Today was an interesting day in that the US Dollar was stronger, the US Markets were down, and for the most part across the board commodities were lower after moving higher for a couple weeks.
One anomaly for the day was Natural Gas which saw a move higher and has started to show signs that maybe the prolonged downtrend may atleast be resting which makes it an interesting item to put on traders watch lists incase it can show some bullish strength and potentially trend higher.
Using the US Market traded Barclays IPath ETN or Exchange Traded Note Symbol:GAZ , which looks to mirror the performance of the natural gas contract traded on the NYMEX, allows non-commodities investors a way to trade those products within a normal brokerage account.
Natural Gas essentially has followed the trends of Crude Oil in that we saw an unbelievable run up and a subsequent fall. In fact while GAZ hit a high of close to $84 in June of 2008, it current stands at just $19.04. Back in July of 2008 the my indicators signaled a short entry at $73 and maintained that position until mid May of 2009 where a long signal was generated around $20.
Optimizing Entry Points: Next Signal Soon?
Looking at the chart we can see the long signal or short exit given recently followed buy a quick sell signal. This is a great example of why indicators should be used as a guide but traders may not actually take every signal. While closing out the short position from July ’08 after capturing a huge downtrend was a good signal as we never know how long trends may last and we can always put positions back on
Now notice the previous or most recent highs around $22 (black line drawn above). Many traders might try and optimize their long entry and wait for price to close above those recent highs. This provides a couple of benefits in that one doesn’t have to worry quite as much about whether price will reach those levels and then bounch back down plus once price closes above $22, this gives traders a nice area where they might place their stop orders below as this would be a new level of support. If GAZ winds up trading in a range for a while, one might expect prices to keep running up to those recent highs so clearing them may be important.
Finally, when we see a series of lower highs and higher lows it forms what I like to call “Price Compression” in that you notice the daily bars on the chart starting to get funneled towards a decision point which can be seen within the triangle.
So for now I will be adding this to the watch list and waiting to see if there is an entry opportunity. Where is Natural Gas heading? Who knows, but those who trend trade look to set conditions for entry, manage risk, and then keep losses small while riding trends until they stop. We never know which entries will yield which results.
Generally I like to only risk 1% of my trading account. I do this by taking the distance between my entry and exit point which I define by subtracting my entry price minus my exit or stop price. So for example if that winds up being say $2, then whatever 1% is of my trading account I divide that by $2 and that helps in choosing how many shares I might purchase. Risk management cannot be stressed enough and the imporatance of taking small losses cannot be underestimated.