Introduction to Commodity Pyramid Trading

This article discusses the how to to profit from commodity pyramid trading.

These key points will help you learn this technique:

  1. What is Commodity Pyramid Trading?
  2. Commodity Pillar Trading Comparison
  3. Commodity Pyramid Trading Comparison
  4. Commodity Pyramid Trading Useful Tips

1. What is Commodity Pyramid Trading?

This is a method of trading commodity futures contracts in such a way that when the profit from a single trade equals the current margin for the commodity, the profit is used to self-finance an additional futures contract. This self-financing process can take either of two methods: Pillar trading or Pyramid trading.

The Pillar trading method involves adding one futures contract to your position during each self-finance round, while Pyramid trading adds one futures contract – but from each active futures contract with each self-financing step. These results in a doubling of your position during each self-financing step.

Both pyramid trades and pillar trades (hereinafter referred to as pyramid trades) should exhibit several characteristics which make them high profit potential candidates. These characteristics include:

  • The market is quiet and has exhibited low volatility for several months.
  • The margin for the commodity is relatively low.
  • The market is set up for a major move. This is evidenced by extreme commercial / public signal, as well as a 12-month high or 12-month low on the daily price chart with a reasonably 1-2-3 Top or Bottom price chart pattern in the process of unfolding.

A VERY IMPORTANT NOTE: The biggest danger in any futures trade is a limit move which goes against your position. With a single futures contract, this is risky enough. With multiple futures contracts, this risk is seriously compounded. However, if you monitor the market conditions (both technical and fundamental market conditions) and the financial news on a daily basis, you will generally receive a timely warning of an impending limit move which may go against your position – giving you time to close out your position before that occurs.

The Pyramid Trading Form

The Pyramid Trading Form is at the heart of helping you to successfully implement and manage these trading strategies. It contains areas that will let you monitor and track up to three commodities using this trading strategy. Each area allows for up to 7 futures contracts to be held in the pillar trade position, and up to 64 futures contracts in the pyramid trade position.

How To Identify A Good Pyramid Trade Candidate

At any point in time, there will be several commodities with varying degrees of profit potential. However, it is important that you identify the commodity which has the best chance of being a profitable pyramid trade. This means that you must perform a current analysis of all commodities to identify the commodity that meets the following requirements.

a. You must first use the Commercial / Public selection tools to identify the commodities that appear to be ready to make a major move.

b. Of these commodities, identify those that appear to be making either a 1-2-3 Top or 1-2-3 Bottom in the daily price chart. Calculate the daily 50% retracement target for each one. Also calculate the dollar amount the move representatives.

c. Where applicable, use the weekly chart to calculate the weekly 50% retracement target for each commodity. Again, calculate the dollar amount the move represents if the weekly target is attained.

d. Identify the margin requirement for each commodity. The ideal pyramid trade will be one with a reliably small margin requirement and with a dollar amount profit potential that is at least three times the margin requirement for the commodity.

e. The commodity that you select must be a quiet commodity – that is, one which does not have wild price swings.

f. The commodity you extremely select as the best pyramid trade candidate must also have sufficient time to allow the move to unfold. This means you need to get into a more distant month to minimize loss from commission switch requirements (which can be expensive with 16 or more contracts in your position). Select the more distant commodity contract month that has 120-180 days available until the Last Trading Day (LTD).

g. The commodity which you have selected must have a daily volume of at least 10,000 contracts for adequate liquidity. Open interest should also be 10,000 or more.

It's important to remember that once you are in a trade, you must religiously perform an analysis on a daily basis so as to identify any changes in the original analysis that may adversely impact your trade. In addition, you should always monitor fundamental "news" which will affect the price of the commodity. For example, if you're short Orange Juice – and Florida has a freeze warning – close your position fast!

2. Commodity Pillar Trading Comparison

The commodity pillar trading strategy is the least risky of the two strategies because you only acquire one contract with each applicable price (profit) increase.

An example pillar trade rejected in $ 12,650 profit (before agreements). During the trade, your total risk was restricted to $ 400 or less. If you had traded only one futures contract (with a 93.79 entry price, and a 94.92 exit price), your gross profit would have been $ 2,825. The pillar trading strategy produced the additional profit.

3. Commodity Pyramid Trading Comparison

The commodity pyramid trading strategy is the most risky of the two strategies because you acquire two contracts with each applicable price (profit) increase. This results in a risky "inverted pyramid" position which, if not intelligently managed can produce significant losses.

An example Pyramid Trade rejected in $ 72,200 profit (before agreements). During the trade your total risk was restricted to $ 4,600 or less. Again, if you had traded only one futures contract, your gross profit would have been $ 2,825. The pyramid trading strategy produced the additional profit.

4. Commodity Pyramid Trading Useful Tips

There are several things which you must do when using the commodity pyramid trading technique described in this course. Failure to do so will likely invite grief into your life.

* You must perform an analysis of the markets to identify an ideal pyramid trading opportunity. Having done that, you need patience and commitment to wait for the inevitable move in price. Your previous efforts at paper trading have given you the confidence and skills to identify major moves. Trust your skills.

* Get into the more distant futures contract to avoid the need to "switch" contracts. The commission on 64 contracts at $ 40 per contract will cost you an extra $ 2,560 in commissions each time you switch.

* You must monitor your position daily. This involves being aware of what the "tools" (described in my complete Commodity FUTURES Trading Course) are telling you about the current state of the market.

* Be aware of any "news" items which would have an impact (positive or negative) on the commodity you are trading. For example, if you are short in Orange Juice, a "freeze" warning in Florida will cause price to move against you, and can likely result in a limit move – a catastrophe you should immediately take steps to avoid!

* A price move generally results in a series of minor retracements; leaving a support point during an increase in price, and a resistance point during a decrease in price. It is a sensible strategy to place the stop-loss a little below the support point for the uptrend and above the resistance point for the downtrend.

* Timing of the order entry is critical. You need to predefine what your entry strategy will be during each phase of pyramid trading.

Closing Advice

You must do your homework and try different strategies using various price charts. By covering the price chart with a sheet of paper so you can not see price action beyond the entry point, you can slowly move the sheet of paper rightward exposing subsequent price action. This technique lets you retroactively "simulate" various strategies and react to market changes. Of course, you should also be entering the applicable data into your Pyramid Trading Form to track your "simulated" trade. This will give you skills and confidence to use this pyramid trading technique.

Special Note: There is substantial risk in trading commodity futures and options.

(C) 2008 Thomas Wnorowski



Source by Thomas Wnorowski

Introduction to Forex

Today, well over 1 trillion dollars per day is traded on the currency exchange market. This amounts to roughly one third of the US GDP. This amount absolutely dwarfs what is traded on equity and commodity markets on a daily basis.

So why is changing currency so popular? Why do more people want to trade on the currency exchange market than on markets for commodities and equity? Well, to give a simple answer: many of the people in the market for Foreign exchange are not investors. For instance, some of the largest players in the money exchange market are multi-national corporations, who need to constantly swap contracts, so they can purchase inputs or finished products from producers in other countries. Other
major players in the foreign currency exchange market include federal governments. They will often purchase other currencies to stabilize their own currency in relation to another. For instance, if the US Treasury or the Federal Reserve System were to purchase Euros (and subsequently take them off the currency market), the value of the Euro would increase in relation to the dollar. This would stimulate European demand for American imports while decreasing American demand for European imports.

While the above partly explains why the demand for exchanging money is so great, it does not do so completely. One other reason why the demand for foreign exchange is so great is because it is the most liquid investment vehicle available. While selling stocks and bonds may take a while and may be dependent on market conditions, selling contracts is usually quite easy. In fact, most online brokers allow you to trade with "no slippage," which means that the second you click "sell," you actually sell the currency you're holding at the exact swap ratio listed on the trading platform. This means that you do not need to worry about getting stuck with a currency that is rapidly declining in value. Rather, you can sell quickly and get out at any moment.

One last factor that has perpetuated the growth of the money exchanging market is international bank holdings. Not only do banks often exchange currencies for their business account holders when they make transactions, but they also sometimes offer to hold deposits in banks overseas or in different currencies. This can prove to be quite advantageous for depositors. For instance, if the value of the dollar is climbing rapidly in relation to the yen, Japanese banks may start to put some deposits into dollars. After the value of the dollar has appreciated significantly, depositors will be able to exchange the dollars for yen, getting back more yen per dollar than was initially deposited.

As you have read, money exchange is a massive market, which influences the decisions of governments, businesses, banks, and individuals. Not only does Forex allow each of these players to make an extremely liquid investment, but it also makes foreign transactions easier.



Source by Mark Crisp