Momentum Day Trading

A good momentum trader would wake up early in the morning reading up on news that may have affected existing trades, or new ones generated the previous day by his system. Momentum traders use online trading platforms more often as it gives them the power of speedy trading. These platforms also provide the latest market news and picks for the trading period. Commodities that have shown very large volume growth with an increase in momentum recently are ideal candidates for the next few trades. Business channels often blare out the latest commodity market updates live and traders gather as much information as they can to help them determine which trades they are going to take.

Momentum traders use charts regularly to determine trends and momentum picks.

Momentum Trading With Charts

A good momentum trader picks trades by using key indicators which usually includes the momentum indicator. This indicator analyzes actual total changes in a commodities closing price over a predefined amount of time while comparing its traded volumes. These are what will tell the trader whether he can shortlist the commodity or not. Once the trader has picked out the trades that match his criteria of being in momentum, the chart for the commodity is pulled up and analyzed. Here, re-confirmation of a trend and momentum are established in different timeframes for the same commodity. When a breakout is confirmed either up or down, then the order to buy or sell the commodity futures is placed. As soon as this order is executed, the disciplined momentum trader immediately places a stop order limiting his loss to a certain fixed amount, which is determined by his trading system.

If he is correct, the commodity will move in momentum, and breakout of its range. If it does so, and the trader keeps investing the money on this particular trade, he will maintain a keen eye on his technical indicators and oscillators for any exhaustion signals. As soon as he gets an exhaustion signal, or his target is reached, he will place an order to close the trade. While his trade moves in momentum, he will also move his stop up slowly to make sure he locks in some gains every time the trade responds in his favor. This is called a trailing stop. Of course, he will be stopped out if he is wrong.

Thus, a momentum trader essentially uses momentum indicators to trade possible breakouts in futures or futures options, which are showing momentum according to the trading system on the charts. However, to be a good momentum trader, discipline and hard work is necessary.

Futures commodity trading, as we know it today, came about for the first time in Japan in the 17th century, where rice was traded in future contracts. It was a period when farmers and buyers came together and decided to commit to each other future prices negotiated on suitable terms in exchange of grain for money. For example, a dealer would agree to buy a ton of rice at the end of the next month for a certain price from a farmer. This would be ideal for both parties, as the farmer would know how much he would get for his rice in advance, and the buyer could plan to raise the money he needed for the purchase. Contracts such as these became more and more popular and common, and were even used as collateral for taking loans. If the buyer could not take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer could not deliver the goods, then he could hand over the contract to another farmer. Thus began commodity futures trading, as we know it today. 

What Are Commodity Futures?

Today, most of the futures commodity trading exchange are set up in a similar way.  Members of the exchange do the actual trading on the floor.  Stock stands for equity in a public company, and can be held as long as you want whereas commodity futures trading contracts have a specified life. In the past, people used commodity futures trading methods mostly to hedge risks and fluctuation in prices, or to take advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of the commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to buy the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. It is to be noted, however that, the delivery generally doesn’t take place. The contract is usually liquidated before its expiry. The entire trade is based on the idea that there will be no delivery, but we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading and futures options trading is done all over the world now.

Different Types Of Commodities

There are many types of commodities that are traded in the international market.  These can be very broadly categorized into the following:

•    Precious metals like Gold, Platinum, Silver, etc.,
•    Metals such as Aluminum, Copper, Steel, etc.,
•    Agricultural products like Rice, Corn, Oils, Cotton, Wheat, etc.,
•    Soft commodities such as Cocoa, Coffee, Tea, Sugar, etc.,
•    Livestock like potbellies, cattle, etc.,
•    Energy commodities like Crude oil, Gasoline, Gas, etc.

If we include forex markets, it has been noted that volumes for futures
trading is far more (or many times over) than those of equity markets in
the US. This goes to show us the amount of interest that futures trading generates worldwide.

%K = (Recent Close-Lowest Low (n) / Highest High (n) – Lowest Low (n)) x 100

%D = 3 period moving average of %K

And (n) = the number of periods used for calculations

Hence, a 20 day stochastic oscillator would take the most recent close, the highest high of the last 20 days as well as the lowest low of the last 20 days. The general time period used here is the 14 time period. These formulas are given here for clarification only. One rarely ever needs to calculate these values manually, as the software used for charting will automatically plot it straight on your commodities chart.

Stochastic Oscillator – How Do We Use It?

Basically, Stochastic Oscillators have three types. Fast, full and slow. By default, most software for trading tends to use the fast one. Here, the oscillator comprises of two lines. The first one is %K which measures the raw momentum of the commodity. As discussed earlier, %D is just a simple moving average of %K, but is still more important than %K. Generally, it is seen that the %K line is the faster line, and the %D line is the slower one. A trader needs to look out for %D line and price both moving to either overbought territory, or the oversold territory. You can sell the commodity when it moves above 80, and then crosses over to begin moving down again and buy when it reaches 20 and begins to move up again. The slow or full stochastic oscillators are smoother, as compared to the fast stochastic. However, it is important to know that just because the oscillator shows that it is above 80 does not mean that it is overbought. It may well continue to trend upwards a long time after that.

Divergences

Sometimes, something unusual happens. There is sometimes a divergence between the prices and the stochastic oscillator. When prices are moving up the oscillator is showing that it is oversold, and vice versa. This tells us that the current trend is losing steam. So, if the commodity moves up, but the %D is going down, this would be a bearish sign. However, it must be noted that the signal is not considered a divergence till %K line moves across the %D line in a direction opposite to the price. One has to be careful with the stochastic oscillator as there are a lot of whipsaw possibilities. Divergence trades are best taken when the oscillator moves below 80 once, moves back up again, and gives a double top formation to move down again below 80.

It is not advised to use this oscillator by itself for commodity and commodity options trading. It is always better to get verification from as many different indicators, but this indicator will give you a very good idea about the trend momentum of a commodity.

Day Trading Defined

Those who trade and complete all their trades within the period of a day’s trading session are known as day traders. Day traders have to square off all their trades by the end of the 24-hour period. That is their time limit. If they hold their positions for any longer, they can then be called position traders, and not day traders. They are the most common form of traders to be found in commodity markets.

Day traders like to churn their capital on a day to day basis to maximize its return. They prefer not to lock in capital for extended periods of time. More often than not, they have very limited capital to leverage, and cannot afford to block it all. Speed is the name of the game where day trading in commodity futures is concerned.

Facts About Day Trading

It has been observed that you stand a better chance of earning money in day trading commodity markets if you are prepared to invest a bigger amount of money. This is because more money gives you the option to diversify your investment and manage the risks better.

An important component of commodity futures trading and futures options trading, is using charts that allow you to decide what you want to do. Secondly, those who follow trends taste success.

As in all things, there are limitations that day traders face. The most important being that they trade in a single day’s session. Hence, they cannot let their profits run any longer even if they want to – they are limited by time. They prefer by choice to take the money and run. Time is money, and time is limited. Another issue that crops up at some time or another for day traders is their stops. They cannot have too large a stop for fear of losing a lot of money. Therefore, they have to keep narrow stops, and thus increase their chances of being whipsawed out of a trade early. Ask any old hand about being whipsawed, and they will tell you that it is a part of the game. Daily ranges also limit targets, as the luxury of hanging on is not available. Quick profits are targeted, and many a time commodity day traders have to get out of a trade at the end of the day having made very little or no money from it.

However, those that day trade are not to be under estimated at all. They truly form the volume numbers of the commodities market. Many intraday movements are because of day traders. They cause sudden spurts in commodity prices with heavy buying or selling. An integral part of the commodity market, they form the backbone of the commodity market.

Though futures options are quite risky investments that can only be understood by expert traders options can be very useful to the individual investor as well.

Futures Options can also add value to your portfolio and have several other advantages that are definitely worth noting. A few are outlined below and will help illustrate reasons why options have gained so much popularity in such a relatively short period of time.

The first advantage of options on futures is that they can provide increased cost efficiency. Since they possess great leveraging power, you the investor can obtain a great option position that nearly mimic a futures position but save you unnecessary cost.

The second advantage is that they provide less risk when used correctly. While there are situations where buying options is actually riskier than owning the futures, but they can also be used to reduce the amount of risk incurred. Futures options can be less risky because they require less financial commitment than equities. They are also the most dependable form of hedge which makes them safer than stocks.

The third advantage of futures options is they provide higher potential for returns. This means you can spend a lot less and make nearly the same profit as you would with the underlying futures. This gives you a higher percentage return.

The fourth and final advantage discussed in this article pertains to the strategic alternatives futures options can provide. Options are a very flexible tool and provide many ways to recreate other positions. These positions are known as synthetics. Synthetic positions provide you the investor multiple methods of attaining the same investment goals which can prove extremely useful.

The four points outlined above are the key advantages futures options offer and are a contributing factor to their growing popularity. If used correctly, they can present less risk than straight futures and they can actually save you unnecessary costs while providing you the same profit. This is important to consider when selecting a type of investment. You want to get the most out of your money and futures options provide several ways of making this happen. Take the time to review this information before ever making a buying decision. Make sure you understand how you may benefit from the decision you make and what it will mean for you in monetary terms.

Before you decide on a particular investment, consider the key advantages and weigh the risks of each possibility against what you are willing to lose. Be sure you understand how to correctly utilize futures options in order to get the most out of them. You are investing for your future so think wisely and choose carefully. The more you know, the closer you’ll be to a more secure and prosperous future.

Moving Averages: How Do We Use them?

Moving averages identify trends and trend reversals, give a measure of a commodities’ strength, and help you arrive at support and resistance levels. Essentially, moving averages are indicators with lag, which is to say that they do not identify new trends but are useful in trend following.  One of the most useful ways in which you can use moving averages as buy or sell indicators, is to have three moving averages running at the same time on the same chart. The idea is to have a short, an intermediate and a longer term time frame. When the first two move upwards and cross above the longer term one, it indicates an uptrend and one can buy. The reverse happens if the first two move below the third moving average. In that case, you can sell, as the commodity is in a downtrend.  A good example of this would be a 10, 20, and a 30 day period moving average, plotted on a commodity chart.

Moving averages are also used by traders to determine support and resistance of a commodity. When the commodity reaches a moving average and struggles to move above it, you might have found resistance. If a commodity stops falling at a key moving average, it can be deemed to have found support.  A prime example of this is a 200 day moving average, which is used to calculate long-term trend directions, and to find support and resistance in them.

Types of Moving Averages

There are different types of moving averages. The simplest one is the simple moving average (SMA), which is calculated by taking the normal arithmetic mean of a specified set of numbers. The exponential moving average (EMA) is calculated by giving weightage to more recent data.  The EMA is regarded to be a better moving average compared to the SMA.  Both of these moving average variants become very useful when used for trend following with moving average crossovers. Indicators such as the moving average convergence divergence (MACD) and Bollinger bands use moving averages as key components. The MACD shows the price divergence of two moving averages, by subtracting a 26 period EMA from the 12 period EMA. A third 9 period EMA is used to give us buy and sell signals when it moves above or below this MACD. Bollinger bands, so named after their creator, use two standard deviations plotted away from a 21 period SMA.

Whichever way you look at it, one cannot deny that using moving averages by themselves may not make you a millionaire in a hurry, but are brilliantly useful in helping you follow trends and plan your commodity trading and commodity options strategy.

How To Use Charts

A good trader will always use professional charting software that give him the right tools, and are comprehensive in nature. Good software will give the discerning trader the variety of tools he requires for his daily trades. Some of the different types of charts that can be viewed by such software are candlesticks, bar charts, and open-high-low-close charts. Traders can (and often do) view these charts in many different time frames starting from as low as one minute to monthly and yearly as well.

In fact, most traders work with at least two or more timeframes when they are trading to get confirmation of a trade in more than one time frame at a time. They put in the indicators they want to use and check the filter to see what commodities result as trade possibilities. The biggest additional benefit of having charting software is to be able to incorporate your own custom indicators and oscillators that you can use in different time frames. Some software’s even allow you to build your own indicators by programming them into the software yourself. This flexibility makes having charting software so useful and worthwhile.

Advantages Of Using Them

For commodity future traders and futures options traders, charts are exceptionally useful in determining the trades that they will take. Having technical filters help you short-list the commodities which are currently showing a buy or a sell. You can tell much more easily whether a commodity is trending or not. Simple tools such as it moving above a moving average with very large volume expansion can give you the signal you are looking for to buy into a commodity. It also helps you determine what commodities are concluding their trends so you can sell them if you have any lots. The data itself is easily available and many vendors add it at little or no cost as a package deal when you decide to open a trading account with them.

Essentially, charts tell you when a commodity is trending for you to enter into a commodity trade or commodity option trade, give you stop levels, help you decide on a target for your trade, and give you an indication when the trend may be ending. Now, if these are not things worth having, then what are? Some comprehensive and popular software includes names like Metastock, Tradestation, and Advanced Get.

A visual aid is always easier to understand, and offers you the scope of being much more detailed in your study of any commodity. That is why charts are now the industry standard, and will make things much more easy for you if you too use them. At the end, you have to remember that these tools can only help you indicate a buy or a sell, but it is you who has to take the call and decide what you want to do.