Let me start by saying I completely understand that there are valid reasons to buy gold for the long term as insurance and for savings. I also don't make trading decisions based on fundamental analysis.
Futures trade in a two way auction. Price is determined only by whatever amount someone is willing to bid or offer at a given moment. This is the truth. If the fundamentals are bullish, and the auction is bullish, a good trader is only going to be on one side of the trade, the right side. But if the auction is bearish what good are fundamentals? An Auction Market Analyst knows that the fundamentals will come out eventually, but by the time the "experts" have it right and are "genius" with the explanations after a move happens, the damage has been done unfortunately. An auction market analyst should never need anyone else's opinion for confirmation. The confirmations are on the chart.
I have been asked about the structure of the COT report in gold and how the large speculators have low open interest that hasn't been seen in a while, and if this is a buy or hold signal. This goes back to the "myths of trading". What is low today is relative to yesterday and not tomorrow. What is preventing the large speculators NET long position from becoming a NET short position? Each month you can hear the same story about the COT report being even more bullish while gold can plunge. I'm not predicting this; what I am saying is that COT analysis is only one important piece in the complete study of auction market analysis. I certainly don't believe it is a reliable timing tool. I have developed my own proprietary indicator that provides a score for price, volume, profile, open interest, and the COT report and I look at these for whether or not there is an "edge" in the supply and demand probabilities and for determining position sizing.
Let's go to the chart. There is a potential lethal "Descending Triangle" on the daily chart that is LARGE, (see right hand side below). A descending triangle shows increasing supply and weakening demand. When this prior demand throws in the towel and sells below the horizontal support level because they are in the "red", it increases the supply side pressure, which can cause the floor to cave in if there are "weak hands" on the long side of the current open interest. What is a weak hand? A trader who trades too big for his mental capacity or uses too much leverage. This old demand would likely be "gun-shy" in the near term. This can lead to "Vertical Development" or a market that is in "imbalance". Where is the stopping price going to be where supply equals demand again, nobody knows. I can tell you this much, once I have correctly identified the phase of development a market is trading in a given degree of timeframe it is absolutely critical for me to stick to my rules.
I have been looking to invest for the intermediate to long term in gold but I also have no interest in having my head handed to me on a breakdown. What I will be looking for is a failed breakdown in order to get comfortable with taking risk on the long side. This would be a sign that "strong hands" are accumulating. But in the meantime, a breakdown with an "Igniter Move" is not what I want to see. You can buy it all you want, I just don't have any desire for bargains in this business.
(Click on chart to expand)
What else is there to keep an eye on? Should "Major Support" hold and gold next breaks the upper trendline resistance of the triangle, this could develop into a very LARGE "Triple Bottom" pattern with extreme bullish implications. That is down the road, but intuitively I see it as a potential development to keep an eye on. I'm paying attention to the triangle in the meantime until something changes. I don't think it is wise to trade early in anticipation of any move.
On a side note, there was a textbook "Symmetrical Triangle" intraday today on the 5 minute chart.
I do my best to tweet out my posts promptly on twitter/ScottPluschau
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Scott,
ReplyDeletevery good article on gold--I think the problem many new and old gold traders have is that they base their trading on fundamental analysis--they are constantly bombarded with articles why gold is going up, the bottom is in ..etc--
they have no clue about trading and what to look for.
i should know since i used to be one..but thanks to you and your blog i have seen the light and now looking at trading in a new way.
So keep up the good work..have a great long weekend .
Bob
If you are doing better trading you deserve all the credit. But I sincerely thank you for the compliment.
DeleteHave a great weekend as well.
Scott
"my own proprietary indicator that provides a score for price, volume, profile, open interest, and the COT report and I look at these for whether or not there is an "edge" in the supply and demand probabilities and for determining position sizing"
ReplyDeleteKeep in mind that COMEX is only part of the total gold market and larger volumes, stock and positions are held out of view in the OTC market. Indicators just based on COMEX may therefore not reflect the actual market supply and demand.
Thanks for the comment Bron.
DeleteI say this with all due respect, I do not believe a precious metals trader should concern him/herself with anything outside the "auction market" laws of supply and demand.
To be fair, someone who is deeply involved or an expert in the real world of physical precious metal probably shouldn't concern themselves with anything outside the "economic" laws of supply and demand either.
With that being said, those with a large cash position or those who are in the business of mining, producing, processing or using the metal that want to utilize the futures market to either "hedge" or "speculate" based on their knowledge, should be teaming up with someone like myself (NOT a technical analyst. TA is a myth) in order to maximize their reward and minimize their risk.
99.9% of what I do is "day-trading" but my principles apply to all futures markets in all timeframes. These principles of mine are valid, robust, and a logical approach to viewing auction market behavior.
It is quite possible that the combination would lead to superior results.
I'm all ears on any offers. The competition might one day regret you beating them to it.
Scott
Scott, I agree that "a precious metals trader should concern him/herself with anything outside the "auction market" laws of supply and demand" it is just that COMEX or other futures markets are just part of the auction market for gold.
ReplyDeleteIf all you are looking at is the COMEX auction, you are missing the auction market occurring in the OTC forwards market. Statements like "greater the open interest the greater the speculation and/or hedging and vice versa" cannot be firm rules as there may be changes in speculative interest in the OTC markets that you cannot see which are driving gold's price.
As an example, the Perth Mint refines and sells 300t of gold a year, which is about 10% of the global mine supply. We have never used any futures market nor OTC forwards. We are not alone. Therefore looking at COT may not be giving you the view full of gold auction market behaviour.
Just saying keep that in mind when doing your analysis.
PS, we do not speculate and we "hedge" ourselves by directly leasing gold and via our client's unallocated metal, so we do not need to concern ourselves with price movements.
I sincerely appreciate the follow up Bron. What you say makes sense. I will however respectfully disagree with you that a precious metal "futures" trader should concern themselves with the OTC or forwards markets.
DeleteI don't have an issue if you disagree with me.
Keep in mind, I don't care what direction gold goes in, up or down, I have no position at this time. I am also not in the business of forecasting.
Once I have correctly identified the phase of development a market is trading in, and then find what I believe to be a "favorable" trade location in regards to reward and risk, and based on the perception of continued supply and demand probabilities and I take a loss, I not only accept it, but I welcome it, as long as the trade had a "Positive Expectancy" at the time of entry.
A positive expectancy is not based on the outcome of a single trade.
Let me add that as complicated as futures Auction Market Analysis is, it's really the easy part of the job when compared to "Risk Management", "Money Management", "Trading Psychology", and "Trade Management". In my opinion without a firm understanding of those, a trader/analyst who uses leverage can be as brilliant as they want in the study of the metals markets, and they will most likely still get destroyed.
It is better to be concerned with the probability for "ruin" than the probability for "jackpot".
Perhaps you can share with us your perception of the supply and demand forces that are currently in play from your end?
I thank you for sharing your insights and I appreciate your contributions to the blog.
Scott
I don't think I understand you technique. If I told you I you would only get 20% of trades made on COMEX, 20% of volume, 20% of COT would your technique still work?
ReplyDeleteBecause that is the sort of relativities of COMEX supply/demand to the OTC "futures" market. It is also possible that bullion banks can "paint the tape" by chosing how much inventory to show in COMEX versus off market and how much (to a lesser extent) of OTC trading they will hedge on COMEX (and thus make it visible to you) vs laying off with other OTC counterparties or into ETFs.
On ETFs, do you include that data into your assessment of the supply and demand probabilities?
Thanks for the follow up questions Bron.
DeleteLet me see if I can use an analogy with the emini equity futures. If I trade the S&P 500 futures (ES) and the Nasdaq 100 (NQ), should I concern myself with the price and volume on the ETF’s SPY and QQQ? Apple’s weight in the NDX is very high at times near 20%. Should I concern myself with what the shares of Apple are doing if I trade NQ? My answer to these questions is respectfully not in this lifetime.
But let me make something clear. If it helps any other trader to keep an eye on all 100 issues of the NDX, or looking at how these companies are trading in afterhours or overseas markets, and this “homework” makes money that is what matters most.
What I strongly believe and I will take this to the grave, is that the price movement of Silver futures (SI) is determined 100% by the supply and demand of (SI), and nothing else. I stand by the comment that an increase in the “open interest” of (SI) is an increase in “hedging and/or speculation” of (SI).
Now perhaps there are opportunities for arbitrage, but I could care less about that strategy. JPMorgan Chase took a big hit trying to capitalize on “arbitrage”, and Long Term Capital Management bit the dust with it. This goes back to me saying previously, it is better to understand the probability of ruin than the probability for jackpot.
Failing to look at OTC markets is not going to ruin me. What would ruin me is “me”. I don’t care if anyone “paints the tape”. What I care most about is how I react to “paint the tape”, which would be either capitalizing on opportunity, or staying out of the way.
I am speaking for myself personally here. When it comes to the metals, if I looked at what was happening in London as an example it would be a distraction. It would lead to hesitation, indecision, second guessing, etc. In my opinion looking at other things, including a “technical indicator” or “moving average”, anything other than the auction taking place right in front of me, would be signs of a psychological disorder such as “confirmation bias”, “Illusory correlation” and “availability bias”, which are all deadly disease for the trader.
Lastly, if whatever you or anyone else does “works” that is all that matters. I say this most sincerely.
Scott
Scott, been away on a business trip. Your analogy doesn't apply. Apple is just one of many going into NQ. Silver in the OTC market is directly equivalent to silver traded on COMEX and their prices are hard linked to each other via simple arbitrage.
ReplyDeleteYou should care about arbitrage between COMEX and other silver markets (includes ETFs and the physical spot OTC market) because this is the mechanism by which their prices are kept in line with each other and by which "auction market" volumes and action in all those markets are transmitted to each other.
Arbitrage as I refer to it is not a "strategy" or the sort of arbitrage that you are talking about re JPM or LTCM. Selling a futures contract and immediately buying physical gold at spot in the OTC market is a risk free trade (well nearly, see here http://www.silveraxis.com/explain_basis.html) and a bread and butter business and role of bullion banks (they may well be spec trading but that is another matter).
I don't think you are appreciating that a bullion bank may be sitting on a large "open interest" of its own, of which only part of which it needs to arbitrage into COMEX (or vice versa).
For example, a bullion bank may have OTC clients who have sold 100,000oz of gold forward but only 80,000oz of clients who have bought forward. To balance its books, it would then only short 20,000oz of gold in COMEX. All you see in COMEX's open interest is the 20,000oz.
Lets say in addition to the bullion bank's 20,000 short position there is another 50,000oz of other COMEX shorts. So what you think is open interest is 70,000oz, when in reality across the entire silver market it is 150,000oz.
It seems to me what matters with your technique is not so much the total open interest but changes in it, which I think is an important data point. Consider then the situation where the 50,000 on COMEX doesn't change, but 30,000oz of OTC forward buys and sells are "closed out". You don't see any change when in reality the "supply and demand probabilities" have changed.
Consider a situation where the bullion bank's forward book is declining over time, a material piece of information, yet COMEX is stable. Then when the forward book declines below the 20,000oz short position the bullion bank has on COMEX, the bullion bank starts closing that position out. This would appear as a sudden and dramatic open interest change to you because you could not see that the OTC forward "open interest" was declining all along.
That is why the price movement of Silver futures (SI) is NOT determined 100% by the supply and demand of (SI).
What I'm trying to say is that precious metals differ from financial futures or agricultural futures in three key respects:
1) unlike finanical products/stocks, precious metals are traded on multiple markets and exchanges 24/7
2) unlike commodities, precious metals are highly fungible and easily transportable at low cost, making them easy to arbitrage
3) many precious metals owners seek privacy so a lot of the action occurs off visible exchanges in OTC dark pools.
Saying that not considering these OTC dark markets will not ruin you I fear is demonstrating "confirmation bias" that your proprietary indicator only needs to look at COMEX data.
Thank you for sharing your insights again Bron. Let me first start by saying that I truly believe you have every intention of being helpful, and you are sincerely sharing what you believe is worthy advice. I greatly appreciate that.
DeleteBefore I reply to you let me first say that I have no intention of “butting heads” with you or arguing with you. It is very hard to “hear” tone of voice in written words so things can get taken out of context. My tone here is as straight forward and as honest and as respectful as I can be.
When you say Apple doesn’t apply, I agree it doesn’t, but are you then suggesting I should study all 100 equities in the NDX in order to effectively analyze and trade the auction of NQ? That is what the price of NQ is hard linked to. You are also telling me that I should care about arbitrage between COMEX and other silver markets, and take into consideration OTC open interest, etc, and my answer to that is… no I shouldn’t. But here is the most important thing, and I cannot stress this enough… If doing this extra type of work/analysis makes you money then I applaud you.
Perhaps my principles for the futures markets could be used to enhance the overall return of an account whose intention is to “hedge” or “speculate”, based on real world supply and demand. That is possible; I would not disagree with that. If a fundamental analyst has a bias and wants to team up or combine it with direction in the study of the auction for risk management/trade management etc. why not? But until the day comes when the price is right on an offer, I will continue to be a one man show.
I will finish with this, and I can’t be clear enough here… I am certainly not stopping you or anyone from doing what you recommend. Also, if you or anyone else for that matter feels that my “methodology” is “mythology”, than you can “fade” my analysis. Although that could be hazardous to your wealth. Somebody out there was doing it, and I haven’t heard back from them in a while. Just sayin.
Scott
Sorry, Scott, I can't avoid weighing in here:
Deletethe point isn't that you need to look at all 100 NDX stocks when trading NQ (although that would be robust) - the point is that you need to consider the price and volume action of other equivalent instruments, like QQQ, ESPECIALLY if you're drawing conclusions based on volume and open interest of NQ: volumes can shift to other functionally equivalent instruments. Now, price action should be quite similar for these "equivalent" instruments, but volume might not be.
So yes - if you're trading ES (or NQ), and you conclude something about price based on declining or increasing volumes without considering the corresponding action in SPY (or QQQ) volumes, you are quite likely to draw a conclusion based on false or incomplete information.
let me give you one more simple example that should be right up your alley: during the height of my former sell side trading career, we traded SPUs. the big ones. That was the liquid, dominant product. Then SPY took off, and volumes morphed into SPY, and then into ES - the e-minis. So, if one was simply trading based on SPU volume and open interest, one would be making dire mistakes, as the volume was shifting into other functionally equivalent instruments.
That's what Bron is trying to explain: COMEX futures are one instrument that are functionally equivalent to a much larger, much less transparent market in London - and that is precisely why the plethora of metals commentators who try to derive conclusions based on erroneous interpretations of the COMEX data - because they are effectively only seeing a tiny % of the real data (I'm not talking about you, here, but if you read any of the precious metals charlatans, you should know what I'm talking about) are proven wrong time and again...
best,
KD
Sorry KD, but if the ES's or NQ's go the wrong way, I strongly believe success or failure in the long run for me will come down to proper or effective "Risk Management", "Money Management" and "Trade Management" principles, and will not depend on SPY or QQQ.
DeleteGranted I don't trade in the pit or trade the large SP, so keep that in mind.
We can agree to disagree, because, if it helps you to make money by keeping an eye on all 500 issues in the SPX and corresponding ETF's, that is all the matters.
I do appreciate you sharing your opinion.
Scott
"I have no intention of “butting heads” with you or arguing with you."
ReplyDeleteI am not arguing, I'm trying to explain my issue and have a discussion about why it may or may not apply. However, your response to my example with figures and Kid's comment is just a "no I shouldn’t" That is not useful and not a discussion. That sort of response is either because:
1. I'm not explaining my issue well and you're not understanding what I'm saying; or
2. You think you understand what I'm saying and on that understanding there isn't a problem with your method, but in actuality you don't understand. Yyou're use of NDX as an example is why I ask this, because these are paper markets, physical markets with a lot of off market action have different dynamics. I thus wonder if you are a guy applying a method that works well in financial markets where the auction all occurs on visible exchanges to the precious metals markets and not considering the structural differences in physical markets; or
3. You can't explain why I'm wrong because that would involve revealing too much about how your "proprietary indicator that provides a score for price, volume, profile, open interest, and the COT report" works and thus you'll lose you're intellectual property; or
4. You understand my point, but can't admit it because it means you would need to take into account the OTC market's volume and open interest figures to get a complete picture of "supply and demand probabilities", the only problem being that no one can get such figures on the OTC market, hence the realisation that your method may get the risk management wrong (ie blows up in certain circumstances). That's what I meant by "confirmation bias".
It is very hard to work out if 1 or 2 is happening if you aren't going to explain why "I shouldn't" "care about arbitrage between COMEX and other silver markets".
If you're answer is 3, then not much point in talking further. I would note in this case that you are selling a black box and the problem is you may be waiting a long time "until the day comes when the price is right on an offer" because without the ability of a user of your method to discuss how robust it is, I can't see many willing to base their risk management on a black box. LTCM blew up because their method and assumptions did not apply in all market circumstances.
In regards to point 1 let me provide another explanation. I'm not talking about analysing Apple and other equities that make up NDX. I'm talking about a situation where NQ, for example, becomes dual listed on another exchange and thus the "the auction of NQ" becomes split over two markets, two markets which, while distinct, are arbitraged and thus price is the same between them and volume, profile, open interest etc flow between the two markets.
Thanks for the comment Bron.
DeleteFirst there is no "Black Box". My proprietary scores are for determining whether or not I believe there is an "edge" in probabilities for supply and demand in the futures markets based on the information the futures markets provide. There is nothing to sell. There is no secret here on this blog. I am a "discretionary trader" with strict "rules" allowing me to be very "systematic" or "mechanical" in my approach.
Futures are a "zero sum" game. I would be shocked if the overwhelming majority of "Black Boxes" worked because it seems that is mathematically impossible.
The only thing I have discussed as an additional service for my readers so far has either been a "newsletter", a "chat room", or "trade assist" as a possible subscription. Again no black boxes to sell.
Have you been burned by a "technical analyst" or a prior "newsletter"?
Find a post on this blog that uses a bogus or technical indicator "gimmick" or "scam"? The last thing I would consider myself is a technician.
The answer of "no I shouldn't" is quite simple. I do not tell you what "you" should do, and if what you do makes you money, than that is great news. I do appreciate your advice, and I do understand that it could be helpful for others in the precious metals arena to consider other aspects of the market. I feel I have made it very clear that studying OTC markets for me as an example would lead to "indecision", "hesitation", or worse, "bad decisions".
For example, yesterday on a 5 minute chart in the Gold futures (GC), there was a textbook "Double Bottom" pricing pattern. I can't post it here in reply of a comment, but I will post it at the top of the blog in a new post for the time being. There was big volume on the first dip, followed by lower volume on the second, with a failure to take out the prior low. When the neckline failed, it trapped the losers on the short side if open interest during the COMEX session, and the "Measured Rule" was nailed for $700+ per contract. What good would it do a trader like me to check out what was going on outside the COMEX in this example. I tell you it would do "no good" for "me".
My principles of auction market analysis apply to all futures markets in all time frames. However some patterns are more reliable on 5 min charts rather than 30 minute charts, daily charts, or weekly charts.
It is obvious to me that you don't trade this way, so you can keep your eyes on other things. I don't have the time to keep my eyes on other things because I trade this way, and in no way am I saying what you do is invalid or based on something illogical. What you do may "apply" to others. You are explaining yourself well and I do understand what you are saying. I don't deal in physical, I deal in paper. It will not help "me" is what I am saying.
Now either 1. You don't think it is possible for a trader to make money trading futures on purely chart/auction market analysis?
Or 2. You don't understand my methodology, which is fine.
But to make things crystal clear I don't need to find something else that "works".
Scott
Here is the link to the chart Bron.
Deletehttp://scottpluschau.blogspot.com/2012/06/pattern-of-day-gold-for-bron-suchecki.html
Scott
"based on the information the futures markets provide"
ReplyDeleteAnd my point is that the information COMEX provides is incomplete. You do not address this with any counter argument and just say it "would lead to indecision". You avoid countering the dual listed NQ example.
"Have you been burned by a "technical analyst" or a prior "newsletter"?"
As I said previously, the Perth Mint does not speculative trade, primarily because we understand the precious metal markets are opaque.
"The answer of "no I shouldn't" is quite simple. I do not tell you what "you" should do"
I'm not asking you to tell me what to do, I'm asking you to explain how your method can be robust when it is missing material "open interest", "volume", and "price" information from the OTC paper market when that market is NOT an "other markets" as you say, but is tightly linked to the futures markets and thus affects it.
"My principles of auction market analysis apply to all futures markets in all time frames. However some patterns are more reliable on 5 min charts rather than 30 minute charts, daily charts, or weekly charts."
Those two statements are somewhat contradictory. If they are not equally reliable then they canot be applies to all time frames. Have you wondered why they may not be reliable to longer time frames? Possibly something to do with the fact that the information you get from the futures markets is not a complete reflection of the total market?
I'm not interested in 5 minute day trading, and on such small time frames the lack of depth in the data you are using may well not be material, hence you observe your method works.
My concern is the application of your method to longer time frames where the errors will compound as your narrow data focus covers less and less of the total auction processes that are driving the gold price.
For example, central bank buying has been a significant factor supporting gold prices but they don't buy on futures markets. Hence your analysis on longer timeframes is based on material understatement of volumes at critical price points.
"You don't think it is possible for a trader to make money trading futures on purely chart/auction market analysis"
You may be making money and if you stick to day trading you may be OK. But there will be days when your price/volume/OI patterns don't work, which will be because you don't have a real view of the volume and OI. I just hope you don't have a big position on at that time. Good luck with it.
Thanks for the comment Bron. I have to reply to you in two parts because my answer is too long to fit in one.
DeleteThis is what it comes down to.
You believe what drives the precious metals futures market is real world physical supply and demand.
Allow me to paraphrase you here: "I'm asking you to explain to me how your system can be robust when it is missing information, that is tightly linked to the futures markets and thus affects it"
Bingo!
What it boils down to is this:
What I believe to the core of my soul, is that there is no need to study the physical or real world supply and demand in order to effectively trade the futures markets.
Why? Because whatever is happening outside the COMEX will be reflected in the futures markets.
What is the point in studying the things outside the futures markets that "affect" (your words) the futures markets, when one can just study the futures market instead?
The Nasdaq 100 is "Hard Linked" to the 100 issues in the NDX. What happens to those 100 issues drives the futures market. I think it is useless to look at any of the 100 issues of the NDX, or ETF's, in order to effectively trade the NQ.
Why? Because I believe whatever is going on in the 100 issues will be reflected in the Price, Volume, and Open Interest of the futures contract. I don't want to sound redundant but it is worth repeating again.
Next, there is nothing contradictory in what I said about the patterns on 5 min, 30 min, daily, or weekly charts. Some are "more reliable", I didn't say "not reliable". There is a difference between "more reliable" and "reliable". The ones that are "more reliable" deserve an increase in "position sizing", that is all.
DeleteNext, allow me to paraphrase you again: "central bank buying has been a factor supporting gold prices..."
Are you suggesting that these actions do not "affect" the futures market? I would disagree with you if you believe that. So to reiterate my point, I don't care what the central banks do, because it will be reflected in the futures market. I would rather spend my time caring about what "I do" in response to the futures market.
Lastly, to address what you said in the end, I believe it is important to have strict trading rules. One such would be to know the exit before entering a trade. Therefore when there is an adverse price movement that invalidates the trade idea, take a loss. You can't tell me that studying "real world" or OTC markets prevents loss? (By the time you figure out what is happening, I'm either long gone or squeezing you.)
Losses should not be ruinous when using proper "Money Management" and "Risk Management" principles, and that goes for any futures market and that goes for any time frame. There is no trading system that avoids loss as far as I know. Therefore it would be best in my opinion for a trader to be an "Expert" in "Risk Management" and "Money Management" well before they even think of becoming an expert in "Real World Supply and Demand".
You see, the smartest people in the world, economists, financial analysts, money managers, etc. take catastrophic losses studying "real world" rather than studying something more useful such as "Psychology". Do you know how many mutual funds have had "abysmal" performance throughout the years, with teams of analysts who study "fundamentals"? Bron, let's be honest, the figure is quite frankly embarrassing.
The futures markets trade in a dual auction, and price will be determined by the auction. Therefore I believe expertise must be in the auction. Those who fail to understand that, and want to trade the futures markets, are putting themself at a serious disadvantage in my opinion.
Perhaps the Mint will one day consider a different approach to their "Hedging" methods.
Good luck to you and the Mint as well. Thank you for your participation.
Scott