,hl=en,siteUrl='http://0ldfox.blogspot.com/',authuser=0,security_token="v_SeT2Tv8vVdKRCcG9CCW-ZdIfQ:1429878696275"/> Old Fox KM Journal

Wednesday, December 24, 2003

Feature Article :

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".

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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.

Chuck LeBeau is the co-author of Computer Analysis of the Futures Market, and the former co-editor of Technical Traders Bulletin. Chuck is the featured speaker at IITM's upcoming How to Develop a Winning Trading System That Fits You three-day workshop in Phoenix, January 2004. Chuck has 27 years experience in the markets and is widely known for his specialized knowledge of technical analysis. He also develops trading systems and currently runs a website devoted to trading topics; www.traderclub.com. This article is Bulletins #54 from the "forum" section of Chuck's informative site.

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