Keeping Some Fire Power In Reserve
Written by Robert W. Colby
Reserves are funds in our account that are held back from trading, and usually parked safely on the sidelines in risk-less money-market instruments. The effect of holding reserves is to reduce net leverage. A workable rule of thumb that has evolved over time out of the real-world trading arena is to limit net leverage to 30%.
To see how reserves, leverage and net leverage work together, employ the following formulas:
Reserves = 100% - (Net Leverage / Leverage)
Net Leverage = Leverage * (100% - Reserves)
Leverage = Net Leverage / (100% - Reserves)
where
Reserves are cash or cash equivalents held back on the sidelines.
We can solve these equations to find any of these numbers. For example, for a stock position where initial margin and leverage are both 50% and net leverage is held to 30%:
Reserves = 100% - ( 30% / 50% ) = 1 - 3/5 = 1.00 - 0.60 = 0.40 = 40%
For stocks, if we deposit initial margin of 70% into our account and confine our use of net leverage to 30%, as recommended, then
Reserves = 100% - (30%/30%) = 1 - 3/3 = 1.00 - 1.00 = 0%
If we entered a futures position using 75% leverage (and, of course, putting up 25% initial margin, which represents 100% minus the 75% leverage), and if the total value of this position amounted to only 40% of our available trading capital (therefore, we are holding back 60% of our trading capital in reserves on the sidelines), then the net leverage would be reduced proportionately to 30% (that is, 75% times 40%). Using the second formula,
Net Leverage = Leverage * (100% - Reserves)
Net Leverage = 75% * (100% - 60%) = .075 * 0.40 = 30%
Again using industry standard (and quite reasonable) rules of thumb, if we wish to keep net leverage at 30% while holding 60% of our capital in reserve, we can put up 25% margin for each contract, and therefore employ 75% leverage for each contract. Thus, using the third formula,
Leverage = Net Leverage / (100% - Reserves) = 30% / (100% - 60%) = 75%
It has long been known that money management is the most critical consideration in trading and investing. Money management includes the prudent use of leverage. Sound rules and disciplines allow success to accumulate while minimizing the risk of ruin.
Reserves are funds in our account that are held back from trading, and usually parked safely on the sidelines in risk-less money-market instruments. The effect of holding reserves is to reduce net leverage. A workable rule of thumb that has evolved over time out of the real-world trading arena is to limit net leverage to 30%.
To see how reserves, leverage and net leverage work together, employ the following formulas:
Reserves = 100% - (Net Leverage / Leverage)
Net Leverage = Leverage * (100% - Reserves)
Leverage = Net Leverage / (100% - Reserves)
where
Reserves are cash or cash equivalents held back on the sidelines.
We can solve these equations to find any of these numbers. For example, for a stock position where initial margin and leverage are both 50% and net leverage is held to 30%:
Reserves = 100% - ( 30% / 50% ) = 1 - 3/5 = 1.00 - 0.60 = 0.40 = 40%
For stocks, if we deposit initial margin of 70% into our account and confine our use of net leverage to 30%, as recommended, then
Reserves = 100% - (30%/30%) = 1 - 3/3 = 1.00 - 1.00 = 0%
If we entered a futures position using 75% leverage (and, of course, putting up 25% initial margin, which represents 100% minus the 75% leverage), and if the total value of this position amounted to only 40% of our available trading capital (therefore, we are holding back 60% of our trading capital in reserves on the sidelines), then the net leverage would be reduced proportionately to 30% (that is, 75% times 40%). Using the second formula,
Net Leverage = Leverage * (100% - Reserves)
Net Leverage = 75% * (100% - 60%) = .075 * 0.40 = 30%
Again using industry standard (and quite reasonable) rules of thumb, if we wish to keep net leverage at 30% while holding 60% of our capital in reserve, we can put up 25% margin for each contract, and therefore employ 75% leverage for each contract. Thus, using the third formula,
Leverage = Net Leverage / (100% - Reserves) = 30% / (100% - 60%) = 75%
It has long been known that money management is the most critical consideration in trading and investing. Money management includes the prudent use of leverage. Sound rules and disciplines allow success to accumulate while minimizing the risk of ruin.
How To Increase Forex Profits 100% in 10 Minutes
Forex Articles | Written by Jimmy Young |
This simple exercise will increase Forex profits 100% and works for 99% of all short-term FX traders - stop trading so much - widen out your stops - widen out your profit targets - and only trade in the direction of the trend indicated by 4 hour chart.
1) Stop trading so much
Sure there are no commissions but the spreads are HUGE and believe it or not (well you'll believe it after you do the simple exercise below) the spreads are reducing your profits 100%!
2) Widen out your stops
Initial stop loss should be a minimum of 23 points; I use between 23 and 35 point stop losses for short-term trading.
3) Widen out your profit targets
Unless you think a trade can make you 100 points or more don't do it.
4) Only trade in the direction of the 4 hour chart
The real money is made in the direction of the trend
Simple exercise
1) Download all your trades for the year into an excel spreadsheet (if you don't know how to do this ask your broker for help).
2) Determine the dollar value of the spread for each trade.
3) Sum up the total dollar value of all spreads for all trades and add this number it to your current account balance; this is your spread adjusted account balance.
4) Take your spread adjusted current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
5) Take your actual current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
6) Subtract your spread adjusted year to date percentage change from your actual year to date percentage change.
7) That number should be 100% or more
8) Take the necessary steps as outlined above (1 to 4) and improve your results 100%
This simple exercise will increase Forex profits 100% and works for 99% of all short-term FX traders - stop trading so much - widen out your stops - widen out your profit targets - and only trade in the direction of the trend indicated by 4 hour chart.
1) Stop trading so much
Sure there are no commissions but the spreads are HUGE and believe it or not (well you'll believe it after you do the simple exercise below) the spreads are reducing your profits 100%!
2) Widen out your stops
Initial stop loss should be a minimum of 23 points; I use between 23 and 35 point stop losses for short-term trading.
3) Widen out your profit targets
Unless you think a trade can make you 100 points or more don't do it.
4) Only trade in the direction of the 4 hour chart
The real money is made in the direction of the trend
Simple exercise
1) Download all your trades for the year into an excel spreadsheet (if you don't know how to do this ask your broker for help).
2) Determine the dollar value of the spread for each trade.
3) Sum up the total dollar value of all spreads for all trades and add this number it to your current account balance; this is your spread adjusted account balance.
4) Take your spread adjusted current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
5) Take your actual current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
6) Subtract your spread adjusted year to date percentage change from your actual year to date percentage change.
7) That number should be 100% or more
8) Take the necessary steps as outlined above (1 to 4) and improve your results 100%
Before You Make a Trade: 10 Critical Questions
Articles Library | General Trading Articles | Written by Jim Wyckoff |
Before You Make a Trade: 10 Critical Questions
A "Trading Checklist" of prioritized criteria not only will help you decide when to execute a trade, but will also help you identify potential winning trades.
What kind of stuff should a trader put on a Trading Checklist? That depends on the individual trader. Each trader should have his or her own set of criteria, or rules, that helps determine a market to trade and the direction to trade it--including when to get in and out. Below are my Top 10 rules on my trading checklist.
1. Are shorter-term and longer-term charts in agreement on price trend?
I've told readers for years that this is my No. 1 trading rule. If the weekly, monthly and daily (and sometimes intra-day) bar charts are not in agreement on price trend, I'll likely pass on a trade. I'm usually a trend trader, and the "trend must be my friend" before I make a trade.
2. Is this potential trade within my financial risk tolerance?
To be a successful trader, I not only have to have winning trades, but I must survive the more numerous losing trades I am likely to encounter. If I see a potentially profitable trading "set-up," but the market is too volatile, I'll likely pass on the trade because of the potential for a big drawdown or even a margin call from my broker. An example is the energy markets a couple years ago. They were highly volatile. Certainly, there were some big moves (and trading opportunities for some) in the energies--both up and down. However, when a 75-cent, or more, daily move in crude oil is a "routine" trading session, that market is too volatile for my risk tolerance--at least when trading straight futures.
3. What is the potential risk-reward ratio of the trade?
My risk-reward ratio in a futures trade should be at least three to one on maximum profit potential. In other words, if my risk of loss is $1,000, my maximum profit potential should be at least $3,000. Anything less is not worth making the trade. Now, any eventual profit that is made may not always attain that three-to-one risk-reward ratio, but the point here is there should be the "potential" for a profit three times greater than your capital at risk in the trade.
4. Has there been a price "breakout" from a trading range?
One of my favorite trading "set-ups" is when prices have been in a trading range--between key support and resistance levels--for an extended period of time (the longer, the better). This type of trading range is also called a congestion zone, or a basing area when at historically lower price levels. If the price breaks out of a range (above the key resistance or below the key support), I like to enter the market--long on an upside breakout or short on a downside breakout. A safer method would be to make sure there is follow-through strength or weakness the next trading session--in order to avoid a false breakout. The trade-off there is that I could be missing out on some of the price move by waiting an extra trading session.
5. Is there a potentially good entry point if the trade looks good?
Entry points in trades most times should be based on some type of support or resistance levels in a market. If I see a potential set-up for a long-side trade, I will wait for the market to push up through a resistance level and begin a fledgling uptrend. Then, if I do go long, I'll set my sell stop just below a support level that's not too far below the market. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful. Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections in a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend.
6. Is there a support or resistance level nearby, at which I can set a protective stop when I enter the trade?
This is my exit strategy, and is one of the most important factors in trading futures. On when to get out of a market, I have a simple, yet very effective method: Upon entering a trade, if I place a sell stop below the market if I'm long (buy stop if I'm short), I know right away approximately how much money I could lose in any given trade. I will never trade straight futures without employing stops. Neither should you. Thus, I will never be in a trade and have a losing position and not know where my exit point is going to be.
7. Do "fundamental" market factors raise any warning flags?
Those who have read my features know I base the majority of my trading decisions on technical indicators and chart analysis--and also on market psychology. However, I do not ignore fundamentals that could impact the markets I'm trading. Neither should you. There are U.S. government economic reports that sometimes have a significant impact on markets. Associations also release reports that impact futures markets. Even private analysts' estimates can move markets. I make it a priority to know, in advance, the release of any scheduled reports or forecasts that have the potential to move the market for which I'm thinking about trading. I don't like surprises when I am in the middle of a trade.
8. What do computer-generated indicators show? (RSI, DMI, Stochastics, etc.)
Some traders use the Directional Movement Indicator (DMI) as a complete trading system. Also, some traders use the Relative Strength Index (RSI), Slow Stochastics or other computer-generated technical indicators solely for determining entry and exit points. I do neither and here’s why: I consider these computer-generated technical indicators to be secondary, yet still important, trading tools. I will use these "secondary tools" to help me confirm or reject ideas that are based on my "primary tools"--which are basic chart patterns, support and resistance levels, trend lines, and fundamental analysis.
9. Do volume and open interest provide any clues?
Most veteran futures traders agree that volume and open interest are also "secondary" technical indicators that help confirm other technical signals on the charts. In other words, traders won't base their trading decisions solely on volume or open interest figures, but will instead use them in conjunction with other technical signals, or to help confirm signals. As a general rule, volume should increase as a trend develops. In an uptrend, volume should be heavier on up-days and lighter on down-days within the trend. In a downtrend, volume should be heavier on down-days and lighter on up-days. Changes in open interest also can be used to help confirm other technical signals. Open interest can help the trader gauge how much new money is flowing into a market, or if money is flowing out of a market. This is helpful when looking at a trending market. Another general trading rule is that if volume and open interest are increasing, then the trend will probably continue in its present direction--either up or down. And if volume and open interest are declining, this can be interpreted as a warning signal that the current trend may be about to end.
10. What is the prevailing general opinion of the market? (Possible contrary thinking.)
When I was working on the trading floors of the major futures exchanges, traders would many times "fade" (or trade against) the featured articles on commodities in the major newspapers, such as the Wall Street Journal. They figured that if the general financial press had picked up on a market (such as a drought driving grain prices higher), then that uptrend must be about over. Contrary opinion in the trading business is defined as going (trading) against the popular or most widely held opinions in the marketplace. This notion of "going against the grain" of popular market opinion is difficult to undertake, especially when there is a steady drumbeat of fundamental information that seems to corroborate the popular opinion. If you've read books on trading markets, most will tell you to have a trading plan and stick with it throughout the trade. A main reason for this trading tenet is to keep you from being swayed or influenced by the opinions of others while you are in the middle of a trade. Popular opinion is many times not the right opinion when it comes to market direction.
Before You Make a Trade: 10 Critical Questions
A "Trading Checklist" of prioritized criteria not only will help you decide when to execute a trade, but will also help you identify potential winning trades.
What kind of stuff should a trader put on a Trading Checklist? That depends on the individual trader. Each trader should have his or her own set of criteria, or rules, that helps determine a market to trade and the direction to trade it--including when to get in and out. Below are my Top 10 rules on my trading checklist.
1. Are shorter-term and longer-term charts in agreement on price trend?
I've told readers for years that this is my No. 1 trading rule. If the weekly, monthly and daily (and sometimes intra-day) bar charts are not in agreement on price trend, I'll likely pass on a trade. I'm usually a trend trader, and the "trend must be my friend" before I make a trade.
2. Is this potential trade within my financial risk tolerance?
To be a successful trader, I not only have to have winning trades, but I must survive the more numerous losing trades I am likely to encounter. If I see a potentially profitable trading "set-up," but the market is too volatile, I'll likely pass on the trade because of the potential for a big drawdown or even a margin call from my broker. An example is the energy markets a couple years ago. They were highly volatile. Certainly, there were some big moves (and trading opportunities for some) in the energies--both up and down. However, when a 75-cent, or more, daily move in crude oil is a "routine" trading session, that market is too volatile for my risk tolerance--at least when trading straight futures.
3. What is the potential risk-reward ratio of the trade?
My risk-reward ratio in a futures trade should be at least three to one on maximum profit potential. In other words, if my risk of loss is $1,000, my maximum profit potential should be at least $3,000. Anything less is not worth making the trade. Now, any eventual profit that is made may not always attain that three-to-one risk-reward ratio, but the point here is there should be the "potential" for a profit three times greater than your capital at risk in the trade.
4. Has there been a price "breakout" from a trading range?
One of my favorite trading "set-ups" is when prices have been in a trading range--between key support and resistance levels--for an extended period of time (the longer, the better). This type of trading range is also called a congestion zone, or a basing area when at historically lower price levels. If the price breaks out of a range (above the key resistance or below the key support), I like to enter the market--long on an upside breakout or short on a downside breakout. A safer method would be to make sure there is follow-through strength or weakness the next trading session--in order to avoid a false breakout. The trade-off there is that I could be missing out on some of the price move by waiting an extra trading session.
5. Is there a potentially good entry point if the trade looks good?
Entry points in trades most times should be based on some type of support or resistance levels in a market. If I see a potential set-up for a long-side trade, I will wait for the market to push up through a resistance level and begin a fledgling uptrend. Then, if I do go long, I'll set my sell stop just below a support level that's not too far below the market. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful. Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections in a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend.
6. Is there a support or resistance level nearby, at which I can set a protective stop when I enter the trade?
This is my exit strategy, and is one of the most important factors in trading futures. On when to get out of a market, I have a simple, yet very effective method: Upon entering a trade, if I place a sell stop below the market if I'm long (buy stop if I'm short), I know right away approximately how much money I could lose in any given trade. I will never trade straight futures without employing stops. Neither should you. Thus, I will never be in a trade and have a losing position and not know where my exit point is going to be.
7. Do "fundamental" market factors raise any warning flags?
Those who have read my features know I base the majority of my trading decisions on technical indicators and chart analysis--and also on market psychology. However, I do not ignore fundamentals that could impact the markets I'm trading. Neither should you. There are U.S. government economic reports that sometimes have a significant impact on markets. Associations also release reports that impact futures markets. Even private analysts' estimates can move markets. I make it a priority to know, in advance, the release of any scheduled reports or forecasts that have the potential to move the market for which I'm thinking about trading. I don't like surprises when I am in the middle of a trade.
8. What do computer-generated indicators show? (RSI, DMI, Stochastics, etc.)
Some traders use the Directional Movement Indicator (DMI) as a complete trading system. Also, some traders use the Relative Strength Index (RSI), Slow Stochastics or other computer-generated technical indicators solely for determining entry and exit points. I do neither and here’s why: I consider these computer-generated technical indicators to be secondary, yet still important, trading tools. I will use these "secondary tools" to help me confirm or reject ideas that are based on my "primary tools"--which are basic chart patterns, support and resistance levels, trend lines, and fundamental analysis.
9. Do volume and open interest provide any clues?
Most veteran futures traders agree that volume and open interest are also "secondary" technical indicators that help confirm other technical signals on the charts. In other words, traders won't base their trading decisions solely on volume or open interest figures, but will instead use them in conjunction with other technical signals, or to help confirm signals. As a general rule, volume should increase as a trend develops. In an uptrend, volume should be heavier on up-days and lighter on down-days within the trend. In a downtrend, volume should be heavier on down-days and lighter on up-days. Changes in open interest also can be used to help confirm other technical signals. Open interest can help the trader gauge how much new money is flowing into a market, or if money is flowing out of a market. This is helpful when looking at a trending market. Another general trading rule is that if volume and open interest are increasing, then the trend will probably continue in its present direction--either up or down. And if volume and open interest are declining, this can be interpreted as a warning signal that the current trend may be about to end.
10. What is the prevailing general opinion of the market? (Possible contrary thinking.)
When I was working on the trading floors of the major futures exchanges, traders would many times "fade" (or trade against) the featured articles on commodities in the major newspapers, such as the Wall Street Journal. They figured that if the general financial press had picked up on a market (such as a drought driving grain prices higher), then that uptrend must be about over. Contrary opinion in the trading business is defined as going (trading) against the popular or most widely held opinions in the marketplace. This notion of "going against the grain" of popular market opinion is difficult to undertake, especially when there is a steady drumbeat of fundamental information that seems to corroborate the popular opinion. If you've read books on trading markets, most will tell you to have a trading plan and stick with it throughout the trade. A main reason for this trading tenet is to keep you from being swayed or influenced by the opinions of others while you are in the middle of a trade. Popular opinion is many times not the right opinion when it comes to market direction.
11 Fascinating Market Correlations You'll Want to Use
Written by Jim Wyckoff
Experienced futures traders know there are many correlations among futures markets - some of which are valuable guides in helping to determine specific market trends, and some of which are fickle. This educational feature will examine some basic correlations among futures markets, and will likely be most beneficial to the less-experienced traders. However, it just might be a good refresher for the experienced traders who may have forgotten a few of the market correlations.
It is important to emphasize that market correlations are never 100% predictable, and that some market correlations can and do make 180-degree turns over a period of time.
U.S. Dollar-Gold: The gold market and the dollar usually trade in an inverse relationship. This has been the case for many years. During times of U.S. economic prosperity and lower inflation, the dollar will usually benefit as money flows into U.S. paper assets (stocks and bonds), while physical assets (gold) are usually less attractive. Conversely, during times of weaker U.S. economic growth, higher inflation or heightened world economic or political uncertainty, traders and investors will tend to flock out of "paper" assets and into "hard" assets such as gold. Inflation is a bullish phenomenon for gold.
U.S. Dollar-U.S. Treasury Bonds: Usually, a stronger dollar means a stronger bond market because of good demand for U.S. dollars (from overseas investors) to buy U.S. T-Bonds. T-Bonds are also seen as a "flight-to-quality" asset during times of economic or political instability. In the past, the U.S. dollar has also benefited from "flight-to-quality" asset moves. However, since the major terrorist attacks on the U.S. and the resulting damage to the U.S. economy, the safe-haven status of the "greenback" has been much less pronounced.
Crude Oil-U.S. Treasury Bonds: If crude oil prices rally strongly, that is a negative for U.S. T-Bond prices, due to notions that inflationary pressures could reignite and become problematic for the economy. Inflation is the arch enemy of the bond market. Rising crude oil prices are also bullish for the gold market.
CRB-U.S. Treasury Bonds: The CRB Index is a basket of commodities melded into one composite price. A rising CRB index means generally rising commodities prices, and increasing inflation. Thus, a rising CRB Index is negative for U.S. Treasury Bond prices.
U.S. Stock Indexes-U.S. Treasury Bonds: Since the bull market in U.S. stocks ended just over two years ago, stock index futures prices and U.S. Treasury bond futures prices have traded in an inverse relationship. When stock prices are up, bond prices are usually down. However, during the long bull market run that preceded the current bear market, stock and bond prices traded in tandem. In fact, years ago, before all the electronic overnight futures trading had begun, the best way to get a good read on how the stock indexes would open was by early trading in the T-bond market. (T-Bond trading opens 70 minutes before the stock indexes).
Silver-Soybeans: This corollary may be more fiction than fact, at least nowadays. But during the "go-go" days of soaring precious metals and soybean prices, it was said that if soybean futures would lock limit-up, bean traders would buy silver futures.
Cattle-Hogs: The point to mention here is that if strong price gains or losses occur in one meat futures complex, there is likely to be somewhat of a spillover effect in the other meat complex. For example, sharp losses in the cattle or feeder cattle futures will likely weigh on the hogs and pork bellies.
Currency Futures-U.S. Dollar Index: Most major IMM currency futures contracts are "crossed" against the U.S. dollar. Thus, when the majority of the currencies are trading higher, it's very likely that the U.S. Dollar Index will be trading lower. It's a good idea for currency traders to keep a watchful eye on the U.S. Dollar Index, as it's the best barometer for the overall health of the U.S. dollar versus major foreign currencies.
U.S. Stock Indexes-Lumber: Lumber is a very important commodity for the U.S. economy. It is literally a building block for the nation. If the stock market is sharply higher, lumber futures prices will be supported. A big sell off in the stock market will likely find selling pressure on lumber futures.
N.Y. Cocoa-British Pound: London cocoa futures trading is as important (or even more important) than New York cocoa futures trading, on a worldwide basis. London cocoa futures trading is conducted in the British pound currency. Thus, big fluctuations in the pound sterling will impact the price of U.S. cocoa futures, due to the cross-currency fluctuations of the British pound versus the U.S. dollar. Keep in mind there is constantly arbitrage taking place between the New York and London cocoa markets, and thus the currency cross-rates between the pound and the dollar are very important.
Grains-U.S. Dollar Index: A weaker U.S. dollar will be an underlying positive for the U.S. grain futures markets because it makes U.S. grain exports more competitive (cheaper prices) on the world market. Larger-degree trends in the U.S. dollar will have a larger-degree impact on the grains.
Experienced futures traders know there are many correlations among futures markets - some of which are valuable guides in helping to determine specific market trends, and some of which are fickle. This educational feature will examine some basic correlations among futures markets, and will likely be most beneficial to the less-experienced traders. However, it just might be a good refresher for the experienced traders who may have forgotten a few of the market correlations.
It is important to emphasize that market correlations are never 100% predictable, and that some market correlations can and do make 180-degree turns over a period of time.
U.S. Dollar-Gold: The gold market and the dollar usually trade in an inverse relationship. This has been the case for many years. During times of U.S. economic prosperity and lower inflation, the dollar will usually benefit as money flows into U.S. paper assets (stocks and bonds), while physical assets (gold) are usually less attractive. Conversely, during times of weaker U.S. economic growth, higher inflation or heightened world economic or political uncertainty, traders and investors will tend to flock out of "paper" assets and into "hard" assets such as gold. Inflation is a bullish phenomenon for gold.
U.S. Dollar-U.S. Treasury Bonds: Usually, a stronger dollar means a stronger bond market because of good demand for U.S. dollars (from overseas investors) to buy U.S. T-Bonds. T-Bonds are also seen as a "flight-to-quality" asset during times of economic or political instability. In the past, the U.S. dollar has also benefited from "flight-to-quality" asset moves. However, since the major terrorist attacks on the U.S. and the resulting damage to the U.S. economy, the safe-haven status of the "greenback" has been much less pronounced.
Crude Oil-U.S. Treasury Bonds: If crude oil prices rally strongly, that is a negative for U.S. T-Bond prices, due to notions that inflationary pressures could reignite and become problematic for the economy. Inflation is the arch enemy of the bond market. Rising crude oil prices are also bullish for the gold market.
CRB-U.S. Treasury Bonds: The CRB Index is a basket of commodities melded into one composite price. A rising CRB index means generally rising commodities prices, and increasing inflation. Thus, a rising CRB Index is negative for U.S. Treasury Bond prices.
U.S. Stock Indexes-U.S. Treasury Bonds: Since the bull market in U.S. stocks ended just over two years ago, stock index futures prices and U.S. Treasury bond futures prices have traded in an inverse relationship. When stock prices are up, bond prices are usually down. However, during the long bull market run that preceded the current bear market, stock and bond prices traded in tandem. In fact, years ago, before all the electronic overnight futures trading had begun, the best way to get a good read on how the stock indexes would open was by early trading in the T-bond market. (T-Bond trading opens 70 minutes before the stock indexes).
Silver-Soybeans: This corollary may be more fiction than fact, at least nowadays. But during the "go-go" days of soaring precious metals and soybean prices, it was said that if soybean futures would lock limit-up, bean traders would buy silver futures.
Cattle-Hogs: The point to mention here is that if strong price gains or losses occur in one meat futures complex, there is likely to be somewhat of a spillover effect in the other meat complex. For example, sharp losses in the cattle or feeder cattle futures will likely weigh on the hogs and pork bellies.
Currency Futures-U.S. Dollar Index: Most major IMM currency futures contracts are "crossed" against the U.S. dollar. Thus, when the majority of the currencies are trading higher, it's very likely that the U.S. Dollar Index will be trading lower. It's a good idea for currency traders to keep a watchful eye on the U.S. Dollar Index, as it's the best barometer for the overall health of the U.S. dollar versus major foreign currencies.
U.S. Stock Indexes-Lumber: Lumber is a very important commodity for the U.S. economy. It is literally a building block for the nation. If the stock market is sharply higher, lumber futures prices will be supported. A big sell off in the stock market will likely find selling pressure on lumber futures.
N.Y. Cocoa-British Pound: London cocoa futures trading is as important (or even more important) than New York cocoa futures trading, on a worldwide basis. London cocoa futures trading is conducted in the British pound currency. Thus, big fluctuations in the pound sterling will impact the price of U.S. cocoa futures, due to the cross-currency fluctuations of the British pound versus the U.S. dollar. Keep in mind there is constantly arbitrage taking place between the New York and London cocoa markets, and thus the currency cross-rates between the pound and the dollar are very important.
Grains-U.S. Dollar Index: A weaker U.S. dollar will be an underlying positive for the U.S. grain futures markets because it makes U.S. grain exports more competitive (cheaper prices) on the world market. Larger-degree trends in the U.S. dollar will have a larger-degree impact on the grains.
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