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Reminiscences of a Bean Trader or Why These Ain't Yo Daddy's Beans No-Mo
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Reminiscences of a Bean Trader or Why These Ain't Yo Daddy's Beans No-Mo

  #11 (permalink)
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random thoughts on traditional ta in the post-modern world

i would imagine that i'm not the first person to identify the classic diamond pattern on the daily soybean chart. it is certainly in compliance with traditional edwards and magee-type ta that had its origins when harry s. truman was president, the spx was trading at ~150.00, and the first monkey astronaut was launched into space. the break above resistance occurred two days ago and continued yesterday, and according to ta rules, signals a move to much higher levels. the market may indeed trade substantially higher, but not because of a perceived random formation. but, because of the true drivers of price and value, which is inevitably the imbalance between supply and demand. of course, if the market does indeed trade higher, the ta advocates will be screaming bull diamond formation. naturally, there is a very short list of possible outcomes; which begins with higher and ends with lower, so the ta advocates always stand a 50/50 chance at being right. however, an equal probability of success does not really cut it, when it comes to achieving consistent profitability in trading. and, the longer-term performance of a trading methodology based on random formations, such as the majority of those found in classical chart analysis, is flat for any sufficiently large risk/reward sample; and when trading friction is introduced, it becomes negative. however, the overwhelming majority of retail traders still use classical chart analysis to make trading decisions, and the reasons are; this is what they are taught by other naive retail traders, this is what they read in books targeted at retail traders, and this is the only analysis they can do inexpensively, and with little work, thought or effort.



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Last edited by tigertrader; May 23rd, 2014 at 06:36 PM.
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Any thoughts on the ZS U-X spread?

@Kurtas identified a potential seasonal trade in this thread.
https://futures.io/commodities-futures-trading/31477-commodity-spreads.html#post408960

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(The chart is inverted, he has a rather obscure way of looking at trades!)

I reran the charts, looking at days 100 to 20 before expiry, with just the last 5 years data.

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(This chart is about 5 trading days out of date)

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SMCJB View Post
Any thoughts on the ZS U-X spread?

@SMCJB

not really. i was never a spread trader pre se, except that i would trade bond calendar spreads in the pit, mainly because it was there and the transactions costs weren't; and and i could get the edge. in other words, i could put on a lot of size, with little risk- and little potential profit, but it was still worth my while because there was little cost involved in the doing trade. if there was squeeze in the beans and spreads were trading at full-carry, i would put on large bean calendar spreads, but once again, the reduced risk for small potential profit was offset by the edge and lack of friction. in an electronic venue, i see little reason to spread, ESPECIALLY intra-market calendar spreads. the potential profit is not worth the risk premium+ friction. my current style of trading has evolved into holding core positions for longer time-frames, while scalping around them intra-market, and dynamically hedging them on an inter-market basis. i have been long es since 04/28 @1847.50 while adding & scalping back-and-forth around the core position, and dynamically hedging the position in the bonds when needed. while having bonds on against the es is technically an inter-market spread, the intent is not to profit on the spread differential per se, but rather as a way to protect my position. however, in a stroke of luck and fundamentals, there have been times when both legs were profitable.

nevertheless, i have attached a report from moore on soybean seasonality that you should find interesting, and hopefully, helpful.

Reminiscences of a Bean Trader or Why These Ain't Yo Daddy's Beans No-Mo-ac-167_mooresoybeanfinal.pdf


Last edited by tigertrader; May 24th, 2014 at 11:09 AM.
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always interesting to see how fundamentals and sentiment are priced into the market

old crop (july) demand
old crop beans remains supported on strong cash values both at Gulf and interior crush points
though some WCB plants trying to break basis by rolling bids to the aug (similar play was seen in 2004, 2009 and last year).
this signals concerns by processors about a possible short squeeze on the July bean contract.

new crop( nov) demand
china continues to book new crop US soybeans as they lock up profitable new crop crush margins (selling new
crop Dalian meal, booking US new crop soybeans). US new crop soybean sales are still behind a year ago at 315
mln bu currently vs the 356 mln bu we had on the books this time last year.

new crop supply

US soybean planting is moving along with the drier weather the last few days and into the weekend.
US soybean plantings should jump toward 55-60% complete by Tuesday night
though not sure if the USDA report will capture all the progress over the weekend.

Argentine soybean harvest is being hampered by rains with progress at 70% now, 23%behind last year.
There is some concern about quality & yield losson the 30% that is in the field yet.

-info from rjo

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relatively steep old crop backwardation

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if one wanted to get long beans,

buy the contract with the steepest slope thereby maximizing roll returns

to further optimize contract selection, include highest momentum and lowest volatility

if one wanted to get short beans,

sell the contract with the flattest slope to minimize roll losses

to further optimize contract selection, include lowest momentum and highest volatility

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aside from being under capitalized, the biggest mistake aspiring traders make, is underestimating the amount of knowledge and deliberate practice required to become a successful full-time trader. for some reason, they assume trading is different from other performance related activities, and that they can read a book and step right into the market and make money. unfortunately, this is about as naive as someone sitting down at a table with poker pros, after playing a only few hands online, and thinking they're going to be competitive. ironically, the market and vegas have more in common than one might think. they were both created by the top-feeders for the sole purpose of taking advantage of the bottom feeders. the only real difference is in vegas you get free drinks. the narratives that are used to sell the dream are the same. and like all good narratives, there is just enough of a ring of truth to them, to make them believable. inevitably, they always appeal to our intellect and emotions, yet they only exist for the benefit of those who would like to take our money. understand this very salient fact and you will stand a much better chance of succeeding.

  • know you have enough Money- if you don't have enough capital to begin with, you're finished, before you started.

  • know the Market- the trader who has the better (more complete) and more timely (current) analysis will enjoy the greatest edge and have the greatest success- if you don't believe that a comprehensive knowledge of the market is important, you're well on your way out the door.

  • know your Methodology-it's taken me 8 years of trading electronically (after having been a professional trader for +30 years, to reach my current level of competency. if you truly believe, that you can compete against the most sophisticated traders in the world drawing trend-lines and channels and employing anachronistic trading methods, you're sadly mistaken, and soon to be broke.

  • know how to Make-Money- there is a big difference between knowing how to trade, and knowing how to make money. the latter is about doing whatever it takes to get the job done. it's about trading the right markets, in the right ways, for the right reasons. in other words, you don't trade a market , because you like its trading hours; you choose to trade a market because its the best vehicle for making the most money. and you trade it in the way, that affords you the highest probability of making the most money.

  • know yourself & your Mentality - there are a variety of different stressors, emotional/personality flaws, and biases, that effect a trader's ability to make objective decisions. be smart enough to know you're dumb enough, that you don't know everything. The successful performances are those that really aren't about you- don't let who you are get in the way of your trading success.

one last general piece of advice - consider the source of the information you seek. as daniel patrick moynihan once said, everyone is entitled to an opinion, but not their own facts. most books geared to the retail trader, are out-dated, irrelevant, ineffectual and misguided - and quite frankly, so are most of the posts you read on this forum. once again, everyone is entitled to an opinion, but only a few posters on this site are sufficiently qualified to render one. you can also choose to try to show everybody how much faith you have in your own methodology, even if it's never been profitable, or you can use the forum to learn from others who have actually been successful. if you really want to learn, find ways to assess information systematically and surround yourself with experienced, knowledgeable, and proven people, who will challenge your opinions; even when they tell you something you don't want to hear.


Last edited by tigertrader; May 27th, 2014 at 02:20 AM. Reason: five m's for success
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futures term structure

one of the most overlooked and misunderstood aspects of trading futures is the shape of the futures curve. yet, it is what intrinsically distinguishes futures from stocks, and both professional specs and hedgers are ever vigilant when it comes to scrutinizing term structure. if we are discussing commodities, we usually refer the shape of the curve as being in contango or backwardation, and if we are referring to an indexed instrument like the spx or the vix, we usually make reference to the term structure as being normal or inverted.

in the below chart, we have a diagram of a futures curve plotted with price plotted along the y-axis, and the contract maturity plotted along the x-axis, as we would have if we were to plot tthe yield curve of a treasury security. the top line is a normal market and the bottom line is an inverted market. the today marker represents the spot or cash price. in a normal market, the price for the deferred contracts get progressively more expensive, and in an inverted market, the prices for the deferred contracts get progressively cheaper than the spot price. in the case of a commodity the futures curve may invert, because there is some benefit to owning the cash product which is called “convenience yield’, and in the case of a financial asset, there may be a dividend conferred to the owner. with a commodity and a normal term structure, the premiums are determined by storage costs, financing costs (carry), and convenience yield.

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the difference between the spot price and the futures price is the basis, and these two prices must converge on maturity or traders would be able to arb free money. the static shape of the curve is referred to as normal/inverted, while contango and backwardation refer to the dynamic pattern as price moves up or down.

contango is when the the deferred futures price is above the expected spot price and because of convergence, the implication is the futures prices will fall over time to meet spot. backwardation is when futures prices are below the expected spot price and the implication is that price will rise.

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spot price


making money on the spot price is easy to understand. you buy it at one price and if you sell it for more you make money; if you are leveraged, you make even more money.

roll yield

here’s where futures are different from stocks. futures expire and if you want to hold onto a futures position for a longer period of time, you have to “roll’ your position forward from the expiring contract into a new one. if the new contract you are rolling into is cheaper you make money, but if it costs more, you lose money. if the market is in contango when you roll, you effectively lose money, and if the market is in backwardation, you effectively make money. this profit or loss you incur rolling your position is called the roll yield.

interest income

with futures contracts you are buying on margin and only putting up a fraction of the cost of the contract. the rest of the cash can theoretically be invested in t-notes at 2.5% giving you an additional source of income that will boost your total return.

e-minis

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as you can see from the chart the longer dated futures contracts are trading at a discount to the near contracts. this a function of 2 factors. interest rates and dividends. in the index arb world traders want to know how futures are trading relative to their “fair value.” the fair value of the futures vs. the cash index ( underlying basket of stocks) is the difference in cash flows between holding one or the other. the carry is derived from current interest rates, index price, time to maturity, and the dividends the companies in the index will pay between now and expiration.

once again, when you buy an e-mini future, you post margin and subsequently earn carry because you can invest the money you would have otherwise spent buying all the underlying stocks.prior to the qe/zirp induced bull market, eminis were always positive or had a normal curve. this was because the yield on the s&p was lower than interest rates. In other words, it made more financial sense to own the futures, rather than the entire basket of underlying stocks, because you can earn more in interest income on the carry, than you could from buying the cash index and collecting dividends

Now, however, interest rates are zero, or near to it, so the fair value basis has turned negative - the futures are "less desirable" than the cash index because you'll earn dividends by holding the underlying stocks, but you don't have any opportunity cost that you're saving by buying the futures - because the alternative reinvestment rate on that cash is zero. Thus, if you go out further on the futures curve, the basis becomes even more negative - because even more dividends are paid (yet the return on cash is still nominal)


corn

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The cash price of corn from harvest into the following summer normally increases roughly enough to offset the cost of storage. Judging the best time to sell stored corn is a guessing game that can have disastrous results. If it is held past the top of the market the following year, not only are you likely to get a low price, but excess interest and storage costs quickly take dollars off the net return. “Selling the Carry” is used by elevators almost every year to buy and store huge quantities of grain and be assured a positive return. The carrying charge is the price difference between a nearby contract month and a deferred month. In the corn market this is normally between the current December contract and the following July contract which is currently 0.22 cents. The ”carry” is a bid by the market to pay you for storing corn until July. Selling the carry is a very low risk strategy for generating profit from storing corn.

crude oil

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while crude is now in backwardation the curve had been in contango from 2008 -2009. physical commodity trading firms took advantage of the positive curve and would hold crude in their tankers at their cost and sell deferred futures contracts at a big enough premium to more than offset storage costs and interest rates. once a profit was locked in over the cash market price, they would still be able to sell the oil to a buyer short of barrels. the potential gain was open ended and the least they could make was the price diferentail they ahd previously locked in. billions of dollars were made doing this crude oil contango trade.

vix

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the vix story is an interesting one. because the vix is negatively correlated to the equity market , so the vix is in contango. it used to be that that steep contango in the vix futures meant that smart money was betting on higher volatility in the near future, and they were usually right. . But since 2008, and especially since the inception of the VIX exchange traded products 2009, the steep contango has not necessarily preceded equity selloffs. this phenomena exists even with the vix at seemingly oversold levels with the attendant expectation for mean reversion. this is because when the vix futures are in contango, the volatility products lose money on the trade when they roll the contracts before expiration to maintain exposure. as explained above, they are rolling longs positions into more expensive deferred contracts due to the contango.on the other hand professional traders continue to sell-the vol-and-roll their short positions because it remains profitable while in contango.

beans

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as you can see from the chart, old crop beans are in steep backwardation while new crop beans are flat to humped. the old school thought was coined bv keynes who referred to a premium tht producers paid in order to hedge their production. this typically found in storable commodities, where producer hedging dominates commodity futures markets and the deferred contracts trade below nearbys. in other words, producers who are long product must sell futures to hedge while there was a shortage of specs to take the other side of the trade. the result was backwardation caused by a "producer premium" that was paid for protection.

today, large hedgers ( “commercials”) exist on both sides of the market representing production AND usage. The deferred futures price may still reflect Keynes’ producer premium but it may presently be offset bya two-sided market and the “consumer discount” of today’s commercial users.

as alluded to above, more modern thinking attributes inverted markets or backwardation to “convenience yield”, that is, the value of having supply at hand—or the costs of unexpected supply interruption. industries dependent upon continuous supply flows or with high shut-down costs (such as energy) may be subject to persistent backwardation while industries in the midst of unexpected supply disruption (lost weather crops) may be subject to episodic backwardation.

in the case of old crop beans it seems much of the strength has come from the assumption that china will continue to be a huge buyer of us beans as their crush margins are currently looking favorable, and therefore the existence of a convenience yield. and while the convenience yield has a mean reverting behavior, there is level of stocks which satisfies the needs of the industry in normal conditions and, the demand of operators in the physical market guarantees that this level is maintained.

-tt


Last edited by tigertrader; May 27th, 2014 at 11:29 AM.
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range day in the beans

should be traded accordingly...

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covered my 1520.75 shorts from friday, this a.m. @ 1502.50-.75

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pullback to poc

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still above the monthly vwap

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I've recently started sim day trading ZS. I wonder if you could point me to a news source for upcoming releases that one should be aware of when daytrading?

Thanks in advance.

And the day came when the risk to remain tight in a bud was more painful than the risk it took to blossom

- Anais Nin
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