A five-tool baseball player is said to be a potential All-Star when he has a well-rounded offensive and defensive skill set. The ability to hit for power and average, run, throw, and field gives him the opportunity to excel in every facet of the game.
In trading, the ability to interpret charts, understand indicators, draw trend lines, and recognize support and resistance levels gives the technical trader an opportunity to excel in the markets. However, one tool may be missing to become a potential All-Star Trader – fundamental analysis. While one does not need to be an expert at fundamental analysis, paying closer attention to it will make a technical trader well-rounded.
The recent trade in Live Cattle is an example of keeping the fundamentals in mind. Let’s go directly to the charts for an example. On May 16th a breakout trade occurred in the August 2011 Live Cattle futures market. With recent lows and a trend line surpassed an opportunity to short the contract presented itself. Upon setting up the trading plan a downside target was determined with numerous technical factors taken into consideration. Potential support at the 107.825 low (1/04/11), 106.750 high (12/07/10) or 104.125 low (12/08/10). A 200-day simple moving average at 108.050. A 50% Fibonacci Retracement level of the bull move dating back almost a year at 106.800. MACD, Rate of Change and Stochastics were also considered. It was determined to place the downside target at 104.200, just above the 12/08/10 low. This target price was reached on May 23rd – I could have exited this trade at my initial target but I had chosen to cancel that profit target order. Why?
I canceled the order because of fundamental information that potentially gave the opportunity to transform a good trade into a better trade. On May 20th a Cattle on Feed report was released after the close of trade. The report had extremely bearish information about the size of the cattle herd. Analysts said that a limit down move ($3.00 below the previous day’s settlement price) the following trading session was not out of question. The next session’s limit down price (104.100) would have been below the original target price (104.200). On May 23rd the August Live Cattle traded and closed limit down to settle at 104.100. The market opened lower the next session (103.875) and traded as low as 103.475 allowing the trade to accrue more profit potential by leaving the target open. The stop loss was immediately lowered to 105.250 but the trade could have been liquidated for profits beyond the original target profit.
Traders need to be well-rounded in their approach and trade in the context of the bigger picture. Once in a while fundamental analysis can help transform an average trader into an All-Star.
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STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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