Confirmation Bias

BarrosMetrics Views: Confirmation Bias

Being on hols, I am giving the markets only an overview, FOMC on Wednesday 14:00 EST is unlikely to produce any rate increase. What I’ll be looking to note is whether the FED will give any indication of a Sept rise.  Failure to provide some clue is likely to send to the USD down; conversely, an indication of a Sept rise will send the USD up.

In the US the news has been and is dominated by the Republican National Congress and the Democratic National Congress. I found more than enough confirmation bias examples in the US media.

The liberal TV and print gloss over the Sanders’ groups dissents; the conservative TV and print gloss over Trump’s difficulties in winning the general election unless he wants over some of the Bernie group, and/or improves his standing among women and Hispanics.

Confirmation bias is a heuristic we traders have to overcome. Until now, there has been an output of material on the effects of heuristics, but little in the way of practical advice.

In my research for my ebook, I came across, ‘How to Have a Good Day‘ by Caroline Webb. This is a very well written book with the latest research and loads of practical suggestions. Be warned though it is s hefty volume.

View from NY – An Important Insight

BarroMetrics Views: View from NY – An Important Insight

I am sitting in the Club Room of the Grand Hyatt, New York, watching Trump on the Republican National Convention. Nothing in the past weeks has changed my mind: the US candidates amount to choosing Tweedle- Dee or Tweedle-Dumb at a time when the world needs a leader.

That’s a depressing thought.

On the positive side, in the 19-hour flight to the US, I had loads of time to reflect on what UIII students are teaching me.

One of the most important insights is that many don’t know how to create an integrated achievement plan. By that I mean, they focus on what I call low-level actions so that they run out of time to take the action to achieve the objectives they desire.

So while I am on hols (till Aug 5), I’ll be laying a plan for the contents of an e-book on Goal Achievement. There has been much research on this  subject in recent times, and much of it counter-intuitive.

My plan is to present the research results and illustrate the ideas with the system I use. No idea how I’ll distribute the e-book – think about the after I have written it.

No One Reason

BarroMetrics Views: No One Reason

Let me start by saying l was dead wrong about the BOE decision. We should see a spate of choppy action till the FOMC decision announcement at 2:00 PM EST on July 27.

Today, I want to turn my attention to what I am learning about passing on a trading education.

The Ultimate III program is now into its practical phase. The attendees have written their trading rules (well, all except two – not sure if they won’t drop out), and most have placed their first trades.

When I first started lecturing, I assumed that all traders would follow the path I took:

  • Find the methods that fit our personality.
  • Take action to make the methods our own until we attained our trading objectives.

With more experience, I found that most attendees failed. And, it was not a question of the course cost – whether $500 or $5000 – the resulting failure rate was relatively uniform.

Ultimate has thrown light on the ’causes’.  I say ’causes’ because there is no ‘one size fits all’. In short, there is ‘no one reason’ for the high failure rate.

Take the current registrants – the webinars these past two weeks have shown interesting patterns:

  • Some discretionary traders need practice at effectively combining the elements of their trading tools. Interestingly, the discretionary group is showing a greater willingness to apply the course material.
  • Some mechanical traders had issues of time. To me, the ‘time’ reason was more an excuse; the real barrier to action was a fear of having to move out of their comfort zone. I sought to solve their problem with fear as the foundation, Let’s see if they have been able to start trading.
  • Other traders, because of their lack of experience, had genuine problems in the understanding and application of the material. Their problems were relatively easy to solve.

We’re taking a month off because the mechanical system we use produces consistently poor results in August. I am keen to see the results at the end of September. The great thing about trading is the equity and psych journals lay bare whether or not long-term success is on the cards for each trader.

Up or Down? II

BarroMetrics Views: Up or Down? II

Yesterday, I provided the technical context. Today, let’s consider a possible trade.

Figure 1 shows the 290-min GBPUSD. We see a possible running correction. If this view is correct, we’ll see the lows at 1.27912 established on July 6 taken out.

Figure 2 shows the alternate view: the move to 1.3102 was a correction to form a measured move up.

The BOE decision tonight will determine which view is correct:

  • A rate cut will lead to Figure 1;
  • A decision not to do anything will lead to Figure 2.

I rate the chance of at least a .25 cut at 67% and have made plans to short the GBPUSD should that come about. A ‘no-cut’ decision, means I stand aside.

2016-07-14 GBPUSD 290-min 5-p (1)

FIGURE 1

2016-07-14 GBPUSD 290-min 5-p (2)

FIGURE 2

Up or Down?

BarroMetrics Views: Up or Down?

324 pips in one day! That was the GBPUSD range yesterday.

I have to say I was surprised – given we have a rate decision on Thursday at 9::30 UK time.

The rally was expected: the GBPUSD had shown a lack of selling follow-through and that, together with the BOE announcement, suggested a rally was on the cards. What surprised me was the extent of the rally in a 24-period. It looked like we were not only seeing short covering but also fresh buying.

Given the change I believed Brexit had brought to the GBP value structure and the long-term chart picture, I see the GBP as being in a sustained bear market.

Figure 1 shows the Spot Monthly chart (from TheChartStore) from 1900. The pattern I am focusing on is:

  • The Nov 80 high
  • Feb 1985 low, and
  • The Value Area sandwiched between the two extremes.

We normally would have seen an upside breakout to test the Nov 80 high. Instead, we have seen acceptance below the Value Area Low (June 2001).

The downside breakout usually means one of two things:

  1. The Value Area is still in the process of completion. In this case, we’ll see a test of the Value Area Highs (Nov 2007 and Sept 1980); or
  2. The Value Area is complete, the breakdown is genuine, and we’ll see a test of the Feb 1985 lows.

More tomorrow……..

2016-07-13 GBPUSD 12m

FIGURE 1 GBPUSD

Pairs in CrossHairs?

BarroMetrics Views: Pairs in CrossHairs?

There are two forthcoming events that should determine the near-term direction of the GBP. Before I come to the two, let’s have a look at the USD following the Non-Farm.

The number was a very good one over 50K above the consensus number. In the past, such a posting would have sent the S&P down and USD strongly up. Yet, on Friday, we saw a stronger stock market and flat USD.

I thought perhaps we’d see the USD take off this morning, but so far nary a whiff of bullishness.

The best explanation is the markets believe that the FED will not raise rates in July and will not raise rates in 2016. So, if I am looking to short the GBP, I need to focus on what will move the GBP.

And this context brings me to the two events:

  • July 14, the BOE to lower rates?
  • July 29, the EU bank stress test. I am interested in the Italian results.

I expect the BOE to cut rates. The news since Brexit has not been good, e.g., consumer confidence took a big hit (UK Economy Showing Brexit Effects).

It seems to me that putting aside the knee-jerk reaction to a decision to leave rates unchanged (GBP up), the sentiment is such that, in the days that follow the BOE decision, the GBP will head south –  on the basis that Carney failed to show support for the UK economy.

If he does cut rates, the GBP will head south.

Whatever the BOE decision, it will leave the GBP exposed to the July 29 stress tests.

I expect that the July 29 report will place great stress on the Italian banks. (See Essential Repairs). Renzi has said he’ll resign if the referendum fails. Accordingly, he needs to keep the Italian public onside. Now, if a main Italian bank, e.g. Monte Pashi looks likes crashing out, retail investors will lose big time (Essential Repairs).

In the event the bank threat comes to pass, I can see Italy bailing out its Banks whether or not Germany likes it. Such an Italian move would threaten the existence of the EU. The resulting uncertainty will cause a further decline in the GBP.

Let’s see what happens………

 

 

In Hibernation

BarroMetrics Views: In Hibernation

The FX markets seem to have retired for the winter – well, perhaps that’s an exaggeration. But, we can say they are in a state of hibernation. I see it as the calm before a storm.

Let’s see what the European and Aussie pairs have been doing…..

At the airport yesterday, on the way home, I was met with the FT headline:

“Renzi ready to defy Brussels and bail out Italy’s troubled banks”. (see attached for the full story).

I was expecting to see a reaction in the GBP and Euro crosses. Instead, there was nary a response. This morning I read:

“Italy denies report on EU bank bailout revolt”.

The attached shows a one-line rebuttal with no details. Perhaps the denial was the reason why the FX response was so muted?

But, then we have the AUD situation. The elections are on a knife’s edge – a hung Parliament is a real possibility. But, instead of the drop we’d expect to see on ‘uncertainty’, we see the AUDUSD post a reasonable rally of 106 pips.

What then would be the reaction once the results are known?

The stillness permeated into the US stock indices.

The S&P had a very quiet day forming a DOJI after three strong up days and forming right on resistance levels. A pause before the next hurricane?

I have been out of the markets since Brexit because I wanted to see how the markets would respond. I think it’s about time I started preparing for the next trade.

Renzi ready to defy Brussels and bail out Italy’s troubled banks — FT

Italy denies report on EU bank bailout revolt

Oscillators

BarroMetrics Views: Oscillators

I am not a great fan of oscillators.

What many forget, is when Welles Wilder first introduced the RSI to the trading world, he postulated that the US stock indices had a 28-day trading cycle. He created the 14-day RSI to identify the swing highs and lows.

The trading world adopted the RSI with a vengeance: ” at last, here was a tool that would allow the trader to enter and exit with a high degree of accuracy!”

Unfortunately, the promised was never fulfilled.

The problem is there may or may not be a 14-cycle, and if there is, it may or may not, currently, be the dominant cycle.

A few traders, e.g. John Ehlers, sought to overcome the problem by software that would identify the dominant cycle (MESA Cycle Finder). But, I was unable to use MESA to produce the results I desired.

What’s true for the RSI is true for most of the oscillators that traders use. I prefer to use tools that are not dependent on fixed cycle periods – ones that adapt to accommodate new information.

Figure I shows the difference between the LRB and RSI. The LRB is saying, if there is to be a sell signal, the price action has to drop and rally with momentum divergence. So, while the ES is now in a sell zone, the price action still needs to provide a set-up.

The RSI is already showing trend divergence.

2016-06-30 30-min ES

FIGURE 1 30-min ES

US Stock Indices to Make New Highs?

BarroMetrics Views: US Stock Indices to Make New Highs?

A quickie post, folks.

The weekly ES (E-mini futures, nearest futures month) is showing an interesting pattern (Figure 1): if we see a bullish-conviction close above 2064, we’ll probably see a move to 2075; and a bullish-conviction above that price will see a move to 2118.

I am waiting to see if there is a sell-up at the price levels. I’ll be looking for:

  1. A LRB momentum divergence (Figure 2) i.e. a new price high that provides a lower momentum high; and
  2. A MDD volume setup (see Figure 3) i.e. an up day on selling volume. The setup occurred yesterday, but since I did not have a resistance level, I ignored it.

It’s worth repeating that have to occur at the designated resistance levels for me to take note of them.

2016-06-29 weekly es

FIGURE 1 Weekly ES

2016-06-29 60-min chart

FIGURE 2 LRB 60-min ES

2016-06-29 MDD_24hrs

FIGURE 3 MDD ES Pit & Globex

Brexit, A Trade Post Morterm

BarroMetrics Views: Brexit, A Trade Post Morterm

My blog will be patchy this week. I’ll be in for a minor procedure on Tuesday, June 28; then from June 30 to July 4, I’ll be engaged in preparing for the seminar I’ll giving on July 2 & 3.

I received a couple of posts asking if I could go through the trade process for the Brexit trade.

Sure, happy to oblige. But, first let me say that this was one of those trade were I was just in sync with the market. Perhaps it was because I was also coaching some friends on what to do that contributed to the synchronisation. It’s the first time I have used ‘whatsAPP’ to give trade recommendations.

The trade context is well set out in the posts here. So, I won’t repeat why I  looked to take the trade. Suffice to say I was looking to sell 100k GBPUSD ahead of the Brexit results. The 100k was a small position (my normal size is around 1M to 2M). The blog entries also explain why I reduced my size.

My original plan was to sell between 5:00 to 6:00 am HKT on June 24. But, at 14:13, I took the view that the cable was going to head south. So I sold 100K at 1.47682. At 14.20, I Whatsapped: ”

“Sold cable 100k 1.47682”. 

Now if you read the blog, you’ll know that I was not planning to place a stop. The reason being that in high volatility times knowing where to place the stop is very difficult. Hence, the reason for the small size.

One of those being coached asked: “Where to put stop?”

I replied: “The stop is the result of the referendum”. 

At 15:01 I messaged:

“The pop to new highs on low volume has changed my entry structure. So, I’ll exit current shorts above high vol node (1.4758) at 1.4767 (offer).

This strategy will be scratched at 10:00 pm UK (5:00 am HK). So if buy not filled by 10:00 pm UK, will run the 1.47682 short into referendum

If filled will sell 100k at 10:00 pm UK.” (10:00 UK is 5:00 am HK).

Figure 1 shows the entry and exit (red arrow entry, green arrow exit).

I awoke at 4:30 a.m. A poll result showing that the ‘remain’ camp had established a 4-point lead sent the cable up. I waited till I I saw some selling and sold 130K. I had not expected cable to get to 1.50 and so decided to sell a little more.

I Whatsapped: “Sold this morning 1.49623″.

At 742, I closed off 300K at 1.44139 to reduce the loss if the referendum went against me. One of my coachees (the one who asked where to place his stop) then Whatsapped to say that he had been stopped out in the 5:00 a.m. run. This price action is typical action during high volatility days.

I closed out the 100k position once it was clear the referendum had voted to ‘leave’. At 12:27, I messaged:

Cut all my positions at 1.3307″. 

Takeaways:

  • During expected high volatility days, stops are not a useful means of loss prevention.
  • Better is to reduce position size so that an extreme move will still not decimate the account. If cable had gone against me and my close out was the same as my profit, I’d have lost 1.3%.
  • Trying to get on board once the train has left the station exposes us to wide spreads. At one point one broker had a spread of 10 pips and another 12 pips. Another reason why keeping size relatively small is important.
  • Don’t be greedy. On days like these, once the uncertainty is removed, expect to see a profit-taking reaction. (My reason for exiting at 12:25).
  • Finally what do we do now? My recommendation – stand aside for a few days. I’ll give my reasons in the next blog.

06-24 30-min GBPUSD

FIGURE 1 GBPUSD 30-min