The Challenge

[bond_trader1]

I have been given the challenge of making £10,000 trading bonds.

There are three conditions to this challenge.

1. I must trade only the BOBL and the Bund.
2. I have just one year from today to achieve this in.
3. I must use only £1,000. If that is lost, the challenge is over and I must accept defeat.

I should state firstly that I am not a trader. I do not know what a BOBL or a Bund is. For that matter, I don't know what a bond is, how it works or what moves it. But I must learn, and fast.

I do not wish to go further into the reasons for the challenge right now. Suffice to say, there is nothing on the line but my word. I have voiced the opinion that I can do this and now I have been called to task. I have a full time job so I am under no illusions that this will be easy and yet I believe in myself.

I have a basic understanding of how spreadbetting works and believe that is probably the best way to trade considering the amount of money I have.

Although I doubt I will trade until I have a firm belief I know what I am doing, I have opened an account with E*Trade so I can watch the prices. The spreads are as follows:

BOBL June: 2 points
Bund June: 3 points

Both markets are currently closed.

I would like to finally say that any help that anyone can give me would be much appreciated but it is the final rule that I must not receive any advice on what to buy, when, at what level. I can only accept guidance on how I can decide these things for myself.

So, tonight - Thursday 26th May, 2007, is the start of my journey. I have decided to keep a journal to record it. What will befall me, whether I will succeed or fail, I cannot say but I hope that it may perhaps serve to help others, even if it is learning from mistakes that I may make. At the very least I hope someone will find it interesting.

D.

 

[bond_trader1]

OK - today I learnt about bonds.

I learnt that when you buy a bond, the money you use to buy it with is then used as a loan by the issuer. Common bond issuers are:

- The federal government (government bonds)
- Municipalities (municipal bonds)
- Private companies (corporate bonds).

At the end of a given period of time - referred to as the bond's "maturity" - the issuer pays back the amount it borrowed (the "face value" or "par value" of the bond).

It also pays back interest to compensate you for lending the money. Generally, the longer the maturity, the higher the coupon, and vice versa.

Now, the Bund and the Bobl are the German government's federal bonds. They are issued to the public as a way for the German government to finance its spending. The Bund has a longer maturity than the Bobl.

So, what causes bond prices to rise and fall? The most influential factor is interest rates:

- When interest rates fall, bond prices rise, since the coupon or interest rate paid by existing bonds is higher than those of the new bonds being issued. Therefore, investors are willing to pay a premium for them.

- When interest rates rise, bond prices fall. As investors can purchase new bonds at higher interest rates, so the value of existing bonds falls and they are sold at a discount.

It seems that a huge amount of news comes out each week that affect traders expectations of the future course of interest rates.

As the expectations change, so I imagine the price of the bonds will change, to reflect the market participants that position themselves to profit.

I will need to find a good calendar of news - that is my next task.

 

[bond_trader1]

There is a calendar over at Forex Factory - http://www.forexfactory.com/calendar.php

This is ideal because it provides me with a colour coded reference for the potential impact of the report on the market in general which will help me whilst I learn which reports are market moving.

I presume that I will be paying attention only to news which affects the European market.

 

[sqky]

I'm actually conducting a similar experiment on Bobls at the moment. I have an ongoing argument with a friend regarding trading styles. Basically i believe that as he is a very large facilitator of local trading his attitude that position trading doesnt reward is based on his lack of commision from it.

I opened a spread betting account first week of jan this year, only a small amount of cash. I calculated Average true range of bobl, put this to how much in % terms i could afford to lose per trade (1.5%) to give me a comfortable position size. Then developed my indeicator system.

Current record is this:


open pos close pos pnl (%)
27th feb + bobl 108.61 14th march - bobl 109.01 +40%
19th mar - bob 108.82 still short onside by 133 tick at present.

Account is currently up 170% on the year.

Current market conditions tel me that if increase the size/risk a little you would blow throught that no problem. But remember, the value of your position could go down as well as up!!


Let me know how you get on..



Lee

 

[bond_trader1]

I've attempted some technical analysis on the Bund. Throughout January and February, prices were caught in a channel before breaking to the upside and topping out in mid March.

After forming strong resistance, price rolled over and fell sharply back into the channel line.

In April, we broke beneath this and throughout April and May, it has attempted to get back into that channel, only to be capped by a descending trend line.

On Monday of this week, price broke through an interim support (which I had thought could be a bottom) and on Tuesday it broke through the bottom of the trend line.

The last two sessions has seen the underside of that trend line acting as resistance.

There is a temporary support at 12.80.

This is the fundamental news:

The ECB said in its May monthly report that policy is accommodative and that interest rates are low. It also reiterated that it will act in a firm and timely manner, pointing out that inflation risks remain to the upside.

The ECB forecasted growth of 2.5% in 2007, up from the previous forecast of 2.1%, and forecasted growth of 2.3% in 2008, up from the previous forecast of 2.1%.

The ECB reduced its 2007 inflation forecast to 1.9% from the previous forecast of 2.0%

The ECB’s Liebscher said overnight that inflation risks remain on the upside, noting that the ECB will take appropriate measures based upon all available data. Liebscher also said overnight that interest rates are not hindering growth.

 

[options]

Interesting.

Good luck in your challenge.

http://transcripts.fxstreet.com/2006/02/using_currency_.html

I haven't read this but you may be able to glean some info from it as the guy is a top bund trader.

And this:
http://www.trade2win.com/boards/showthread.php?t=21439

 

[bond_trader1]

Thanks for the links options.

I learnt some interesting things from them that I would like to remember:

Despite being not only a multi-millionaire from his trading but also among the top 30 financial traders in the world, Lawrie says his early experiences showed that some markets weren't right for him. This highlights how important it is to find a market and a style of trading, that suits your personality.

He trades the Bobl and makes a huge number of "round trips" per day, which I assume means he is scalping the market as opposed to position trading.

When he loses he shuts off and forgets trading. This is presumably of key importance so that the outcome of one trade does not affect the next.

 

[bond_trader1]

The thing about Technical Analysis is that it is a very subjective art.

Different people will no doubt see different trend lines or support/resistance setups in the market.

This is my interpretation of the current technical picture of the Bobl.

I would appreciate any advice/comments from any other traders.

 

[options]

"The thing about Technical Analysis is that it is a very subjective art.

Different people will no doubt see different trend lines or support/resistance setups in the market."

Got to pop out in a min, so don't have a lot of time at the mo.

Now I don't intend to be rude, and please take what I say as constuctive advice/critiscism.

But very few people draw trend line correctly. You are one of them. Part of what you say is right. It is subjective. But there is a standard to begin with.

Your best lines are the top two, and if you draw similar lines on the bottom section that will make more sense. You are after all drawing trend lines and there has to be a trend there to begin with. You can't force your own trend.

You say you have a full time job. So I'm assuming you are at work 9 to 5. If you don't have access to a computer while you are working you can't trade intraday. (I hope you do have access, because you might just pull this off). Assuming you can't trade during the day you are limited to end of day trading; have you seen the daily chart? This is horrendous. I would not like to trade this at all. Best tradable time frame I can come up with is a 4 hour chart, as the market is only active during the times you are at work,

I would really say unless you can take a year off and be in front of your computer during market hours: Concede defeat. Don't risk your money. You say you are not a trader. The opening gaps on the boble will kill ya.

If you do insist on going on, I will say look for the 2nd wave to get into a trade. Don't take the first signal.

 

[bond_trader1]

But very few people draw trend line correctly. You are one of them.

Thank you! That's encouraging to know.

You say you have a full time job. So I'm assuming you are at work 9 to 5. If you don't have access to a computer while you are working you can't trade intraday. (I hope you do have access, because you might just pull this off).

I do have a full time job and I do have access to a computer but I can't use the E*Trade account I have set up - the framework of the site shows when I log in but the applet with the moving prices doesn't display. I'm not sure why, I thought it used Java which I do have installed.

Assuming you can't trade during the day you are limited to end of day trading; have you seen the daily chart? This is horrendous. I would not like to trade this at all. Best tradable time frame I can come up with is a 4 hour chart, as the market is only active during the times you are at work.

Yes, I have seen the daily chart. It's the time frame I was analysing in the charts above. I don't think this looks "horrendous" - on the contrary it looks like it responds to Technical Analysis rather well but then I guess that's the result of viewing the market with the benefit of hindsight.

I will certainly look at other time frames although I have been told that trading lower time frames takes a good deal of experience and that one should become profitable on the daily/weekly first.

Lawrie is obviously scalping but this is not realistic for me, not only with my lack of experience and the constraints of being at work but also because I have a two point spread on the Bobl and a three point spread on the Bund and that would prohibit any sizable number of round trips.

I would really say unless you can take a year off and be in front of your computer during market hours: Concede defeat. Don't risk your money. You say you are not a trader. The opening gaps on the boble will kill ya.

Conceding defeat is not an option. For better or worse, I am highly competitive and I have never given up at anything in my life. I agree with you, the odds are stacked against me but I think it's better to try and fail than never to have tried at all.

If you do insist on going on, I will say look for the 2nd wave to get into a trade. Don't take the first signal.

Do you mean, don't try to pick a bottom? I agree with you - I have heard that is the downfall of many a trader. If you were to get in on the second wave though, do you think the best entry would be as it breaks the first wave high or as the first wave pulls back but fails to make a lower low and then starts to move higher again?

 

[bond_trader1]

I just read an insightful interview with Paul Rotter - aka "the Eurex Flipper".

Paul is referred to as “arguably the single largest and most successful individual futures trader on planet Earth, trading primarily in the Bund, but also in the Bobl and Schatz interest rate futures.”

I won’t deny that it’s fairly daunting to be entering a market with such high profile players in it but then presumably if I am a position trader I am less likely to be affected by the movements on the smaller time frames which seems to be the domain of the professionals doing big size in this market.

Now clearly I want to find my own way to trade these two markets but I am willing to look at what other people are doing and see if I can discover anything that can help me find an edge.

The article said he trades between 200-300,000 round turns daily but it also said he only spends five hours at his screens. I worked this out to be one trade every six seconds continually. The speed with which he must be entering and exiting these trades is almost unfathomable to me.

I have to admit I didn’t understand what little he explained of his strategy but I learnt some interesting things that may come in useful.

I found his preparation for the trading day interesting. Not only does he check all the economic reports that are about to be released, speeches of central bankers - anything that could move the market but he then tries to define important levels in the markets. He does this through his own analysis but also through reading analyst commentaries. This provides him with a “picture of the market and its important levels” but he clearly states that he is not interested in the opinions of other market participants as this would influence his own opinion.

Rotter said the time frames he uses on his charts are 5 and 30m for trend lines and indicators but I am going to have to stick to a daily time frame. I simply do not see how I can go any lower than this with my situation at work although possibly if a setup on the hourly occurs in the time before work or when I get home, I could take it.

He mentions that he prefers P&F charts because they provide him with a clearer view on patterns such as triple tops. I may look into this method of charting although at the moment I am spending most of my time studying price action. I’ve learnt about candlestick analysis but I see a lot of people using bar charts so I am looking mainly at those. At any rate the information seems to be the same – they both display an open, close, high and low – it just seems to be a different window to view price through.

As far as indicators, Rotter says he uses the CCI because it shows the volatility of the markets. I have heard other traders say that indicators simply confuse traders and to study just the price and see how it reacts to key levels in the market such as support/resistance areas. Still, I'd like to see what this indicator looks like on a chart.

Well, I'll leave it there for now. There is a lot to think about here.

 

[bond_trader1]

The Bund

Today's action in the Bund shows the resistance level set by the lower trend line still holding and a temporary support forming around the 12.80 level.

 

[bond_trader1]

The Bobl

The Bobl is still sitting at the bottom of that descending channel line but it looks like it has found support over the two sessions, just below 107.00.

I realise it may be coincidental but I find it none the less encouraging that the market has conformed to the lines I drew on the charts yesterday.

 

[options]

My fault with the first reply: I meant that you are one of the many that do not draw lines correctly. Sorry. The top 2 lines are okay.

If I can remember how to paste a chart in here I'll show you what I mean by horrendous. I only looked at the june contract chart on cmc. The hourly one would be the most favourable to work with.

Ahhh! Apologies. I looked at the daily chart again of the june contract and it is displaying properly now. Apparantly there have been a few problems with the cmc servers the last few days. This causesd the chart to have huge gaps in it and very small bar movement. That's why I said It was horrendous.

Now if this chart pastes in properly, I've arrowed one example of waiting for the 2nd wave.
Up to you if you get in as it retraces back through a mark or probably best in your case is to have a sell order in place waiting to be triggered at a certain price. With a buy stop order just above that in case it carries onward. Then a limit buy order to get out of the trade at a certain price if all goes well. You would have a couple of hours to trade after work so you would get a little bit of live trading in.

 

[bond_trader1]

My fault with the first reply: I meant that you are one of the many that do not draw lines correctly. Sorry. The top 2 lines are okay.

Options, can you tell me what I am doing wrong in the drawing of my trendlines, please?

 

[options]

"If it aint broke, don't fix it."

That's one of the sayings I live by, so just carry on with what you are doing. Those lines worked out well for you. You might see something that other people don't so keep going with it.

If I start adding to the 'mix' it will start to confuse you.

 

[bond_trader1]

If I start adding to the 'mix' it will start to confuse you.

Options, that may be the case but nevertheless, I would still like to know where you think I am going wrong.

 

[bond_trader1]

I posted a message in another forum I frequent, asking other members to comment on what I might be doing wrong with my trendlines.

I got several responses but I have included an extract of what I found to be the most insightful response, along with the annotated chart:

Note: i used visio to markup your charts, so the lines are not exactly where i would have put them if i had the actual chart in my pgm, however, i think you can get a close enuff idea of what i am attempting to illustrate.

as you work on static charts, honing your skills, you have to keep in mind that drawings are not in realtime.

a good exercise in charting would be to hide portions of the historical chart and work on segments - aiming to define the future possibilities for market direction.

the chart attempts to help determine:

1. the support and resistance levels of the breakout trend.

2. a potential topping spike hi bar (don't try to pick tops) -which is really only useful after confirmation of:

3. the potential dbl top / small head w/shoulders area

4. the trendline failure

5. retest of the pre-breakout resistance which may become a support.

6. failure of the pre breakout R area to become a support for continued uptrend and failure of support at the longer term uptrend support line

7.testing of the pre-breakout support level identified in the prior Trading Range S/R channel

8. failure of the are mentioned above in #7.

9. resistance testing of the same area.

10. mkt failure to sustain itself above the last resistance area tested.

if u want to add more - it could be the new trading range established after # 10; so on and so on.

There is more than one way to skin a cat and these 'drawings' will often be used in conjunction with other tools to help you manage your risk vs. reward while attempting to determine market direction with reasonable odds.

 

[bond_trader1]

Studying the way in which the lines were drawn by the trader in the chart above and re-reading Options' comments again, I'm seeing the chart I drew in a new light.

Options wrote: "Your best lines are the top two, and if you draw similar lines on the bottom section that will make more sense. You are after all drawing trend lines and there has to be a trend there to begin with. You can't force your own trend."

I think he is right. There are lower highs on the large range days but on the whole that section of the chart (circled) looks more like a period of consolidation than any real trend.

As a result, it appears to look better with simple support and resistance lines that attempt to define a channel.

 

[options]

"Ding"

Much better whne the light comes on and it is you flipping the switch!

The sup and res lines are also a trend!

More powerful moves comes from this set up then any other.

To trade this the easy way, you simply set a buy a few points/pips above the (high)line and a sell a few points/pips under the lower line.

Look at the top trend sup/res lines again in your first chart for another light bulb moment.