MARKET TIMING
by Scott W. Barrie
Traders tend to be more interested in trading short time frames than long ones, but a longer one can be of value as well. Here's a simple technical system based on monthly Eurodollar charts for entry and exit signals.
A tool often overlooked in trading futures is the monthly chart. Monthly charts present a clear picture of the trend, be it up, down or sideways. The price trend shown on monthly charts are the moves that as traders, we all wish we could participate in. However, most traders lack the patience and discipline necessary to stay with a long-term position.
The true beauty of the monthly chart lies in that it allows the trader to see the forest through the trees. The day-to-day noise of the markets is filtered by the monthly high-low-close bars, and patterns are more easily discernible than they are in other, shorter-term, charts. But this picture is a relative one, as the distance between support and resistance levels is too wide in most monthly charts; too much risk could be involved. So for many, the monthly chart is considered an interesting anomaly but without practical use in trading.
The monthly chart can be useful in trading, however, with the proper choice of markets and a solid trading plan.
CHOOSING A MARKET FOR LONG-TERM TRADING
Some markets stand out as great trading opportunities due to their technical nature. How? First, speculators trading longer-term trends should trade the more liquid markets because liquidity is a technical way of indicating that the market in question has very close to equal representation on both the buy and sell sides. This is probably due to a good mix of market participants between hedgers and speculators. One single large order does not dramatically move a liquid market, and so breakouts are more clearly defined, as are the longer-term market trends.
Second to consider is the dollar value of a probable market move, as building the bottom line of our accounts is the goal. Margin requirements are another aspect to consider, especially when dealing with longer-term trends; these types of trades tend to be held for longer periods, tying up capital.
One liquid market with a reasonable tick size, decent probable movement and a reasonable margin requirement is the Eurodollar market. Eurodollars are one of the most liquid futures contracts in the world (see the Futures Liquidity table elsewhere in this issue), and so this market is not susceptible to manipulation. That makes the Eurodollar market a good one to use in developing and testing a simple rule-based pattern recognition system using the Eurodollar's monthly charts.
FIGURE 1: CHANGER BUY SIGNAL. Long positions will be exited after one profitable close on a monthly basis unless the settlement value is above the entry month's high, in which case the position is held for one more month. The positions are exited only if the close of the following month(s) is above the settlement value of the entry month, but below the entry month's high.
Scott W. Barrie is the director of research and operations for Great Pacific Trading Co., Grants Pass, OR. He publishes the firm's "Trend Watch" newsletter and writes the "Spread Opportunities" and "Seasonal Stratagems" pieces. A former member of the MidAmerican Commodity Exchange and a private fund manager, he can be reached at barrie@gptc.com or 800 479-7920 ext. 1142.
