Year-end Trading Considerations
By Chuck LeBeau
One of the primary requirements for successful technical trading is adequate liquidity. As much as possible we need to trade in markets where the price action is orderly and the flow of orders is substantial. This requirement is true regardless of the size of our personal transactions. We want to confine our trading to active markets where large transactions by other traders do not distort prices.
Most traders assume that if they are trading small positions then market liquidity doesn't matter. They fail to understand that they need to be concerned about the orders of the large traders who may make decisions based on a variety of factors that may have nothing to do with the current price action. If we are trading a small position we don't want our stops to be triggered by a large trader who suddenly decides to enter a market order or has a large stop order triggered.
Here are specific liquidity thresholds that I have found to be helpful over the years:
1) In futures markets there should be a minimum of 20,000 contracts of open interest and at least 5,000 contracts of average daily volume.
2) In securities there should be a minimum of 500,000 shares of average daily volume.
There are also important liquidity concerns over holidays, especially the period between Christmas and New Years. For many years I had a personal rule that I would not trade futures in the period between the last Friday before Christmas and the first business day after New Year's day. Then for a two-year period this policy seemed to cost some money in missed profits so I decided to abandon the policy the following year. This decision proved to be a big mistake.
The following year was 1994 and on December 28th I was holding hundreds of profitable currency positions on the CME. Suddenly, for no obvious reason, the direction of the currencies reversed sharply and our stops were hit and my orders were filled at unbelievably bad prices. I had positions in Yen, D-Marks and Swiss Francs and all of the stops got hit at the same time and the fills were just terrible. The worst was the Yen executions. I encountered 130 points of slippage on more than two-hundred Yen contracts. When I contacted the exchange to voice my outrage I was told that due to the holiday schedule most of the usual pit traders were on vacation. I was told that there were only seven traders in the Yen pit when my stops were hit. To make matters worse, the pit traders were unable to lay off their trades in the cash market because the bank traders were also "on holiday".
Not only was it an expensive lesson but it was particularly painful because it was a lesson I had already learned from many years of experience. I had violated one of my own rules and I paid the price. Those bad currency trades on December 28th turned a slightly profitable year into a losing year.
Another lesson to be learned from this experience is the need for consistency. If I had traded over the holidays on a consistent basis year in and year out I would have made a little more profit in the years prior to 1994. However by changing tactics I encountered the worst possible out come. I missed the profits and experienced a nearly catastrophic loss in 1994. Had I followed either tactic consistently I would have been much better off.
Needless to say I have reverted to my previous policy of not carrying any open futures positions from the Friday before Christmas until the trading day after NewYears.
I'm not sure how important this rule might be to stock traders but I am inclined to think that the holiday period would be a good time to take a break and relax. Then we can return to the markets refreshed and with a clear head after the beginning of the year. Not only will we have more time to spend with our loved ones over the holidays, we will probably come out dollars ahead over the long run.
Year-end performance notes: We frequently receive messages asking how our systems have performed over recent data. Many of our members are apparently not aware that updated performance data is posted on the web site on the Systems page. Just click on "Reports" and you can download this data in Excel format.
Here is a quick commentary on system performance in 2001.
The stock index systems performed poorly. There seemed to be a bullish bias to the trading and the increased volatility was a problem. We are currently working on some improvements in the stock index systems starting with the Piranha system.
The Bond and Eurodollar systems performed very well. The Big Dipper system had six winners out of seven trades. The Little Dipper had seven winners out of ten trades. The Phoenix System had three winners out of four trades. The Serendipity System was profitable and the Sidewinder System had six winners out of seven trades. The Millennium ED system had seven winners out of nine trades.
The Crude Oil systems fared poorly. (They do best when prices are rising. They should do well next year.)
The currency systems were mixed. Two out of the three Yen systems were down slightly (the profitable one was the First Sword System). The Crossbow Swiss System was a standout and six out of seven trades were profitable (not counting the open winner we are still holding). The Swiss Franc systems received unusually high rankings from Futures Truth this year. Please note that past performance is not necessarily indicative of future performance. Futures trading involves risk and may not be suitable for all investors.
As you know, our system are very inexpensive (only $250 each) and we usually have an annual year-end sale so now is a good time to look into buying those that might interest you. Until January 15th you can buy any three systems for $500. If you want to buy more than three systems the additional systems are only $150 each.
That's all for now. Best Wishes for the New Year!
* * * * * * *
New Hedge Fund
I will begin trading a new Hedge Fund on January 2nd. Regulations prohibit me from discussing it publicly. If you are a qualified investor and have an interest in receiving information please contact me privately. (310) 2650 9776 or e-mail at CRLeBeau@home.com.
* * * * * * *
February Workshop in Los Angeles
Learn How to Design, Test, Evaluate and Implement Profitable Trading Systems. Whatever your market and whatever your time frame you are certain to benefit from this carefully prepared two-day workshop. On February 23rd and 24th Chuck LeBeau will personally teach a small group of traders the step by step process of how to design better trading systems.
It doesn't matter if you trade stocks or futures or if you are a day trader or a position trader. The procedures that need to be followed are the same and you will learn what you need to know to improve your systems at this informative Workshop.
Contact Chuck LeBeau at (310) 265- 9776 for more information or go to
Can't attend the Workshop? Consider our Workshop Video Package. Two videos, a video workbook, and an ADX based stock trading system for only $250.00. Go to http://www.traderclub.com/video.htm for details.
* * * * * * * *
Visit our FORUM discussion group and share ideas with other traders.
The Traders Club Forum is the best discussion group for traders anywhere on the web. We have many lively and informative threads in progress that will increase your knowledge and generate helpful ideas. If you are new and need questions answered this is the place. You will find that our Club members are knowledgeable and very helpful. It's a very friendly and supportive group and you will be surprised at the amount of information and assistance that is available. The discussions are very high quality and best of all - IT'S ALL FREE.
Just go to http://www.traderclub.com/discus/board.html and take a look.