The Metals Market

Hi from Andrea Unger. Today I want to talk about Metals, futures of metals and I put this list here so you can see what I mean.

Obviously you know about gold the first precious metal you could think of, silver, platinum and copper.

These are all interesting instruments to develop systems. In particular gold is a very good market for traders; it’s a market where you can develop trend-following systems, countertrend systems, bias systems, especially bias, believe me, there are very interesting opportunities on gold to discover and to take advantage of.

So gold is one of my favorite instruments to trade with trading systems. Silver is also very good but much more nervous compared to gold and it’s harder to find a good model that fits silver.

So if you’re starting now developing systems, start with gold and forget about silver. And consider also that silver is a very expensive Market, and also because of the moves that it has. Sudden and strong moves. Your stops that have to be wide enough to face this Market will be or have higher chances of being hit.

So silver is a market where you can get a certain degree of frustration when you develop a system so I will not put it as as first choice. So, certainly gold and eventually Platinum, which year after year is becoming more interesting. The only drawback on Platinum is the fact that, I might say, it is highly correlated to gold so if you have a model and apply that model to gold it will be useless to add the same model on Platinum in your portfolio because it would actually over expose yourself to probably a similar move so at one point you will have to choose between the two.

There is a sort of inverted correlation in the moves of copper to gold at least in the short-term, so Copper is another Market that is interesting and responds well to countertrend, mean-reverting moves, but also trend-following… so… actually, believe me, copper has very explosives and sudden moves.

The point is that these moves often end up with a huge retracement and that’s why I mentioned the counter trends because on the excessive moves you have rebounds and the point is that we can take advantage of both so when you start developing on copper try to manage your position in the best way possible. Investigate what the best way to management the position could be because it offers incredible opportunities but it is also a very nervous market so you have to be pretty much skilled to trade it.

Gold for sure Number One, Platinum, don’t forget copper, keep silver for your later days.

Gold on intraday should work with stop loss of at least $1,000 but 1,500 or 2,000 is better; Platinum is similar and Copper can be traded with stops starting from 700-800$ up, and all these are linked to the characteristics of the moves of the market: if you use tighter stops you waste your strategy because you don’t adapt anything to the way that market moves.

In case you really love gold you could consider micro gold to trade instead of gold if you want to dedicate a lower level of risk. Don’t use mini gold because there is not much liquidity, micro gold is much better, you could choose that one, is a good market to start with smaller capitals.

That’s it! Stay tuned for other Markets, Ciao from Andrea Unger.


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Trading is Stressful

Hello Guys from Andrea Unger, here on the beach, relaxing a little bit because trading is a source of stress.

Even though I trade automatically, so my systems are trading alone on the cloud server, I must admit that stress is always part of our daily routine and it’s normal, because we take care of our system, we take care of performance, we try to detach ourselves but we are not able to do it completely so it is important to do something that enables us to relax.

People practice sports, it’s a good idea, people have hobbies, it is important that you don’t dedicate 100% of your time and mental power to trading because that will probably kill your business.

Stay tuned, Ciao!


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Forex and leverage: The other truth

In trading, there are periods when trends change whether that be in the type of technical analysis used or the instruments traded. In the early 2000’s there were Covered Warrants, then a few futures contracts slowly made their way into the picture…then options. Even bitcoin ending with the more recent Binary Options. However, the backdrop to all of these markets has always been the big shadow of the forex market, a mysterious entity that was unleashed on the world of trading taking on different meanings – in the beginning it was the mysterious and fascinating world of currencies. This soon transformed into the go to place for survivors of other markets, aided by attractive offers by various brokers and a massive advertising campaign to boot.

What attracted people to trade in the Forex market? I believe the answer lies in two main factors: The 24 hour accessibility and, above all, the leverage which was being offered.

The fact that we can trade any hour of the day or night is alluring because it gives the impression that we can reconcile our trading activities with that of the office job which “obligates” us to stay far away from the monitors during the central hours of the day. Unfortunately, many markets also appear to “punch out” of work and, as such, tend to move too slowly to create compelling trading setups. Overlooking this aspect, let’s touch on the most delicate theme linked to forex – leverage.


Figure 1: The effect of leverage

Due to the way it’s marketed, online trading is often considered a blissful oasis where you can’t help but make money or, worse still, as a way to save yourself from a difficult financial situation. Thanks to the leverage provided, forex allows us to trade with small sums of money whilst moving large amounts of capital within the markets. This allows us to amplify our winnings…or at least this is the message perceived.

In my line of work, I’m often contacted by the unemployed or people in financial difficulty who are in search of a solution to their financial woes. The general consensus is that there is a secret formula that will allow mistakes to be avoided or, at the very least, allow the gains to outweigh the losses. Assuming this to be true, people think that the logical next step can be none other than to use the aforementioned formula with as much capital as possible in order to maximize their gains.

This is where leverage enters the picture with its accompanying commercial messages: “With $1000 you can trade with $100,000 buying power!” (100:1 leverage), “Make 1% and you will DOUBLE your account…” and so on and so forth.

Are these claims lies or the truth? Everything that is said is absolutely true, the problem is what is omitted or simply “not said”, if it is in fact true that leverage can amplify your profits it’s also true that it can amplify your losses. Making 100% is as possible as losing everything. Many brokers promise the closure of open positions so that you don’t lose more than the available funds in your account. This is usually what happens but there are sometimes cases in which you can find yourself in debt with the broker. A good example is the movement of the Swiss Franc in January 2015. Whoever was long the EURCHF with extreme leverage, counting on the 1.20 level holding, found themselves with negative accounts when the Swiss National Bank made their announcement, removing the floor at that level. Not all of the brokers covered the losses that were greater than the accounts in question and some of them filed lawsuits that last until this day.

Let’s not overlook the psychological block that would probably be faced in the case of movement against a position. The newbie trader, clouded by advertising promising easy profits, would probably look on petrified as their account disintegrated before their very eyes as price continued to move against their expectations.

There are also other, more conservative messages within the industry. Messages such as, “If used correctly, leverage can amplify profits…”, but they are still missing a clear definition of what “correctly” is. The message tells us everything and nothing…it’s the “nothing” that is of concern. After all, we are dealing with our own money…

So, Forex is terrible? Is it to be avoided by newbie traders?

When someone comes to me and asks my advice on how to approach the markets with a small amount of capital, my general answer is “think about trading Forex” (actually my very first response is always to change route and forget about trading! but nobody ever listens to this…). Does this make me part of the host of reckless vendors who lure people into trading with ridiculous leverage..?

Absolutely not. For me, risk control is an essential element of successful trading. So what advantages can an under-capitalized trader find in Forex?

The real advantage in Forex lies in its enormous scalability both to the upside, due to its massive liquidity, and, more importantly, to the downside. A standard lot is 100K (I won’t specify a value as this depends on the pair used) but it’s also possible to trade with mini lots (10K) and micro lots (1K). This allows us to adjust our risk exposure and take on the appropriate risk for almost any account size.

The ability to limit the risk exposure to values that keep the negative excursion of any one position under control allows us to trade with our chosen strategies even when we have small sums of money at our disposition. We don’t need leverage to amplify, we need scalability to limit. The real secret to being able to survive in the markets as long as possible is being able to trade tomorrow. Live to fight another day! This is only possible when we still have money in our account to trade with…

Let’s suppose then that we have a strategy that, for example, requires a 50 pip stoploss on the EURUSD, what would we do?

If we were to trade with a full lot of 100K the stop would be the equivalent of a $500 loss…is that magnitude of loss sustainable? This is where we need to start. We have to ask ourselves what sort of impact that loss would have on our account.

Let’s assume we have an account of $1000 (I’m using dollars as this is the underlying currency of the EURUSD), what could we do? If we consider the fact that the exposure is 100K, it’s not a given that the broker will allow us to open a full lot. This depends on the margin limits that they enforce, but it’s this exact erroneous way of thinking that is to be avoided. We shouldn’t start by thinking about how much we can invest, we should be thinking about how much we could lose! With a full lot we’ve seen that we would lose $500 in the case of a stoploss. This would constitute 50% of our account! One could argue that we would still have half our capital left and that we could make it back with future trades. However, it goes without saying that losing 50% of your capital with one trade is madness. If someone considers trading in this manner, they can’t refer to it as trading but, rather, pure gambling. Not that there is anything wrong with such a choice…it’s just simply outside of the realm of trading.

So how much can we actually afford to lose? This is subjective and depends on many factors, from our risk profile to the type and number of strategies that we intend to use. However, a good, sensible rule suggests a starting point of 2% per trade. Some of you will be saying, “So small?!”. I assure you that that isn’t very small at all. A losing streak is always around the corner and that same 2% could easily land you in a 10-20% drawdown without even realizing it. 2% isn’t a value for scared traders, unsure of the validity of their strategies. It’s a sensible starting point that will obviously be personally reconsidered by each trader based on the above factors.


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Returning to our example, what would that mean? 2% of $1000 is $20 and this would be the maximum that we would be willing to lose in that trade. To make sure that the 50 pip stop doesn’t result in losses that exceed this, we have to calculate the size of the position:

If 500 equivalates to a size of 100K, what size do we need for 20?

20 : X = 500 : 100.000

Therefore

500* X = 20* 100.000

And

X = 20*100.000/500 = 4.000

Our position can be opened with 4 micro lots.

If instead of Forex we had chosen the futures market, we would have had to go with the 6E (EURUSD futures contract). In this case, the 50 pips would be the equivalent of $625 and we wouldn’t have had any way to risk any less as we wouldn’t have been able to buy a fraction of a contract. The same goes for the micro 6E (M6E) contract. This is valued at a 10th of its larger counterpart and would have resulted in a loss of $62.50…still too much for the size of our account.

It must be said that trading stocks also offers a remarkable scalability towards the downside but the lower exposure is often hit by excessive transaction costs. Only a few brokers offer low commissions without a minimum…in general, there is a fixed minimum per transaction and this cost is usually too high for the reduced position size. Forex is a different situation where you either pay a spread proportional to your exposure or you pay an additional commission which is also proportional to the lot size.

Here is a table which summarizes some of the fundamental principles we have discussed:

All of the above is intended for whoever, at the beginning of their journey, doesn’t want to/can’t dedicate significant capital towards trading. But once a sufficient amount of capital is available, are there still advantages in trading Forex rather than Futures?

Taking into account the list of pros and cons and any personal bias towards trading one market over another, there is another aspect, which is still linked to the greater scalability of Forex compared to that of futures, that might make the former more appealing.

Considering the calculation of the size shown above underlines the fact that scaling is more complex when trading Futures insomuch as you are unable to use fractions of contracts. For this very reason, the ability to increase size as your account grows is inhibited…you have to wait until you have the capital necessary to move from 1 contract to 2 (or from any given number of contracts to the next whole number). Whereas in Forex, thanks to micro lots, it’s possible to increase your exposure gradually in harmony with the growth of your trading account.

This way, using a strategy with positive expectancy (that will grow our account over time), we have a greater advantage trading Forex as we are able to use position sizing in a very precise way and trade size which more closely resembles the ideal size for our account and/or strategies.

On the EURUSD pair, the corresponding exposure of the 6E is equal to 125K. Obviously with futures we are obliged to trade 1 contract until such time as our trading capital allows us to move to trading 2 contracts. Whereas in Forex, moving from 125K to 250K (i.e. 2 6E contracts) can be done much more gradually at a rate of 1K per size increase.

To demonstrate this concept using actual numbers, let’s look at the following graph. It shows a given number of trades that were taken both in the EURUSD pair and the 6E futures contract. The size for both was calculated periodically and increased as described earlier in this article.

In figure 2, the two equity resulting equity lines are shown. The greater scalability in Forex allowed for a better final result when compared with that of the 6E futures contract.


Figure 2: PnL curve using the EURUSD or the 6E


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DAX First Hour Strategy (Last Year Performance)

Unger Academy (formerly Skilled Academy) began at the beginning of November 2015 with a webinar that showed, step-by-step, the development of a trading strategy. The chosen market was the Dax Futures Contract and the goal of the strategy was to get on board a potential intra-day trend starting within the first couple of hours in the morning, specifically during the second hour of trading, entering with a breakout of levels which had been found based on the range of the first hour. Trading was restricted when there was extreme directional movement in the prior day. This filter created an improvement in the quality of the trades without ruining the basic idea of the system.

The system bases its logic on the concept of the Opening Range Breakout as well as on specific characteristics of the Dax. The time window in which orders are placed is the second hour of trading in the futures contract but the first of the actual, underlying stock market: this asymmetry creates the edge because the futures have time to create setups before the stock market opens and leads the way.

Aside from the concepts at the heart of the driving force of this system, the obvious question that comes to mind is, “How has the system been performing since its presentation?”.

To answer this question, let’s look at Figure 1. The red, vertical line represents the approximate moment in which we were about to present the system (the results are net of 30 Euros in transaction costs per trade):

Fig. 1 Equity Line & DrawDown from 1/01/2007

As we can see the Out Of Sample movement doesn’t vary at all when compared to the previous market dynamics.

We can carry out a more thorough analysis by studying the yearly earnings of the system, shown in Figure 2:

Fig. 2 Annual gains of the strategy

Although 2016 wasn’t a year that one would define as brilliant by any means, the strategy still showed positive returns.

On closer inspection of the annual results, we can see that there is a seasonal tendency for a year with relatively smaller gains. This occurs roughly every 3 years and, as a matter of fact, the years with smaller gains were 2007, 2010, 2013 and 2016. After every lower performing year, there were 2 with decisively larger gains. This gives us hope for 2017 and 2018. Especially as 2017 has had such a strong start within the first month!


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The sooner you start to apply this pattern, the better…

We are traders, we look for trends, no matter how long, long enough to ride them and take some money out of the markets, it looks easy… well it isn’t.

Reading Technical Analysis books and papers we often find strong trend indicators in defined moves and clear extensions, so we may get confused and consider those are the chart patterns we have to look for to enter the market.

Fig. 1: Here a candle which is often defined as a strong long signal

A candle with a clearly defined body may well identify a strong will to trend in the direction the prices showed; but the truth is that this is not an immediate indication to enter the market.

In fact markets are like human beings, they decide after having had indecision, they run after having had a rest.

To see if actually a message of indecision is a better information then strong decision let’s test a very simple system with different setups.

The action we will take in our system is, on daily bars, to buy the breakout of yesterday’s high and to exit the position on close.

The first setup will have no particular conditions, it will buy the breakout regardless of any setup.

In the picture below you can see some examples of trade on Gold Future

Fig. 2: Examples on Gold Future, trades are opened at breakout of previous high and closed at the end of the day

We can test this system on a basket of instruments:

  • Crude Oil Future
  • British Pound Future
  • Gold Future
  • Heating Oil Future
  • Sugar Future
  • Corn Future
  • Wheat Future
  • Bund Future
  • EuroFX Future
  • Dax Future
  • Coffee Future
  • Silver Future
  • 10 yrs T-Notes
  • Australian Dollar Future
  • Japanese Yen Future
  • Copper Future
  • Natural Gas Future
  • 30 yrs T-Bond
  • Soybeans Future

The tests are run without considering slippage and commissions as the purpose is not to build a winning system but to compare market behavior.

The entry without particular constraints shows to be profitable on most markets but there are also some where losses are shown:

Fig. 3: Silver shows to be the best performing instrument for this approach while Japanese Yen Future is the one where we see the highest losses

Here is the Performance Report and the Equity Line of all these markets together:


Fig. 4 : Merged Performance Report, there are gains but the drawdown is certainly too high and the average trade of only 14 USD is absolutely not tradable

Fig. 5: The Equity Line is not vey nice


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We can also have a more detailed look at the best and worst report:


Fig. 6: Silver shows interesting profits using this simple method

Fig. 7 : The Equity Line is in any case not the best that could be desired

Fig. 8. Japanese Yen is definitively losing with the proposed entries


Fig. 9 : A bad Equity Line witnesses what we saw in the report

Now we go into our demonstration and we consider the assumption that it might well be true that candles like the one shown in Figure 1 indicate a trend; but our idea is that after such a day there is not immediately much left, this means we’d prefer to follow our breakout only after days where indecision is shown, that is, days where the distance between open and close is much less then the whole range.

Fig. 10: a day as this shows indecision, the prices opened at a determined level, moved up and down but ended up to close not far from the open

The first setup we can test is to place trades only if the distance between open and close of the day before, is less then 50% of the whole range. Here are the results on the basket of instruments we chose for our tests:

Fig. 11: to Trade only after a day with indecision shows much better results on al the instruments we are testing

And here is the Performance Report and the Equity Curve

Fig. 12: the number of trades reduced to one half but the profits are more then double!

Fig. 13: also the Equity Line has a much better shape

The results are pretty interesting, to demonstrate that filtering trades with an indecision pattern we can also go to extreme levels where the difference between open and close of the day is less then 25% of the whole range and take trades only in this case.

Here are Performance Report and Equity Curve

Fig. 14: we are losing one third of performance but looking at the average trade and at the drawdown we notice a real improvement in the quality of these results

Fig. 15: The Equity Line shows a constant growth

Conclusions

A very simple rule that tries to ride an intraday trend leads to positive results. The intraday trends we are looking for are anyway more effective after days where the market showed indecision, filtering trades entering only after indecision (measured with the ratio between the body and the range of the candle) leads to better and more robust results.


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