soccer game on TV, I looked up the ETF OIH, USL and the stock SLB. Charts for OIH and SLB are shown below. Looks like oil bottomed out – I see a double bottom on OIH and then the move up. We are now making higher highs, which is the classical definition of an uptrend. The uptrend is facing headwinds with the 200 exp moving average (black line) but the trend is certainly up nonetheless and is bouncing of the 50 exp moving average (red line). SLB has broken through its blue downtrend line and slowly climbing back upwards.

Fundamentally, there is global growth, which will continue to fuel the demand for more oil. Countries like Saudi Arabia, Iran, Iraq, Russia, and Venezuela will keep producing more oil regardless of fluctuating demand. When there is an oil glut and price drops, it will be the shale producers in the US who are “for profit” companies that will blink first and stop, reducing output and thereby again increasing the price of oil. Long term oil prices will have a bottom. That may be the double bottom we have seen or further down, but the nature of supply and demand will keep oil within a range. US is on the verge of being the largest oil and natural gas producer in the world but we are profit driven. When the price of oil drops, shale producers have to close down as they will not be able to sustain production at a loss for long. Also, their cost of production is likely higher than some of the Middle East countries. Short of a recession, I would expect oil to hold. 

I think oil and SLB are good investments for a contrarian investor. I don’t like the immediate technicals, such as OBV and the slower stochastics pointing downward. With some pull back, this should be a good buy and I think I will follow my friend’s suggestion and put some money into oil using the technicals to figure a turning point as well as a stop loss level.

401K Monthly Analysis – The trend that refuses to end

All kinds of pundits are saying we are due for a correction, time to get out but the market keeps wanting to go up. As long as Yellen holds up on raising interest rates, and as long as the growth remains tepid, we are trending upwards. S&P500 (SPY ETF) remains caught in a sideways motion for a few months now and the only resolution possible is Up or Down. See chart below.

In my current employer’s 401K, the funds showing most strength are Fidelity Growth Strategies, Fidelity Blue Chip Growth and Fidelity Div Intl. Growth, Blue Chip and International.

In my previous employer’s 401K the top funds are Fidelity Invst Div Intl, Artisan Mid Cap FD and Fidelity Mt Vernon Growth…  all in all, a blend of growth and international funds again. Bond funds are nowhere in the top few yet.  

Long term treasury bond fund (TLT) hit a lower low and has been retreating. The inverse bond fund TBF is showing signs of strength. See chart below. All this has been on the likelihood of interest rates going up. There are those that feel that the Feds cannot raise interest rates and if we see that, then the market may very well surprise the pundits once again. I remain cautiously optimistic.