I own a bar/restaurant and was just speaking to my produce vendor, who is a
large nationwide company. We were talking about how ridiculous prices have
gotten, and he said “you aint seen nuttin’ yet.” He was telling me how the recent
flooding in the Midwest is going to drive prices through the roof and not
just because the floods have made the grains hit record highs. It’s because his
cross-country truckers have to take alternate routes as the roads are impassable.
He said it normally costs $4,200 to send one truck cross-country, and last
week it was over $11,000 as they had to go through Canada. Between the extra
manhours and extra gasoline, coupled with all-time record-high oil prices, the
cost of a fajita at my place is going to go up.
Are There Any Seasonal Patterns?
You should be aware of any seasonal patterns present in what you are trading.
For instance, heating oil being in more demand in the winter will cause
it to be higher during the winter. Soybeans tend to have wilder swings the
closer it is to harvest time. Harvest time for cocoa is September, and this
typically lowers the market a little. There are many seasonal patterns out
there, and if you know your market you can use them to your advantage.
Is the Market Sensitive to Foreign Events?
Some markets are very sensitive to what is going on in other countries.
Cocoa can be moved by things happening in the Ivory Coast, coffee by
Columbia or Brazil. Foreign exchange is obviously sensitive to other foreign
markets, while others are less obvious. The huge rise in crude prices
recently, amongst other things, has been attributed to the modernization
of developing countries like China. If you want to be the best you can be,
these are things you will need to know.
How Does It React to Different Times of Day?
Some markets move more in the morning, while others are more active
closer to the end of the day. Some don’t budge during lunchtimes and others
tend to always rally. I have found that the S&Ps rally at 3:30 and tend to close gaps that were left in the morning. These are things you pick up over
time the more you are familiar with a market.
Does It Move at Night?
Some markets barely move overnight and some make most of their moves
overnight. You better know this before you start trading, or it can make
you old fast. If a stock is going to make a big move overnight and gap lower
in the morning, it can blow though any stop you may have. Though this is
hard to predict because it can happen to any stock, there are some that are
much more prone to doing it, as are many of the futures markets.
I used to trade currencies a lot, but I had to stop because I couldn’t
sleep. I’d stay awake till 3 or 4 in the morning to see how they were doing
in London and Europe and then I’d sleep with one eye open, constantly
waking up to check how they were doing on a computer screen next to
my bed. It began taking a toll on me and affected my regular trading so I
stopped doing it. If I do it now, it’s a long-term trade with a small position
I can handle not watching all the time.
Are There Any Recognizable Patterns
that Repeat?
Because markets are driven by people who are creatures of habit you will
begin to see patterns repeated over and over in different markets. For example,
after a nice run-up on a five-minute chart in the S&Ps, you are very
likely to see an orderly pullback before the next run-up. Some markets tend
to always close in the opposite direction that they opened. Some will tend
to reverse between 10:30 and 11ish. Some will close near their high or low
and others tend to always close in the middle. Some react perfectly to certain
technical indicators while others look like they move randomly. Keep
looking for patterns and you’ll find that a market tends to do things in a
somewhat predictable way.
How Does It React to News?
The word news is generic and can mean many things including all the reports
I’ve mentioned before. It also means every little thing that comes off
the news wire, like a strike by coffee workers in Venezuela, the death of
a CEO, an airplane crashing, or a popular toy getting recalled. If you are
going to trade you should learn how what you trade reacts to certain news.
Some markets will rally on the same news that will make another fall. Interest
rates affect markets in different ways. Higher oil prices are good for
some stocks but not for others.
As for reports, not only do you need to know that the crop report is
coming out, but you should know how it will likely affect the price of soybeans
and even hogs, which eat those grains. By knowing how it should
react you can then be in a position to capitalize on the news. By the way, included
in the hogs’ diet of corn, soymeal, oats, barley, and wheat are some
delicacies (according to the Dallas News 5/1/07), like blood and ground-up
bone and meat byproducts from a variety of animals for the protein and calcium
content. Feed can include the carcasses of unborn cattle, which are
taken from slaughtered cows. The product is produced by grinding whole
carcasses, exclusive of calf hides. Misshapen and leftover pet food is frequently
added. Animal manure and leftover food and grease from restaurants
are also sometimes included. Anyway some of the best trades are
made when a market fails to react the way you’d expect it to and you go
with what the market is telling you instead of what the news tells you. Like
when you’d expect an interest rate cut to really make the market rally, but
in reality it drops. Shorting at this time is a great trade because it means that
the market has shaken off or taken into consideration the news and is heading
where it belongs regardless of outside noise. Learning how to read markets
after a news release is one thing that will definitely make you a superior
trader, but I don’t believe that it is something you can pick up in a book.
How Does It React to Sentiment?
Some traders like to look at sentiment indicators to help make their trading
decisions. Such indicators could be the put/call ratio and the commitment
of traders’ reports that come out every Friday for various commodities.
The theory being that when everyone is bullish the market has no one left
to buy and it should turn. Some markets respond better than others to these
indicators and a good trader will know how his market reacts to sentiment
indicators if he chooses to use them.
How Does It React in Different
Market Environments?
Different markets will react differently under the same conditions. For example
in a range bound market one stock may constantly hit the support
and resistance areas, while another may just float around aimlessly. Some
markets are textbook examples of trend following, with regular size retracements
and can be traded with much clearer signals and safer stop
areas. I remember years ago that crude oil was stuck in a 2-dollar range
from $18 to $20 for a long time, and it moved much differently when it was
in that range than when it broke out and started trending. In an uptrending
market it tended to rally regardless of whether it opened weak or not.
While it was range bound though, it tended to close the morning gap almost
all the time and then trade aimlessly the rest of the day.
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