Bar Charts for Commodity Futures Trading
One of the most used tools in commodity trading is perhaps the chart. Charts not only show high prices, low prices, current commodity prices and other data, which can be used for derivative information generating. Each commodity trader has their own way of using and interpreting their charts.
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Some make up their own commodity charts while others will buy them from a commercial vendor. When it comes to their use, author remembers when commodity charts were charted on a big graph in the pits themselves for all to see.
QUESTION - Sometimes I wonder how organized commodity traders can be with all of the charts around their offices. I always thought the less information you had to research during trading hours, the better you would be able to react to the current market situations. What do you view with your charting?
There are advantages and disadvantages in charting. When you use them to look back to get sign, you are setting yourself up to believe you can actually be more right than wrong.
It is possible but you must never forget rule one regardless of how accurate your chart indicator shows over the past. Just because it worked nine out of the last ten times does in no way suggest that it will stay ninety percent accurate. Protect your positions at all times.
I think the main advantage which, I see in commodity charts is that you can plainly see what will be dictated to other commodity traders for them to think at certain points. You will remember that I said I don't totally agree that the commodity market is always right at all times but that is what we must trade with or against.
How many times have you seen public sentiment be a massive majority of opinion one way or the other? What happens? More times than not the thinking was wrong.
In charting I have to say my strongest signs are when support or resistance is broken and thinking is in the majority against what is happening to that support or resistance.
I don't want to go into specific type charting and indicators as there are so many of them and so many ways to interpret them. I will try and point out what I think is useful to all traders the most. I could explain each type of indicator and charting process but that serves no purpose.
Each trader must decide his or her own criteria for charting. My charting is based on knowing what the sign of each type indicate to other trades more so than to myself. I am always looking to find what is the edge to me.
I don't care about what the charts indicate if they are not my tools but since others do use them, I must be aware of those indicators. I need to know what other traders are thinking.
I don't position opposite to my signals ever but that doesn't mean I don't position opposite to my fellow trader's charts and indicators. My criteria takes into account the other signals though not directly a signal indicator to me.
There are many commodity trading plans based on various charts and indicators, which can be accurate over a period of time. The biggest problem with the dependable plans is that rule one and two are not a part of the plan and the commodity traders never get to trade in the long run.
The commodity trade plan may have what they call money management but that is always a weak point in the plan. Drawdown eventually demoralizes the traders. In the end all is lost.
QUESTION - Do you have any specific advice on using charts?
ANSWER - Yes, when you see what most charts give you, it is clear that everyone is looking at the same data to establish a method of being the most accurate.
The key in usefulness of charts as far as I am concerned is that you take everyone else's chart with a grain of salt and establish your own charting to be reflective of data not usually known to others.
All bar charts show the same things. It is a daily chart of high, low, close, open, volume, open interest and other moving averages or indicators. This is one reason I prefer a chart like a point and figure chart. It removes the daily bar graph points as the most important for that day.
Let me ask you what would you think of a chart, which takes the same parameters as a standard, bar chart but your daily high, low, close and open data had a time frame different than daily? You would laugh. I like that laugh! It tells me I have no competition with the idea.
I will give you an idea and an example here. Let us say you take and make a chart, which starts one hour and fifteen minutes prior to the close of a market. We will justify this by saying that the most important trading data for a day is in that last part of the trading day. We will call this the opening for your next day's chart.
One hour and fifteen minutes of today's commodity trading is already on tomorrow's chart. We will call this tomorrow's support and resistance. We continue to chart tomorrow until one hour and fifteen minutes prior to the close. This closes out our day's commodity trading chart.
OK I think you see what I am getting you to think about. Now keep in mind I am not giving you my way of charting but using this as an example of how to change your behavior when it comes to charting.
Most traders will never chart this way for several reasons and that to me is good. They can't get the data this way as they may only get it out of a newspaper, delayed or through a broker. Other reasons exist which prevent them from getting a different outlook chart.
I feel you need a jump on tomorrow's trading to get the edge. The edge to me is important but not as important as execution. It is just that with the edge, you can get better execution. You are ahead of the game because you are in front of the day traders, funds, scalpers and position traders because you are not using their data to follow them.
Instead you are using your data to look beyond their view. By using rules one and two, you can establish a plan which is a little more remarkable than anyone would think.
You will have to do back testing and research and most traders can't even come up with that data yet even today. I guarantee in the future there will be those who look at what I have done lately and say it is time to make the computers earn their keep. You see the frontier is just now opening!
The sharpest commodity trader with the most intuition will win here. I want you to remember where the idea of "Different Outlook Chart" came into play. It started with me when I was thirteen. It can start with you today.
Do your research! Do it again! Learn what different outlook charting can do for your commodity trading plan. I have given ideas of what my criteria is in trading certain situations so that an understanding of where I am coming from shows up. Vary your data times. Use fifteen minutes, half hour, half day, first hour and other time frames.
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I am giving you a gift here and someday it will hit you. Just don't take too long to see what is behind all three doors. I still want to point out that we will see different outlook charts as the years go by and they will get better and better. There will be a day when they are followed closely enough that they no longer have the same value.
In trading you need to change the odds to your favor. By using rules one and two you are moving in the right direction. By using your own mind, you are doing what that computer programmer did many years ago. You are looking at a different view. An artist will view his subject material from all angles. Shouldn't you?
QUESTION - Aren't you making it a little dangerous by telling traders to go find your own plan and make your own charting system?
ANSWER - I believe I am only making it a little more difficult in showing that trading is complicated when it comes to getting the edge in trading. I don't expect them to take entry and exit signals, which they devise without using rules one for protection and rule two for enforcement of their new knowledge.
I believe in the small trader! I know what the potential is because I know every trader started out as a small trader. Not one big trader started just big. You must start. There is no better place to start than at the start line. Only then can you say you went the entire course.
You must understand that somewhere as a trader the light must come on for you. There will be a point that the biggest mistake of your trading career will be the best mistake you have ever made.
QUESTION - On point and figure charting one question I see often is what size to make the boxes?
ANSWER - The fact of P & F charting is that the smaller you make the boxes and retrace criteria, the closer you will see the market characteristics and order flow. To learn the nature of trading and each market at first I suggest the smaller box sizes. Keep in mind for the retrace that it must have some significance beyond a normal bid and offer slippage.
Each market can be a percentage of daily-expected moves. I would say that as an example in soybeans that if the daily range is usually 9 cents, I would use a 1 by 3 box. Each box is one cent and each significant retrace has to be at least 3 cents. This pretty well says to take ten percent of the daily-expected move as the box size and thirty percent of the daily move as retrace requirement.
As time goes by you will want to extend the sizes to larger sizes. You may even keep multiple P & F charts to compare. Today computers can do this for you if you are set up for it. It is important to realize that at one time or another each trader will try and improve his trading office.
Is it good to improve your data before your success or after your success? The answer is a catch 22 as you will improve your trading as you improve your understanding of how markets work. Most traders do not want to extend the costs at first due to limited funds.
What really can you do with your data if it is based on someone else's criteria and information? You can only be a derivative trader of that restriction.
I am not going into how to specifically use P & F charts but many good books on the subject will be a good library add for you. Learn the highlights of support lines, resistance lines, three wave recognition and breakouts. You will be able to see what the trade does each day within the market parameters. This is important to see first hand and P & F charts are the perfect way to do it.
You are better off if you do your own charting rather than using a computer until you understand and see what important data is available on these type charts. I also suggest that if you had to use only one chart it would be a point and figure chart.
I don't mean to be weak on giving knowledge on charting but it is critical that each trader come up with his own thoughts and ideas. For someone to give you their thoughts just limits a trader's horizon of what is possible for them. Do your own homework and decide what your charting shows.
On some of my programs on charting and signal criteria, I narrow it down to inputs of importance. I could have as many as 64 inputs. I can weight each one according to how important they are or I can have them in one of two states only. Some of my criteria input is qualified by going through several doors first.
In other words if the criteria is met, that input must go through the next set of criteria. It sort of ends up like an eye examination as you expect one total answer in the end.
Charts and criteria are nothing more than the best set of eye glasses at the end of the examination. You will wear those glasses after your exam. Same in trading, you will use that data after your criteria is set.
Why argue with it? Many traders are always making exception. For example the last time they used their criteria signal they lost money. They won't make the next trade. The big one! If you lost money last time and aren't happy with the signals you must go back over your program or criteria and reintroduce the correct data that you expect to be required.
If at any time data is excluded which you require, your signals are useless. Get the total picture on your plan and not just the pieces. Have a definite signal and not a maybe signal.
There are times when nothing you do seems to work. When things continue to go bad, I can say to you that you have violated another known fact. Diversity helps reduce risk but only in the long term. In the short run we are talking about luck, both good and bad. Believe me that if bad luck comes first you are finished if you only depend on luck.
Charts are not an answer alone and have no use if your trades can't be executed promptly. Anytime you can't as a trader do what is required to get the position on, you will take the scales the wrong way. Remember you must be in before you can get a correct move.
QUESTION - What kinds of charts do pit traders use mostly in trading?
ANSWER - I have seen P & F charts bar charts with half hour, ten minute, down to 1 minute used. I have also seen several of the new popular volume based price charts as well as different color charts with indications of momentum along with price.
QUESTION - What type do you use when you are in the pits?
ANSWER - I never use anything but mental graphs when in the pit. The mental charts are more point and figure charts. They are really easier as I am looking for the third wave to position against the public on the third wave in my desired direction. It works for add on positions well and keeps my entry cleaner for protection requirements.
I don't go to the pit often anymore unless it is to be an exceptional day indicated by my signals. I will go to the pits when I have an unusually downward bias indicated, as gravity seems faster to me in those markets, which reverse to the downside.
Most of my charts are kept on computers but that doesn't mean the computer gives me my signals during the day. I like to have them before the day begins.
It is more mechanical that way and not ever emotional that way. That is an important point in trading to remove those human elements as best as possible. Only then can you truly be objective. Look at it this way. When it is no longer your money, it is easy to do the right thing. But when it isn't your money you can also be careless.
Just follow the rules and your signals without exception. If they don't work in the long run, you are not using the correct system or you're not using my two rules first and foremost.
QUESTION - You are still going to have arguments about your two rules as to whether they work for all traders!
ANSWER - We wouldn't have markets if everyone agreed on a plan. We would have nothing but limit day moves everyday. We really need various ideas and concepts. I just want one, which will work over time and keep my drawdown smaller than when I first started.
I must have a rule which allows me my freedom to know regardless of what happens today, I will be here tomorrow and tomorrow and next year and next decade if I wish to be.
Don't ever think that no one ever cared whether you learned anything in trading. I do care and I insist you take full responsibility to learn the correct knowledge. That knowledge must be not only criteria for trading but also the correct method of changing your behavior to that which are required to be successful in the long run.
Your trading career should be a long-term expectation on your part. A short time frame is not acceptable in trading. I am not saying that short-term trades are not acceptable but that you must look beyond one day in your trading career.
Some of the best traders started out broke! And then they got more broke. Until success!
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