The founding principles behind futures markets are for
businesses to hedge their positions. Ranging from General Mills buying sugar to
lock in their costs, to General Motors shorting the Yen in order to lock in
their agreed contract prices in Japan.
For a while I studied Larry Williams’ method on swing
trading commodities and it completely resonated with me. Mainly the basis of
his trading is COT analysis and seasonal patterns. Which is an oversimplification,
but nonetheless I finally felt like I was seeing what moved the market and
riding with the whales that moved those markets. The greatest part was, in
order to be wrong the market had to prove the big boys wrong who were betting
billions.
The S&P 500 E-mini, is an extremely liquid and cost
effective hedge/insurance product for the equity markets. I assume this as the
guiding fundamental truth of the market place. Another truth about the market
place is that it spends 80% of the time range bound, which means our goal
should be to devise a strategy to exploit the range. In short, mean reversion.
My favorite chart of all time comes from Dr. Brett
Steenbarger:
http://traderfeed.blogspot.fr/2006/12/three-lessons-from-daytraders-index.html
The entire post is well worth the read.
Here is a chart from earlier this week to illustrate how
powerful ranges are:
A poster recently commented on my ability to remain
objective about the market and ignore the news and personal economic opinions.
The truth is I merely apply the same principle that I learned through Larry
Williams.
Instead of a COT report, I can watch whether buying/selling
has dried up and whether the big blocks are selling or buying.
Instead of seasonal patterns to give me a window of
opportunity I have the range extremes primarily defined by the previous session
and overnight extremes.
If I am looking to buy, I am looking for a lack of selling
near a lower range extreme, confirming price action and buy blocks. At that
point, not only are we statistically likely (like the seasonal pattern) to head
up but now it is being proven by buyers and price action (like the commercials
getting aggressive). For me to be wrong, they have to be wrong. I never
questioned why commercial hedgers put so much money behind wheat heading
higher. Which means I have no reason to question why they are buying the S1
pivot. All that matters is that they think we are heading higher and they are
putting their money behind the opinion.
“The opportunity to secure
ourselves against defeat lies in our own hands, but the opportunity of
defeating the enemy is provided by the enemy himself.” –Sun Tzu
