Friday, November 22, 2013

Palm Oil Up, Soybean Oil Down. Then How?

"I didn't long CPO because Soybean Oil is bearish."
"I should have long palm oil even though soyoil is bearish."
"I short palm oil because I believe eventually palm oil must follow soyoil to trade lower."
"2600 is top already, short the way to 2300."

Sounds familiar? Many traders relayed their palm oil trading experience with me. They couldn't believe palm oil price is rising. They either not participated in the rally or went short the market. Eventually they have to part with their money and blamed the market for their own trading. I wouldn't say market is wrong because I hold the believe that "Market is always right".

So, why palm oil didn't follow soybean oil to go south? Ringgit appreciation? Biodiesel factor? Weather? Export figures? Inventory? China buying for LNY? Well, personally I don't know the reason and I don't see the need to know the exact reason(s).

Soybean oil futures is drifting lower while soybean futures is forming higher high and lower low. I dislike the price action in soybean futures because the volatility is increasing while market is going nowhere. This kind of pattern takes out a lot of stop-losses, causing injuries to many trend traders' account. While inevitable, losing hurts in terms of monetary and psychology.

From the chart, FCPO is bullish. Ask a 5 year old child to define the trend, he will tell you exactly where the market is going. Often, adult has too many prejudices and likes to make simple thing complicated. If the trend is bullish, trade the long side only, that's it. But wait.... soybean oil is bearish! Here comes the question, which direction is right? The answer is a simple one:
The market is always right. 
FCPO is right. Soybean Oil is right. Soybean is right. If FCPO is bullish, trade from the long side only. If Soybean Oil is bearish, trade from the short side only. If Soybean is sideways, you can either trade both long and short, or sidelines yourself from the market. 

In trading decision making process, traders like to predict the direction of a particular market based on the various factors that will determine the supply demand relationship. This is OK if you have first hand information and possess the necessary knowledge in term of fundamental analysis to support your research and analysis. Unfortunately most traders / speculators / punters do not. They rely probably on news report, export figures, inventory level etc to support their "opinion" of the market, then trade on their desired direction, hoping market will move according to their wishful thinking. Will this work? You have to ask them.

My way of decision is fairly simple. I read price action to interpret where the market is going and follow it. I don't possess in depth knowledge about fundamental analysis and don't access to latest export or inventory data. I am basically a trend follower. If the market is trending upward, I will trade from the long side and try to follow the trend till it end. On many occasions, after I initiated a position market reversed and hit my stop loss. I admit defeat and carry on. By managing my risk prudently and control my emotion, hopefully I can ride through the drawdown that is inevitable in trading and come out alive.