Main menu

Short Term Traders Ask Short Questions

You can always tell a scalper by the type of questions he asks – short and to the point.

It makes them easy to answer. Here are some questions recently received via email.

Below are some of my thoughts on ZN. Wondering if you could comment on them? Am i in the right direction in analyzing the market? Do the 'rules' listed down in some bullet points make sense?

1. Scratch more often. Queue to enter. Scratch if size gets thinner too fast. See pt 9 too.

Love it.

2. When approaching a weak support or resistance from a few ticks away, fade once only.

Hmmm, sometimes yes, sometimes no. Try scaling in like you would in the levels drill.

3. The longer a position waits to square, the more likely it will lose. Scratch or cut non performing positions earlier.

More time in the market will teach you the 'know when to hold and know when to fold' approach.

4. Follow EMA 22 on 1 min chart. Only upsize once when touch ema. Reduce to one clip ASAP, by scratch/cut/tp.

Not my thing, but if it works for you then fine.

5. Fading major support/resistance fail: cut and turn around immediately.

Careful not to pay up on entry.

6. PATIENCE!!!

Absolutely, more than anything.

7. Look for leading signal from related market.

Yes

8. Try averaging moderately in sideways market. Enter at every two ticks.

Yes

9. For ZN sl and tp should not be 1 tick.

Yes, but be flexible

Trainee Question on Spread Exits

Question via email re our fixed interest spreading drill: I found that because the spread is expensive to enter at market, it in turn makes existing hard operation too. You didn't talk much about exiting in the reading. After a few hands, I think it is best to close [market A] at limit order first since it is less active. Then close the [market B] leg on limit or market order after. Are there guidelines on exiting?

A: I suppose I can (generally) say how you exit is dependent on the type of trade you have on and what the market is doing. “Well der” I’m sure you just said but let me explain.

If you are looking for trend trades, it’s not too different from a trend trade in the outrights. One good tip is to use an analysis of the outrights as well as the spread chart. You can then get look at unwinding one leg at a time.

If you looking for mean reversion, look to cover around the mean. Many make the mistake of trying to sell high and buy low. It’s actually selling high, covering at the mean, buying low, covering at the mean. Why? Because there is no guarantee a market will oscillate equally around a mean. That is, just because price has shot higher to an overbought level does not mean it will follow with a reversal to an oversold level. It’s easier just to bet on the market returning from an extreme to normal than one extreme to another extreme. This is similar to how some people use Bollinger Bands. Hold on – there’s an idea!

Bond Spread Reacts to Fed News

This is an example of a move in the Aussie 10yr bond futures versus the US Tnote driven by fundamental news. This week’s news from the Fed presented a good (low risk) opportunity in the spread.

The news came out bond bearish – and logically it was bound to affect the US market more than it would the Au market. If not wanting to carry the risk of an outright short position, the trade to make would be long Au and short US.

Over the course of the evening, both markets lost ground – about 23 basis points for the US and 14 for the Aussie.

The spread therefore drifted in favour of the Aussie market and improved by about 9 basis points.

Action shots below.

1010example

1010example 2

 1010example 3

 

 

When to Roll Bond Futures

Question via email: Will we need to switch to the Sep bonds once we start [sim trading] in June? How should we determine when to switch to the next expiry date?

Answer: Au and US fixed interest markets roll at a different time of month.

SFE bonds

Au bonds are easy because they are cash settled. Like most cash markets I can think of, the volume in the near month dies just before expiry – within the week leading up to last trading day. It is a ‘general’ statement for almost all markets, but accurate for the Au bonds.

In the week or so leading up to expiry, you’ll see the 3yr bond trade in half basis points (0.005 instead of the usual 0.01) and funny looking bulk trades go through time and sales for each contract. Those trades are happening in the exchange spread market (I will elaborate more on that when it happens.)
The short answer is for Au bonds, we will start trading the Seps a few days before June expiry in the middle of the month.

US Treasuries

Since this contract is deliverable, there is what they call a Notice Period. This is where a contract can be delivered. In most cases, the notice period lasts a couple of weeks.

Unless you want to put the cash bonds in your bottom drawer, you don’t want to be trading the futures during this period – and most people don’t.

Now, there is what we call the First Notice Day (FND). You guessed it – that is the first day of the Notice Period. For contracts that are deliverable, such as treasuries, most trading volume drops off right before FND.

This year, June Treasuries expire on the June 19th and FND is May 31st. This means next week, we will be on to the Sep contract.

You can see the pace of the bond roll either by looking at open interest in a chart or using this link:

http://www.cmegroup.com/trading/interest-rates/paceoftheroll/

How to find expiration and first notice days

There are two ways:
1. The exchange website. On most sites, you’ll find an event calendar or expiration schedule. That’s easy enough.

2. There is also a tool on CQG called ‘Contract Spec’. To find this, click on the contract you are interested in (i.e. highlight a chart). Then in the top menu, select More, then Contract Spec. Details of First Notice Day and Expiration are right there.

Why do you trade what you trade?

I’m just reading a book called Traders at Work by Bourquin and Mango (yes, it does sound like a stage act). One of the traders profiled said he started out as a floor trader focussing solely on the September to December spread in Corn.

This can be a good spread to trade, but it can also be super sleepy. From Nov 12 to March 13 for example, it stuck mostly within a 7 cent range. In Corn 7 cents equals $350.

Back when he was doing it, it was probably even smaller. So how does one make a living from this? Was he waiting for the MACD divergence, the third wave count or the chart breakout for every trade? Highly unlikely.

It’s interesting to think how he could have made money from this. For our trainees, hopefully that scalping drill now starts to sound more like a useful skill than a strange exercise.

The novice trader seems to be drawn to high volatility like a moth to a light. The seasoned trader is more likely to be found trading something out of favour or ignored by the populous. Think about it.

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets

Of Spreads, Corn, Gappers and Reopens

Here is a good example of how the market behaves when price reached a trading limit. Here we are looking at Corn after a USDA report. Old crop July went limit down right after the data and pretty much stayed there. New crop December also sold off, but stayed above limit.

Corn limit down

Now, the exchange spread between the two also continued to trade – and it continued lower.

Corn limit down 2

If you were calculating the spread between the two by taking one price away from the other, you’d get a different number from the exchange spread. That is because July was limit down and therefore not moving – while Dec was.

The exchange spread however is the true representation of where the market is.

Now this is really handy to know because it will give you an idea of where July should be trading if there were no trading limits. Or more importantly, it can give you an idea of where the market can re-open in the next session.

We know Dec is trading at 546.25 at the July-Dec spread is 111.75. To calculate what we can call a fair value for the July contract, we just add the two together. Simple!

546.25 + 111.75 = 658

A fair value of 658 is a way off the limit down price of 676.0.

So how can you trade that? Assuming the spread value holds over the course of close to next open, then an actual open too far away from 658 may provide a fast trading opportunity. 

If for example, July opened around where it closed (limit down at 676), that would be a pretty low risk short.

Do I have to wait for a limit move? No, these kinds of things happen on a smaller scale all the time – and you don’t need a limit move for opportunity to present itself. What do you need is a market in which you can estimate a potential open that is somewhat reliable.

In the above example, we estimated where July should open based on the Dec price and the Jul-Dec spread.

In a way, looking at a calendar spread in a limit down scenario is a little like having two related markets such as the Tnote and the Aussie 10s with one of them trading while the other is closed.

While one market is closed (namely the Aussie 10s) the other can move about and affect where the other market ‘should’ open.

Given our Aussie bonds take lead from the US, a reasonable sized move in the Tnote means the Aussie 10s will gap in that direction when it opens and plays catch up.

How do you calculate that potential gap? For fixed interest, that’s where DV01s come in – and it’s all explained in our Bond Fundamentals book (see DV01 Gapper).

Summary

This article started out about Corn limits, but ended up talking about fixed interest markets. However there is a parallel there. A limit move can provide opportunity if you know what you are looking for (i.e. know how to calculate an expected re-open). Same goes for related fixed interest markets.

I bet there are other markets in which you could apply this concept…

When Nothing Goes Right

Question:
I have a question about when you are having a day with bad trading result.  Let's say you have been trading about 5 hours so far but you have only 1 win trades and more than 20 lost trades a day.  Excluding mental management point of view, how do you manage your trade for rest of day?  Take a break or change your trading strategy?

Trainee Question Time: Using Stops

A question received from a trainee currently on our simulation program.

Q: Would you recommend using a stop (SL or SM) order to protect against sharp movement?

Propex Morning Reports

The morning Bond & SPI reports are for the sole use of Propex traders and trainees. It will no longer appear on these pages.

Should you wish to receive the reports please contact Alex by email at the following address This email address is being protected from spambots. You need JavaScript enabled to view it.

Subscribe to this RSS feed

NEW TO TRADING?

Download the Guide to Proprietary Trading and receive our free educational updates.

FacebookTwitterTwitterGoogle+YouTube