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CONTRACT VOLUME VERSUS TOTAL VOLUME

December 5, 2009 // Posted in loans (Tags: , , , , ) |  Comments Off

in futures markets, in which individual contracts specify standard delivery months. the volume of each contract is available, along with the total volume of the market; that is. the total volume of all individual contracts. Spread transactions are not included in volume. This information is officially posted one day late, but estimates are available for many markets during the day. Total volume of crude oil is estimated even, hour and released to online news services.
Individual contract volume is important to determine the delivery. month that is most active. Traders find that the best execution fills are most likely where there is greatest liquidity. Analysts, however, have a difficult time assessing volume trends because there is a natural increase in volume as a contract moves from second month out to the nearby and traders shift their positions to the closest delivery month; there is a corresponding decline in volume as the delivery date becomes close. Looking only at the volume of one delivery month is equivalent to ignoring seasonality in an agricultural market.
Each futures market has its unique pattern of volume for individual contracts. Some, such as the interest rates, shift abruptly on the last day of the month prior to delivery, because the exchange raises margins dramatically for all traders holding positions in the delivery month. Currencies are very different and tend to trade actively in the nearest month up to one or two days before that contract goes off the board. While volume increases slightly in the next deferred contract, anyone trading sizable positions will need to stay with the nearby contract to the end.
Other than for determining which contract to trade, and perhaps the size order that the market can absorb, an analysis of volume as discussed in this series of posts must use total volume, the aggregate of all contracts, to have a data series that does not suffer the patterns of increasing and decreasing participation based on the coming and going of individual delivery months. When traders roll from the nearby to the next deferred contract, the transactions are performed as a spread, and those trades are not included in the volume figures. Because positions are closed out in one contract and opened in another. there is no change in the open interest.
The stock market equivalent to using total volume would be to add the volume for all stocks in a similar group. This would help smooth over those periods when the volume of one stock is very low If the group is not highly correlated in price movement, the end result might be a volume series that has very little to do with the stock you are trading.

TOPS AND BOTTOMS

December 1, 2009 // Posted in Financial market (Tags: , , , , ) |  Comments Off

Most of the formations important to bar charting can be traded using a penetration of one of the support or resistance lines as a signal. The most interesting and potentially profitable trades occur on breakouts from major top or bottom formations. The simplest of all bottom formations, as well as one that offers great opportunities, is the extended rectangle at contract lows. Fortunes have been made by applying patience, some available capital, and the following plan:
1. Find a market with a long consolidating base and low volatility (with futures it should also have increasing open interest). When evaluating interest rates, use the yield rather than the price, and avoid currencies that have no base price; that is, they have no level considered low, but instead have a point of equilibrium.
2. Buy whenever there is a test of its major support level, placing a stop-loss to liquidate all positions on a new, low price.
3. After the initial breakout, buy again when prices pull back to the original resistance line (now a support level). Close out all positions if prices penetrate back into the consolidation area, and start again at step 2.
4. Buy whenever there is a major price adjustment in the bull move. These adjustments, or pullbacks, will become shorter and less frequent as the move develops. They will usually be proportional to current volatility or the size of the price as measured from the original breakout.
5. Liquidate all positions at a prior major resistance point, a top formation, or the breaking of a major bullish support line.
Building positions in this way can be done with a relatively small amount of capital and risk. The closer the price comes to major support, the shorter the distance from the stop loss; however, fewer positions can be placed. In his book, The Professional Commodity Trader (Harper & Row), Stanley Kroll discussed “The Copper Caper-How We’re Going to Make a Million,” using a similar technique for building positions. It can be done, but it requires patience, planning, and capital. The opportunities continue to be there.
This example of patiently building a large position does not usually apply to bear markets. Although there is a great deal of money to be made on the short side of the market, prices move faster and may not permit the accumulation of a large position. There is also exceptionally high risk and the increased risk of false signals caused by greater volatility. Within consolidation areas at low levels, there is an underlying demand for a product, the cost of production, government price support (for agricultural products), and low volatility. There is also a well-defined trendline that may have been tested many times. A careful trader will not enter a large short-sale position at an anticipated top, but will join the buyers who contribute to the growing volume and open interest at a well-defined major support level.