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NEW SERVICE: Roger Wiegand Provides Energy Trading Ideas
Taylor Hard Money Advisors, Inc., the publisher of this letter, has teamed up with Roger Wiegand to help him market his excellent newsletter, Trader Tracks. Roger has done such a tremendous job with his trades that we asked him if he thought he could help us find some ways to help you profit from trading certain energy markets. Roger answered positively on that score, and as such, we are launching a new chapter in J Taylor’s Energy & Energy Tech Stocks newsletter, starting with this issue.
Many of you are already familiar with Roger Wiegand. But to initiate this new service, we have chosen to interview him so he can tell you what he has in mind for those of you who may wish to begin trading certain energy markets. We hope you enjoy the following discussion, which we had with Roger on April29, 2008. More importantly, we hope you profit from his ideas.
TAYLOR: Roger, you had an excellent track record last year and have done even better so far this year. Can you tell our readers about your track record and perhaps outline some of your better trades? On the other side of the coin, could you tell us which of your trades might not have done as well and also tell our viewers how much you lost on those trades?
WIEGAND: We got into the swing of very good trading with excellent results during the last half of 2007 and most of this year, 2008. Previously, some years back, we were not spread trading to the degree we are now. I think it was because of my concerns about capping the upside of potentially an excellent trade. We have learned since, however, that the best pro traders, those who have made millions and can prove it, use spread trading as the basis for their business. When we asked about one trading star we knew of, our broker, Ryan Olson, who had worked for this man for eight years, said, “He uses spread trades for about 80% of his total experience.” This convinced me this had to be part of our trading plan. Sure enough, we were recommending spread trades in gold, silver, grain, and some options on others, and we have had great success. This plan shall continue in our recommendations.
On the trades where we lost money, they were in corn and some gold futures trades where we entered in fast markets and were stopped out (exited on risk stops hit shortly after the trades opened) with small exposure per trade like $500 to $900 per contract and on a couple last year, slightly higher.
Out typical trade probably earns about $2,000 and we are risking perhaps one-third of that. Reading trading studies by others, the commodities funds and larger speculative traders can be successful, losing on two out of three trades. This works, as the losers are contained with small stops and the winners are usually 2-3-4 times the risk posture. Over roughly the past 12 months, our success rate has been much higher.
For 2008, we have now recommended 18 trades, missed on three, and won on 15, which is far above the averages. Traders should understand this record is far above normal, and sometimes traders can find an excellent long winning streak usually followed by a losing streak, usually contained and shorter in duration. When traders hit a rough patch, they need to immediately trade fewer contracts and take fewer trades. Sometimes due to the intensity of daily excitement, it’s better to stop trading for a few days and maybe take a rest and go on vacation.
TAYLOR: Could you tell our readers which energy markets you think they can make money in?
WIEGAND: In the energy group we like unleaded gasoline, heating oil, and natural gas for futures, as well as crude oil for larger traders. With the new Globex all-electronic trading platform, we can trade mini-contracts electronically for very fast fills with little price slippage. We also like the new range of ETFs offered throughout the energy sector in a variety of formats. Of course, the exploration companies continue to grow and dominate along with a small grouping of newer juniors in that sector. In our view, with the longer bull markets for the energy group remaining intact, we can see some traders specializing in these markets with success. The first rule is to stay long in bull markets. The second rule is stay out of marginal markets, focusing on only the best, picking your spots and trades with care. We prefer to focus on a handful of trades and intermediate investments for anywhere from a few days to a few weeks/months. The longest we’ve had any spread, option, or futures open is under one year. In our Trader Tracks we have warrants maturing in 2011 for a senior gold company but they have generally been passive. We’ll exit those at the first opportunity, as our motto is to “make the cash register ring” at least two or three times per month.
TAYLOR: Can you give our readers some idea of the risks and rewards in these trades?
WIEGAND: While using spreads, we look for opportunities with a potential for a Three to Five to One. If we consider recommending a trade, I want to see a reasonable chance of earning $3,000 if the risk is $1,000. This would be typical of our trading ideas. We have open spreads now on the December 2008 Silver contract with an upside of $10,000 per contract, which is about double what we normally can find. We expect those to pay off this coming fall of 2008. We also have similar gold spreads for December 2008 with a potential gain of perhaps half of that.
Our trading plan, one of our favorite theories, is to trade multiple contract spreads and at the first opportunity, exit half of them when that portion will pay us back 100% of the cost or risk on the trade. This idea applies to options as well as spreads on futures/options. WE LEARNED EARLY ON THAT THE OVERALL WINNERS STRIVE TO CONTAIN RISK FIRST, AND THE PROFITS TAKE CARE OF THEMSELVES. THIS REALLY WORKS!
TAYLOR: What kind of minimum amount of cash do you think investors should commit to trade these markets?
WIEGAND: One rule of thumb would be two contracts for each $5,000 of account capital. Depending upon the market sector we trade, the margin requirements can range from as little as $1,000 to $25,000 or more.
I do not encourage new traders to open a large account and begin trading several contracts at once. This is the wrong approach. It is better to start with $5,000 to $25,000 of capital and begin by trading two spread or mini contracts and then have patience. New traders want to go faster and I understand this, but by trading small you limit mistakes and go through the beginning-learning process. This helps new traders assimilate the jargon and understand more about this trading business while containing risk. The emotions and feelings are quite different when real money is at risk versus paper trading while practicing. Traders also need to understand they should only use risk money, not grocery or rent money, for trading. By beginning with limited capital and trading small, they receive opening exposure and can learn more about trading by “Paper Trading.” The emotions are easy with no money at risk, but by using good rules and discipline while trading only on paper (no cash at risk), the learning experience is faster with less emotional upheaval.
TAYLOR: How important is volatility to making money in these markets?
WIEGAND: Volatility is very important. Markets can go only three ways: up, down, or sideways. Today we are in sideways, non-trending markets. We need volatility for the trading action. Good traders can go long or short but despair when we get non-trending cycles such as the present one. The sideways trends often chew up capital and produce little gain. In these cases it’s simply better to wait and watch. The legendary trader Jesse Livermore often said, “I earn the most by waiting and watching, not by actively trading all the time.” From our experience he is absolutely right.
TAYLOR: Would you entertain taking a short position in these markets?
WIEGAND: We haven’t recommended trading many shorts but know how to do it and plan to do it this spring. If you are long only and are very picky about which wave cycles you enter, this eliminates most of the trading time. We strongly suggest never shorting a longer-term bull market, but there are exceptions and opportunities when you can briefly enter and exit a longer-term bull market on the short side. The beauty of short trades is they move 2-3 times faster than going long. This can make the cash register ring more frequently, presuming you can enter with the proper market setups.
TAYLOR: Could you explain some of the strategies that you might employ in trading these energy futures?
WIEGAND: For futures energy trading we would seek the third wave cycle of five going long and trade it. This is normally 50% of the entire five-wave rally cycle. Waves one and two begin and correct followed by three up, which is the big one and where we want to be going long. When wave four corrects we prefer to be out and also out of the following wave five, which is smaller and indicates the peak or top for one rally cycle. This peak is then followed by an ABC normal correction. These waves are smaller and choppy. After the ABC in a longer bull market, we might see another breakout with more waves moving higher and we repeat the process. Should the ABC be followed by selling, we can technically discover a price in the next wave moving lower. Often this one on the short side can be as big as wave three going up. That larger short side wave after the ABC is usually faster and you must be in position ahead of it, with buy stops ready to go.
TAYLOR: How about outlining some of the risks of investing in these markets and how to limit those risks?
WIEGAND: Trading futures, in our view, is no more risky than shares and in some cases can be safer, as in the use of spreads and options. Spreads contain both the upside and downside. This limits the profit profile, but it more importantly contains risk and permits traders to STAY IN TRADES FOR LONGER PERIODS TO WIN; WHEN BY USING STRAIGHT FUTURES YOU CAN GET STOPPED OUT VERY QUICKLY. Options on futures are safer as well, but often they are too expensive or are not offered in the time span you desire. To make an option work, you must be correct on your time span cycle. Do not overpay for the option, and determine when you can exit. These trades can be excellent if all the planning is done in advance and completed properly. For example, we had a sugar option trade with a far out expiration date. It was cheap to buy per contract, as the win was quite out of the money. However, we could see sugar in a rally and had forecast the price to go far beyond our option needs. While we were prepared to stay with it for a few months, the trade gave us +100% in an unexpected short time period.
TAYLOR: How much capital should one have to allow oneself to have a good chance to succeed? You’ve already cautioned our readers not to use their grocery or rent money when speculating in the futures market…
WIEGAND: Yes. Only risk money should be used to trade and, as we’ve mentioned, trade small and carefully for a while when you begin. Five thousand dollars should a minimum but $10,000-$15,000 is better.
TAYLOR: Do you see some opportunities in trading stocks or buying put/call options for various energy stocks that are on our list?
WIEGAND: Absolutely. With so many choices available on most energy sectors to the long side, we have several opportunities to trade both long and short using futures, spreads, and puts and calls on the shares.
TAYLOR: If you know of some volatile energy stocks that we do not follow, would you share them with our readers in the form of alerts?
WIEGAND: Yes. We are not married to any of these trading ideas. If we see something new and unrecognized with good potential, we would issue an alert to buy it, add to the position, or sell it and take profits.
TAYLOR: What are your thoughts on the long-term prospects for the energy markets in general?
WIEGAND: The world is short right now 2-3mm barrels of crude each day. We believe in the peak oil story and expect oil to continue to go higher in price indefinitely. Will there be selling periods? Yes, there will, but the longer-term trend for energy is higher. Our President is after the Saudi’s to produce more crude oil, but realistically, they can’t. If those huge oil fields are pushed too hard, extraction engineering problems will surface. Natural gas is harder to control and the wells are operated constantly if product can be shipped. During the last few months, gas got in oversupply on some favorable weather, but this has now returned to normal and gas is 10.75 from a recent low of 6.0. Coal prices keep rising and Korea just signed a contract for 20mm tons of met coal (premium material) for making steel at $300 per ton. This price was barely $90 only a few months ago. We will be assembling a fine cross-section portfolio containing several market sectors of opportunity in energy.
TAYLOR: Could you talk about your views on the long-term prospects for oil, natural gas, coal, and uranium?
WIEGAND: Oil and its distillates are all in rallies with a tiny sideways selling relief this spring, lasting perhaps four to six weeks. Then, it’s off we go again in more rallies. Natural gas is up +40% from just a few weeks ago and several U.S. power plants use natural gas with a hot summer air-conditioning season just ahead. Steam coal for power plants was sold near $40 per ton a few months ago and new contracts are being signed anywhere from $65 to $90 per ton. Shipping is additional and can be costly, as load and unload dockage with land-based facilities is woefully short. Uranium had its glory days and sold back to a higher steady price. When the U.S. wakes up, which we expect very soon, we forecast another rally should begin in uranium.
TAYLOR: What are your views on the viability of ethanol? Are there markets in ethanol that can be traded?
WIEGAND: Ethanol futures can be traded, but the market is too thin on volume for our taste. What it has done is caused a rally in corn and sugarcane. In the U.S., the rally is supported by government subsidy and they have mandated a doubling of American ethanol production for 2008. While we understand the fundamentals of this market and its opportunities, we prefer not to trade it but stick with higher volume, seasonal, contract-liquid energy markets with strong seasonal movements.
TAYLOR: Please expand upon some of your favorite ideas for trading the energy sectors in a summary form.
WIEGAND: We would suggest that traders work toward building a grouping of exploration shares, ETF shares, and use futures in crude oil, unleaded gasoline, and heating oil. Further, we can find an excellent package of solid senior oil companies like your MRO–Marathon choice that offer excellent returns. A handful of higher risk junior explorers would be excellent, as the best in this group have a bright future during the next few years. The refiners had some setbacks but are ready to rally once more, after the current cycle has completed. We see some fine oil and gas companies in Canada along with others in their support industries offering geology, seismic, and on-going field services. These markets have proven themselves for several months/years and remain our top choice among several ideas.
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