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3 categories of traders
In the past, two schools of
thought on trading ruled: fundamental trading and technical trading (or reports
vs. patterns/pictures). Today, both of these schools are also greatly affected
by a third thought: macro trading. Following are explanations and examples to help
you determine which type of trading suits you best.
Fundamental trading was
really the first type of a decision-making process that gripped traders, even
100 years ago. Its derivation lies in the equity arena where traders were
trying to apply their own common-sense principals into the process of
anticipating which stocks were likely to rise and which stocks were to be sold.
What is known about the company and its books? What has the board of directors
decided to do lately?
When agricultural and
mercantile exchanges began to open to help producers in the cyclical money
management of their products, a lot of these principles were readily
The traders who subscribe to
the fundamental approach will be primarily looking at the number of total
planted acres and harvested acres, weather, and export sales. Interest rates
and information about seed technology and test weight should be examined as
A person could argue that it’s
almost impossible to make an investment decision without all the fundamental
information, but it happens millions of times a day. The people who make
decisions based on pure math, graphs, and charts are the technical traders.
In the “A Technical Look” chart
on page 00, there are a multitude of patterns and pictures at work.
The stochastic reference
that runs through the bottom of the graph refers to the theory that as prices
rise or decrease, the closing prices will also tend to rise or decrease, and
the red and blue lines at the bottom are exactly that. This reference graph is
a commonly used tool by floor and desk traders.
The volume color bar gives a
visual representation of the relative excitement in a product. Generally, this
measure is an indicator that a trend is ending. High volumes on the lows might
mean that the lows are close to being in. Low volume on the highs might mean
that the buyers are exhausted and the highs are in.
The high/low/close portion
in black is at the top of the chart. Many books have been written on the
formations of patterns, and here is a classic one. The triple-top pattern may
indicate to some followers that the move is over to the upside and that it’s
been exhausted. Traders also like to draw support and resistance lines on these
charts to keep track of trend lines.
Other indicators that may be
overlaid onto these charts are 20-, 50-, and 100- day moving averages. Some
will even go out as far as 200 days.
The whole point is to
illustrate that there are a multitude of technical tools all centered on
patterns and pictures. When these things are laid out in this way, traders can
get a good feel for the product in a two-dimensional fashion.
These tools are interpretive
and have no exact right or wrong answers. There are hundreds, if not thousands,
of books written on this subject.
This quite possibly is the
most difficult part of a trader’s job. This macro picture is an all-consuming
reason/excuse for why a particular commodity moved the way it did on any given
day. Certain subjects move into the macro vernacular and then back out on a
One good example is the
Greek debt crisis. It’s forgotten about until it’s not forgotten about. The
U.S. dollar, oil, and sovereign debt are just a few of the recent headliners.
The key to getting a handle on these moves really means getting a handle on the
industry as a whole.
Fundamental traders will be
greatly affected by macro news and events. For instance, if no other nations have
money to buy U.S. corn, the price will most likely go down. Our own tight
balance sheet issues may be overshadowed by a European nation defaulting on its
Technical traders can be
caught off guard when the levels of support and resistance that they really may
have pinned their hopes to are breached.
For instance, in the past
few years there have been a number of examples of this in the U.S. stock
market. At these times, technical traders saw the world throw all of its
so-called rules out the window. Who cares about a moving average when the stock
market has a panic attack? Who cares about stochastics, Bollinger bands, and
RSIs (relative strength indices) when we have an age-old American investment
institution going bankrupt with scores of others soon to follow?
And just when you think you
have a handle on things, raw technology takes control.
Technology is a macro issue
because it is a trading tool without borders. It is a trading tool that has a
single language that is not widely spoken but is widely employed. It is a
trading tool that has no hours and very few limitations. It is the world’s
Traders and institutions use
what are called icebergs. These are orders that are programmed to be shown only
to the electronic market in small quantities so as not to give away the
purchaser or seller’s total size and intensity. The financial world is all
abuzz about the high-frequency trading taking place that’s knocking the naughty
black box trading machines off the front page for the time being.
Many years ago, the
cigar-chomping, seasoned veterans with the green visors used to speak about the
voice from the tomb. A quick Internet search reveals this was just a very
early, rude and crude technical trading tool that was made possible by
crunching years of data in the wheat market for some sort of cyclical pattern.
This technical trading tool
can now be replicated for thousands of markets, updated by the second, because
of the width and breadth of the technology that is at our fingertips today.
Now, take all the data and
without a way of representing that data, all we really have is just a bunch of
data. The next big wave in the technical trading revolution will be in the
There are companies that
only mine data from massive databases – relevant data – and make an intelligent
trading platform around it. Now throw in the ability of these firms and their
computers to update and back-test instantaneously, and you have a pretty
powerful tool. The term artificial intelligence is creeping back into the
trading room, and it’s saying all over again that you just don’t know what you
think you know.
So keep learning and keep
changing up your game plan. Figure out what type of trader you are and use all
the tools of technology to help you make the best trading decisions for your
Scott Shellady is a fixed
income manager for XFA. He is an experienced trader of commodities and
financials in North America, Europe, and Asia. Shellady holds a Chicago
Mercantile Exchange Group membership.