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Alexander Elder - Trading For A Living | ||||
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free download links about online stock trading, forex, futures, stock investing, market, trading systems Several government agencies and exchanges collect data on buying and selling by several groups of investors and traders. They publish summary reports of actual trades—commitments of money as well as ego. It pays to trade with those groups that have a track record of success and bet against those with poor track records. For example, the Commodity Futures Trading Commission (CFTC) reports long and short positions of hedgers and big speculators. Hedgers — the commercial producers and consumers of commodities — are the most successful participants in the futures markets. The Securities and Exchange Commission (SEC) reports purchases and sales by corporate insiders. Officers of publicly traded companies know when to buy or sell their company shares. The New York Stock Exchange reports the number of shares bought, sold, and shorted by its members and by odd-lot traders. Members are more successful than small-time speculators. Commitments of Traders Traders must report their positions to the CFTC after they reach certain levels, called reporting levels. At the time of this writing, if you are long or short 100 contracts of corn or 300 contracts of the S&P 500 futures, the CFTC classifies you as a big speculator. Brokers send reports on positions that reach reporting levels to the CFTC. It compiles them and releases summaries once every two weeks. The CFTC also sets up the maximum number of contracts, called position limits, that a speculator is allowed to hold in any given market. At this time, a speculator may not be net long or short more than 2400 contracts of corn or 500 contracts of the S&P 500 futures. These limits are set to prevent very large speculators from accumulating positions that are big enough to bully the markets. The CFTC divides all market participants into three groups: commercials, small speculators, and large speculators. Commercials, also known as hedgers, are firms or individuals who deal in actual commodities in the normal course of business. In theory, they trade futures to hedge business risks. For example, a bank trades interest rate futures to hedge its loan portfolio, or a food processing company trades wheat futures to offset the risks of buying grain. Hedgers post smaller margins and are exempt from speculative position limits. Large speculators are those traders whose positions reach reporting levels. The CFTC reports buying and selling by commercials and large speculators. To find the positions of small traders, you need to subtract the holdings of the first two groups from the open interest. The divisions between hedgers, big speculators, and small speculators are somewhat artificial. Smart small traders grow into big traders, dumb big traders become small traders, and many hedgers speculate. Some market participants play games that distort the CFTC reports. For example, an acquaintance who owns a brokerage firm sometimes registers his wealthy speculator clients as hedgers, claiming they trade stock index and bond futures to hedge their stock and bond positions. The commercials can legally speculate in the futures markets using inside information. Some of them are big enough to play futures markets against cash markets. For example, an oil firm may buy crude oil futures, divert several tankers, and hold them offshore in order to tighten supplies and push futures prices up. They can take profits on long positions, go short, and deliver several tankers at once to refiners in order to push crude futures down and cover shorts. This manipulation is illegal, and most firms hotly deny that it takes place. As a group, the commercials have the best track record in the futures markets. They have inside information and are well-capitalized. It pays to follow them because they are successful in the long run. The few exceptions, such as orange juice hedgers, only confirm this rule. Big speculators used to be highly successful as a group until a decade or so ago. They used to be wealthy individuals who took careful risks with their own money. Today's big traders are commodity funds. These trend-follow- ing behemoths do poorly as a group. The masses of small traders are the proverbial "wrong-way Corrigans" of the markets. It is not enough to know whether a certain group is short or long. Commercials are often short futures because many of them own physical commodities. Small traders are usually long, reflecting their perennial optimism. To draw valid conclusions from the CFTC reports, you need to compare current positions to their historical norms. The modern approach to analyzing commitments of traders has been developed by Curtis Arnold and popularized by Stephen Briese, publisher of the Bullish Review newsletter. These analysts measure deviations of current commitments from their historical norms. Bullish Review uses the following formula: COT Index = Current Net - Minimum Net/Maximum Net - Minimum Net where COT Index = commitments of Traders Index. Current Net = the difference between commercial and speculative net positions. Minimum Net = the smallest difference between commercial and speculative net positions. Maximum Net= the largest difference between commercial and speculative net positions. Net Position = long contracts minus short contracts of any given group. When the COT Index rises above 90 percent, it shows that commercials are uncommonly bullish and gives a buy signal. When the COT Index falls below 10 percent, it shows that commercials are uncommonly bearish and gives a sell signal. Insider Trading Officers and investors who hold more than 5 percent of the shares in publicly traded companies must report their buying and selling to the Securities and Exchange Commission. The SEC tabulates insider buying and selling and releases this data to the public once a month. Corporate insiders have a record of buying stocks cheap and selling dear. Insider buying emerges after severe market drops, and insider selling accelerates when the market rallies and becomes overpriced. The Odd-Lot Short Sale Ratio was a very different indicator. It tracked the behavior of short-sellers among odd-lotters, many of whom were gamblers. Very low levels of odd-lot short sales indicated that the market was near the top, and high levels of odd-lot short sales showed that the stock market was at a bottom. These indicators lost value as the financial scene changed in the 1970s and 1980s. The intelligent small investors moved their money into well-run mutual funds, and gamblers discovered that they could get more bang for their money in options. Now the New York Stock Exchange has a preferential mechanism for filling odd-lot orders, and many professionals trade in 99- share lots. Buying or selling by a single insider matters little. For example, an executive may sell shares in his firm to meet major personal expenses or may buy shares to exercise stock options. Analysts who researched legal insider trading found that insider buying or selling was meaningful only if more than three executives or large stockholders bought or sold within a month. These actions reveal that something very positive or negative is about to happen to the firm. A stock is likely to rise if three insiders buy in one month and to fall if three insiders sell within a month. Stock Exchange Members Membership in a stock exchange — particularly as a specialist — is a license to mint money. An element of risk does not deter generations of traders from paying hundreds of thousands of dollars for the privilege of planting their feet on a few square inches of a crowded floor. The Member Short Sale Ratio (MSSR) is the ratio of shorting by members to total shorting. The Specialist Short Sale Ratio (SSSR) is the ratio of shorting by specialists to shorting by members. These indicators used to serve as the best tools of stock market technicians. High readings of MSSR (over 85 percent) and SSSR (over 60 percent) showed that savvy traders were selling short to the public and identified stock market tops. Low readings of MSSR (below 75 percent) and SSSR (below 40 percent) showed that members were buying from the bearish public and identified stock market bottoms. These indicators became erratic in the 1980s. They were done in by the options markets, which gave exchange members more opportunities for arbitrage. Now it is impossible to tell when their shorting is due to bearish- ness or to arbitrage plays. Odd-Lot Activity Odd-lotters are people who trade less than 100 shares of stock at a time — the small fry of the stock exchange. They remind us of a more bucolic time on Wall Street. Odd-lotters transacted one quarter of the exchange volume a century ago, and 1 percent as recently as two decades ago. Odd-lotters as a group are value investors. They buy when stocks are cheap and sell when prices rise. The indicators for tracking the behavior of odd-lotters were developed in the 1930s. The Odd-Lot Sales Ratio measured the ratio of odd-lot sales to purchases. When it fell, it showed that odd-lotters were buying and the stock market was near the bottom. When it rose, it indicated that odd-lotters were selling and the stock market was near the top. |
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