Black Swan

BarroMetrics Views: A Black Swan

Sometime in October or November, Italy will be going to the polls on a referendum called by Renzi. The referendum is for Renzi’s structural constitutional reforms. If the referendum succeeds, he’ll be free to carry out what appears to be much needed economic changes. If it fails, Renzi will step down – at least he has promised to do so. And, if he resigns, we may well see a parliamentary election that leads to Italy leaving the EU.

Unlike the UK, Italian participation in the EU is key to EU’s continuation. It is one of the core members and the third biggest economy. An Italian departure would lead to a break-up of the community.

What are the chances of Renzi losing the referendum? The polls suggest it is too close to call. And unlike the UK, I don’t follow Italian matters closely – so I have no personal assessment to rely on.

What I do know if there is a populist party, the 5-Star Movement, which has promised to withdraw from the Euro Zone if elected. It has won mayoral elections in Rome and Turin and is running even-stevens with Renzi’s PD party in the polls.

A loss to the 5-Star Movement under current conditions may well be the Black Swan that will bring about a decline in world stock markets.

We’ll see.

 

 

Whither the Summer Hols?

BarroMetrics Views: Whither the Summer Hols?

The doldrums should come to an end with most US schools returning towards the end of August. Moreover, the Non-Farm Payrolls are due on September 2. Given the conflicting views expressed by the FED chiefs on the US interest rise, the Non-Farm will be an important guide to the September FED meeting outcome.

Figure 1 shows that the S&P is at an inflexion point. A bullish-conviction bar close above 2242 will return me back to the 2009 strategy: long or out. A bearish conviction close below 2101 provides an Upthrust Change in Trend of a quarterly magnitude.

2016-08-24_18-15-42 S&P

FIGURE 1 13w S&P Cash

 

 

Attaining Your Dream?

Here it is: the link to the ebook that will be available on September 30.

http://www.barrometrics.com/ebook-life-of-your-dreams-traders

If you register now, the ebook is free. Remember the book is about the circle of success: Planning, Executing and Reviewing. But, you must register before September 8, after that date, the book will retail for        USD 97.00

The link again:

http://www.barrometrics.com/ebook-life-of-your-dreams-traders

 

Solution to Impulsive Trades? II

BarroMetrics Views: Solution to Impulsive Trades? II

I’m still battling jet lag and now have a touch of the flu. So, today I’ll be brief.

When preparing for your trading, you reduce the chances of impulsive trades by being as specific as possible. For example in the AUDUSD Currency Strength Meter chart in Solution to Impulsive Trades?, the AUD could:

  • Form a bearish conviction bar down – suggesting downside continuation.
  • Form a bullish conviction up – suggesting upside continuation.

The two possibilities form the boundaries of the price action. That’s not to say either will occur; but by setting the boundaries we have anchor points by which to judge the subsequent price action.

For example, Figure 1 shows yesterday’s price action in the AUDUSD. The bar is bullish, but the range us below normal. So, I’d see that as suggesting more upside today that needs to attract buying as evidenced by at least a 75-point range with bullish form.

I’d be wrong if we saw a bearish bar today.  Anything in-between we’d have to assess at the end of the day.

So, how do we use the info? Use is limited only by our imagination. For example, if we went short on Friday, assessing the price action as bullish will allow us to exit before the stop is hit. If we went long on Friday, we could look to tighten out trailing stop and so on.

The point is creating detail specific scenarios inhibits impulsive trading; and the more you do it, the more accurate you become in assessing the day’s bar.

2016-08-23_19-20-09 AUDUSD 01

FIGURE 1 AUDUSD Daily

 

 

 

Solution to Impulsive Trades?

BarroMetrics Views: Solution to Impulsive Trades?

One of the most common refrains from traders is: “I lose money because I take impulsive trades. If only I kept to my plan, I’d make money!”

The implication is ‘I have to fix my psychology’. 

Sometimes this is true – there is a limiting belief that needs to reframing. I have found that most times, however, the solution is far simpler. By that I mean the trader fails to describe precisely:

  • The conditions that will trigger the trade.  And,
  • The conditions that will keep the trader in the trade.

Last week, I set Figure 1 as part of UIII’s preparation for the week.

Here’s the context to the assignment. UIII FX traders are asked to sell the weak currencies and buy the strong ones. Why? Because such pairs produce the biggest bang for the investment dollar. I have found two configurations produce the best results:

  1. At the start of a trending move – the corollary: when congestion has likely ended; and
  2. At the start of a parabolic move.

UIII’s who replied to the assignment took the for either:

  • The attached reply or
  • The AUDUSD is in congestion and accordingly, will look elsewhere for a strong or weak pair.

What do you think? I’ll post my assessment tomorrow.

2016-08-22 CSM AUDUSD

FIGURE 1 AUD CSM

2016-08-22_09-50-22 GB HW

FIGURE 2 Sample Work

Thank Goodness for the Cable

BarroMetrics Views: Thank Goodness for the Cable

August is traditionality a tough month for traders. With the US summer school holidays, come light volumes, and directionless trading. This year GBP came to the rescue. Courtesy of Brexit, we have seen a strong downtrend develop.

Today the continuation of the trend will be either confirmed or rejected at 16:30 HK with the release of the UK employment numbers – expected to come in unchanged (4.9%) from last month.

Yesterday’s CPI led to a strengthening of the GBP when it came in at 6% rather than 5%. Pundits expressed surprise at the slight higher number. I don’t know why. In my view, Carney had telegraphed the inflation number when he told us that the BOE would continue with QE even in the face of higher inflation numbers.

I also believe that his comment also implied that the other measures of the UK economy would be worse than normal.

Yesterday’s rally allows a shorting opportunity. With expectations of an unchanged number, the GBP ought to give back the gains it following the CPI  – at least until 2:00 am Thursday (HK time) or 2:00 PM EST when the FOMC minutes are released.

I expect the minutes to show bearish inclination to raising rates. If so, we may see the GBP rally. The structure of the rally will indicate whether or not we have another longer-term shorting opportunity. I’ll cover that tomorrow.

While shorting the GBP (I prefer the GBPUSD pair) is strategically easy; tactically it is less so because it involves a time window between 4:30 PM Wednesday (HK time) to around 1:00 am Thursday (HK time). Given the time window, we’d need to take a position ahead of the number. Executing this entails additional risk.

I’d cope with the risk by taking a position size of no larger than half normal size and seeking to cover if the number comes in better than expected or within expectations.

The target would be around 1.2877 or exiting at 1:00 am, Thursday  (HK Time).

 

Choice Commitment & Consistency

BarroMetrics Views: Choice Commitment & Consistency

We all want to move from non-profitable to profitable, from profitable to even more profitable. To do that we need to acquire the necessary knowledge and then transform that knowledge into a skill.

The problem with trading is that on a trade-by-trade basis, we produce random results. For this reason, newbies often confuse being lucky with being competent. “Hey, if just turned $10k into $100k, how can you tell me that I have just been lucky“?

As a result, most of the 90% who fail at trading don’t even try to acquire the necessary knowledge.

Those that do seek it are met with the challenge that many of the ‘educators’ promise ‘get rich schemes’ that have no chance of long-term success. The courses pander to our human insecurities promising ‘no loss’ trading, ‘instant success’ and so on.

As a result, many an aspiring new trader loses heart or his capital. He’s tried so many courses with little success! 

The remaining hardy bunch continue to pursue their dream They finally find a program (or coach), that their research shows, is genuine. The knowledge is there – all they have to do, to succeed, is learn it, apply it and internalise it.

But, learn, apply and internalise,  is difficult. And here they face the most difficult challenge.

Usually,  for the hardy bunch, learning is not a problem – they do this quite readily. No, learning is not the challenge – making the commitment and choices to act consistently in a way that turns the knowledge into a skill is the challenge.

Let me give you an example of what I mean.

Research shows deliberative practice is the most effective and efficient way to master a skill. For Ultimate III students, a request was made in early August for at least one hour per week of practice. We are meeting in the last week of August – I wonder how many will have put in at least four hours. I suspect not too many (if any at all). I am curious to hear the excuses.

Going into the benefits of deliberative practice is beyond the scope of this blog. But, it’s not hard to figure out. I’ll leave it with you to work it our for yourselves.

Les Meehan

BarroMetrics Views: Les Meehan

I am still struggling with jet lag. I guess it’s a function of age – takes longer to get back to normal.

I’ll be setting up a more structured program for the blog:

  • Monday and Tuesday, I’ll focus on material aimed at assisting traders.
  • Wednesday and Thursday, I’ll focus on market commentary.
  • Friday will be a ‘free-for-all’.

In the spirit of the new format, here is the rego page to the podcast I promised last week (Execute Plan)

We had a few technical difficulties, so there is no video, only sound. Still, there is worthwhile information in the 20-minute interview.

Here is the link:

http://www.barrometrics.com/webinar-keep-me-informed/

You will need to register – we’d like to know who are accessing the podcasts.

Execute Plan

BarroMetrics Views: Execute Plan

John dropped me a line asking: “I have problems entering according to my plan. I pull the trigger either too late or too early!”.

Interestingly, the problem is not an uncommon one. I am seeing it repeated in the current crop of Ultimate students.

My advice:

Firstly, make sure you do have a problem and are not merely falling prey to hindsight bias i.e. ‘too late or too early’ is defined by what the market did after you entered.

Secondly, if you are not executing as planned, take steps to define clearly what has to happen to enter a trade. For example, the statement below would be inadequate. :

I’ll enter at my buy zone when I see a bullish conviction bar

Better would be:

I’ll enter after the market hits my buy zone, 1.3500 to 1.3510 at the close of a     30-minute bullish conviction bar. The maximum price I’ll pay is 1.3520. If the bullish bar closes above 1.3520, I’ll place a limit order at 1.3520.

If the market fails to hold 1.3500, I’ll stand aside for today and review my options for tomorrow. 

Let’s see why the latter statement is better:

  1. It defines the buy zone. So, no action is taken until the zone is hit. It also means you may miss a trade if the market gets to 1.3511 and bounces. Accept that you will miss trades because a market fails to get to your zone.
  2. It defines the entry timeframe.
  3. It provides a plan in the event the market bounces strongly off the buy zone.

The key is we define our entry conditions as clearly as possible. Once that is done, I recommend you spend a few minutes, visualising entering the market – include scenarios, where the market throws you a curve, e.g., hits the zone, closes above 1.3520 and never retraces. It’s important to accept the scenario ahead of time.

The reason we circumvent our plan is usually due to the fear of missing out – the 3Fs (flight, fight or freeze) raise their heads. Speaking of which, on Monday, August 11, we’ll be providing a link to a podcast with Les Meehan, trading psychology coach. Don’t miss listening to the interview (it’s only 15-mins long). Les is providing a special free offer – details Monday.

Also, he is conducting a webinar on Thursday, Aug 11 at 13:30 EST (that’s 1:30 Singapore time, Friday, August 12): Engineering Your Trading Mindset for Success.

Now 1:30 is a wee too early for me (at least normally) living in Hong Kong. But, if you register, you’ll be given access to a recording. Based on past webinars, it would be a worthwhile event.

Here’s the link to register: rightmindtrader.com webinar

Fed Rate Rise September?

BarroMetrics Views: Fed Rate Rise September?

On August 3, Jerome Powell gave some interesting comments at the Brooking Institution conference.

Powell is a member of the Federal Reserve Board of Governors. He told the Finanical Times that “he favoured a ‘very gradual path’ for any rises as US economic outlook was dogged by global risks”.

Note however, that the comment was before the better than expected Non-Farm payrolls number of August 5.

Will that cause him to change his mind?

I think not. He as been consistent is saying that the rate rise ought to be done gradually. I rate him as a ‘1 Dove’ although Bloomberg rates him as ‘neutral’ (See Fed Hawke to Dove Scoreboard)