Con-tango

The Regression to the Mean

Playing Dice by René Schützenberger (circa 1910).

Peter Bernstein’s Against the Gods captivating history of risk rekindled and made me look with new eyes the regression to the mean trading approach —where many good methods take their cue.
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The Contango

Hilary Till, Principal Premia Capital Management, LLC

Continuing with Hilary Till’s study, the next interesting find is the roll yield embedded in the term structure of futures contracts. In her own words:

In the past, even if spot commodity prices declined, there was an additional way that a commodity investor could have a positive statistical expectation of profit, and that was through the “roll yield” embedded in certain commodity futures contracts.
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…Going to the movies

NYMEX_CL_X06, Chuck Le Beau's Giant Footprints

This is a snap shot of Chuck LeBeau’s latest little film; and it’s related to the recent drop in crude prices. Unfortunately for Amaranth, they did not take to heart this basic lesson in trading…

Click here to watch this nice video.

Happy trading.

Giant footprints

Chuck LeBeau

Chuck LeBeau, author of a few trading books and a trader I respect very much, sent this promo video of his MarketClub, which I find quite instructive and entertaining…

He describes step by step his "Great Footprints" trading method; which in essence looks at the quarterly, monthly, weekly and daily charts of a security to confirm its trend.
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Curl your toes… to relax while trading

Happy feet

…yes, you’ve got to curl back your toes to relax.

Stress is inextricably intertwined with trading.

Worth a pretty coin: assess your emotions while trading; then, jot down what would happen to your account if you trade a fade of your emotions…
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Trend channels

As we previously saw with the channel breakout method, channels are a good source of support and resistance. But channels can also be used when prices are trending.

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Channel Breakout

I wanted to share with you guys the channel breakout formation setup I see in GC0604.

First, channels are a natural extension of the high (low) hooks mentioned in our previous post. Think of them this way, the more times a high (low) resistance (support) has been challenged the stronger it becomes, and the harder it is for prices to break away from the channel top (bottom).

Originating from Joe Ross’s channel breakout, I’ve set the following modified simple rules for this setup:

• There are two conditions to enter a trade:

The channel is at least 40 days old, or the breakout will take a 40 day high (low).

Buy (sell) on a stop at a price set at a quarter of the height of the channel above (below) the ceiling (bottom) of the channel.

• To exit the trade on a failure:

Sell (buy) on a stop at the opposite band of the channel; bottom (top) when long (short).

For our example, the height of the October – November 2005 GC0604 channel is $27.5 = $490.1 – $462.6,
then a quarter of the channel is $6.9 = 0.25 * $27.5,
the stop order is placed at $ 497.0 = $490.1 + $6.9
and the protective stop at $462.6.

Looking at this present GC0604 chart, we see a similar formation with a ceiling at $579.5 and bottom at $534.5; so we have a potential breakout trade if $590.75 is taken,
from $590.75 = $579.5 + 0.25 * ($579.5 – $534.5);
and a protective stop at $534.5.

(I would consider a $562.0 stop protection; $534.5 is too harsh for my taste…)

We’ll see what unfolds.