Tuesday, October 21, 2008

Entry for 10/21/08 - BP trading game

Day one concluded of the BP trading games.

Login Name: Chart Pride
Current Rank: 20/157

I believe it was yesterday night that I entered two short positions on ICE Brent and ICE gasoil -1 lot each. At the time I entered my trade prices on ICE Brent were around 71 - 73. Currently the bid is at 68.92 and the offer is at 69.72.

My rational behind the trade is as follows:

Considering I do not know in depth the driving fundamentals of the energy markets I used what I knew. I know the basics that oil is at most times supply driven, ( though recently the media loves to attribute the fall from 140+ to current levels on "slowed consumer demand"), has geopolitical risks, and susceptible to Marco conditions.

Primarily for last nights trade my model included macro considerations, geopolitical in the sense of what I read from the media, and lastly basic technical analysis.

1. macro considerations

Overall fundamentals of the world economies in general or obviously not sound at all. Every industry is craving for capital and business earnings are expected not to outperform previous quarters (though Im not to sure on the equity side totally). But in general, macro fundamentals due to effects of financial systems, in general will tend to slow business down. Production will be less and transportation costs will would also decline. Now much in part production can be slowing down as a fucntion of "slowed down" consumption. Which I will admit to some extent is affecting overall consumption. Though I will have to say from the US perspective, the Middle middle, and the upper middle class are still relatively well off. If consumption however is driven from the lower end consumers then peaked off demand could quite reasonably be a reason for oil prices dropping off (though however i don't see people eating of of garbage's and walking around in rags yet). The point being that on the fundamental side macro conditions if correlated to oil prices to some extent, would indicate that oil prices should be in a down trend. And that is the point to the macro analysis. Overall trend Should be down, and that any whipsaws to the upside are just temporary as overall conditions have not fully stabilized.

This brings me to my second point. Whipsaws... As I was reading the news last night, a whipsaw should have been ready to happened before I entered my trade. The media kept hounding how OPEC was going to "cut production," to maintain prices around 70. Now anyone sensible seeing that oil is highly supply related would have used this rational to enter on the long side. However, I felt that to be too simplistic in nature for that assumption. Though I am not too sure when OPEC makes their official announcements I felt it was something that they still needed to discuss as there are many market risks still were present ( though recent expected earnings from oil equities make pacify these market risk worries causing a cut in production to occur sooner). I felt that considering this is a bear market, you will get strong reactions to media reports, the type of heard mentality. Thinking this I felt it was a good idea to consider the contrarian perspective (a little nice view i learned to apply from the old Fund I worked with). I felt that all this news and media quite could possible already priced in the markets. And that instead that this would produce opposite affects of the normal news of production cuts (as the news wasn't that "new"). The point being is, though geopolitical risks said for me to go long, a contrarian perspective said otherwise. Adding more solid reasoning for me to go short.

3. My last consideration, considering this is short term trading I tend to give more weight to charts in the short term. Though the BP platform does not provide me with as many lovely charts as my FX platform. However, i scrounged google and found some basic futures charts on brent and gasoil. Though the functions were basic in nature, it was more than to suffice for the time being (in fact simple often works quite well for me). I confirmed the downward trend with a simple BB on a standard deviation of 2 and average of 20. The general charts (oct, nov, dec 08) showed continued movement along the lower BB. I also used the RSI and MACD indicators, though I do not think the RSI would really fit into this system as I am not sure how responsive it is in the oil markets. Though, I gave weight to the MACD as indication of movments of momentum and volume. Overall, there seemd to be indications of continued downward movement as volume was still relatively high. It is unfortunate, but I am not exactly sure what contract I entered as it does not say in the BP trading screen, and I am still very new to this all. Hopefully I will get some support from BP later.

I would like to comment on my current position on the ladder. The first and second trader have 136 trades and 205 trades with $31,780 and $28,085 mark to market respectively. Considering the number of trades, these guys must have lots of time on their hands as this only started yesterday. Secondly, there strategy I would think is really ineffective as the number of trades is so high for one day. Though, I am not familiar with the total amount of taxes for short term gains, Im sure a considerable amount of their money will be going to taxes. Where these top to traders are students, I would like to high light two BP traders. Ranked 15 and 16 are to BP employees playing the game. They have 10 trades total each with $8,240 and $8,185 respectively. In the top traders these are the two traders with the least amount of trade and highest amount of money, excluding myself. I am the 20th person with only 20 trades. Though I would like to point out that Cambridge Hedge has 2 trades as well and is ranked 22. I believe these trades to be more profitable, or if not at least shows better discipline. Sticking to a sound reasoning and following through. Though of course part of this discipline will need to also follow through when any position turns sour.

At any rate, I hope I will learn more about the fundamentals of the oils as my technical abilities are quite stunted with the current platform. It is too bad that the platform also does not have any limits or stops which would help me trade with more. Anyway, I will have to follow up again to see if I need to readjust any positions.

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