I have taken profits on cocoa. Consistent with my new resolution not to take profits on weakness, I held my position through a pullback. This morning the price was up again, but no higher than the top of the recent range, and I took the chance to exit. I have not hit my profit target of 2 risk units, but that is because I entered the trade too late with too little leverage. Given that the cocoa market is prone to quick runs upwards that are reversed equally quickly — see chart — and that the price has reached a near-term plateau, and that there is a lot of alarm in the price, I decided that to hold on would be to compound the mistakes I made on entry, so took profits of around 1.5 risk units. The situation in Ivory Coast remains unresolved and the cocoa price may head upwards again, but on the other hand a lot of political risk is priced in (there had even been talk of an AU military intervention, which I’ll believe when I see it), and there could be plenty of time for prices to fall even if they subsequently rise again. Cocoa is one of the few agricultural markets that seems to have ample supplies this year following a good harvest (and much of Ivory Coast’s harvest has already been exported).
… despite having only going into it yesterday. Why? Another sugar flash crash. This seems to be becoming a feature of this market. Happily IG Index got me out at my stop level. The market dropped on reports that Cyclone Yasi had done less damage to the Australian crop than initially reported — of course that was a risk, but it has still done a lot of damage and relief doesn’t seem to justify this crash.
The top chart shows 1-minute bars, the bottom one daily bars.
This was a bad mistake. I was overexcited by the possibility of a news-breakout after the UK Q4 GDP number came in very weak. Almost immediately, however, the MPC minutes showed that there were two votes for a rate hike at the latest meeting, and that refocused the market on inflation and the chance of future rate increases. Was the news-breakout not a real one? Yes, it was, but breakouts are a signal that works in the direction of the trend, and, if there is a trend in this market (which is questionable), it is downward, as the following chart shows.
I was stopped out on a quick downward move that was subsequently reversed — but the market does still look weak. Perhaps I should have paid more attention to the warning in the falling gold price (lower chart).
In my defence, markets have very suddenly become uncorrelated and it is hard to know what correlations to trust. On the other hand, the correlation between gold and platinum is a longstanding one (see chart below — lower portion, orange line; the other lines are the S&P and Treasuries) and not a function of the latest QE.
I think that the recent highly-correlated markets have made me a bit slack when it comes to the main question — is there a trend? For months, the answer in almost every market has been “yes.” But this month that has changed.
I was stopped out of soybeans yesterday, by a whisker, after strong Chinese GDP and somewhat elevated inflation spooked the markets. The price subsequently recovered — annoyingly. I think this trade was fine and I have been unlucky, but as always the real trade analysis comes a month or two later once I can see whether I was right about there being a trend or not.
I was stopped out of this position yesterday.
I was stopped out of this position yesterday as a relatively-poorly-bid US Treasury auction and an agricultural report that presaged further food price inflation sent bond yields higher and risk assets into reverse. Palladium had advanced over 6 risk units and I had narrowed the stop to four risk units. I am still not sure whether this is the right thing to do, but it did mean that I took a decent profit out of this trade.
Should I keep the stop at its initial level and always sell into strength, accepting that sometimes a winning trade will turn around and come all the way back to the stop before I get a chance to sell? Or should I narrow the stop as the trade runs? I really don’t know. I need to do some back-testing in Tradestation to help me resolve this.
I was stopped out of this on European debt worries — the Euro dropped back after the Germans managed to get agreement that investors would take a haircut if a country went into default after the current European resolution regime expires in 2013. I was surprised the market had such a reaction. The EU is not going to become a full fiscal union any time soon, and that means that it will remain possible for weaker members to default — this is not a surprise. But as I say so often, markets don’t get politics.
I was stopped out of soybeans yesterday, and today the market has finally moved upwards (albeit in overnight trade — the move will mean move if it is sustained in the main session — although the importance of the Chinese market in the current up-trend means an overnight move definitely means something at present). I was right to tighten my stop after a long wait for the market to do anything, but it put it much too tight, at the kind of level that is bound to get knocked out. This was a real amateur mistake. I made it because I was nervous about the market and felt like bailing out of the position.
Here is a picture: