MIND X MONEY X METHOD = Trading Succe$$

Part of  “MIND” means we attain our goals. And goal attainment has two elements:

  1. Goal setting – setting the direction. Actions without direction could easily turn out to be aimless wandering.
  2. Goal execution  – goals without action are merely daydreams.

Recently, I read an excellent article by James Clear “Goal Setting: A Scientific Guide to Setting and Achieving Goals“. It’s mainly on the goal setting aspect. If you scroll down to the bottom of the page, you’ll see a host of articles on execution. I particularly like “Identity-Based Habits:….

And speaking of goals……….

It’s mid-January 2018. The stock indices and Crude Oil have provided opportunities for an exceptionally profitable year. The 30-Year US Bonds may be on the brink.

Have you secured your share?

If not, then maybe, just maybe, you need to set goals and plans for 2018 and make 2018, a year to remember?

 

The 3Ms – Secondary Reasons for Trader Failure

Earlier this month I made available a report to my subscribers called

“The Single Most Important Reason Keeping You Among the Losing 90%…..and It’s Not What You Think!”.

The reviews far exceeded my expectation. One review, in particular, prompted me to think…….

…….a splendid way to start the new series would be one on the 3Ms – the reasons most of us think of when asked why so many traders fail.

Here’s in part what he said in his review:

“The question I asked of myself is will I repeat the same patterns of the past so I appreciate your article.  First time it is bad luck and after a few times I can see the patterns and I have been questioning myself so your article is appreciated.”

That’s the key question, isn’t it? Why is it, despite all the improvements, in psychology, risk management and trading methods that over 90% of us still fail?

If I asked you the question, the top of mind answer you’d probably give would be Mind x Money x Method.  And, if I were asking you for secondary answers, you’d be 100% correct!

Mind x Money x Method = Trading Success

where

A) Mind means:

  • the consistent execution of our Money and Method rules, and
  • the willingness to engage in consistent and never-ending improvement (CANI)

B) Money means:

  • Risk management and

C) Method means:

  • A strategy that provides a positive expectancy

Notice the multiplication sign between each of the Ms. Because they are so linked, all 3Ms are needed for your success. And, notice too that the degree of our success is limited to the weakest link (the weakest “M”) in the chain.

But, what if I wasn’t asking for secondary answers? What if I was looking for the ‘single most important reason?’ That report we’ll look to make available in February. In the meantime, I’ll do a series on Mind, Money and Method. We’ll start the first of the series on Wednesday, January, 24.

So, see you here next Wednesday. I’ll be asking for reviews and comments are on par with those of “The Single Greatest Reason”,  I may turn the whole series into an e-book and provide it free to all who comment.

What do you think? Sound good?

 

Perception?

Which one do you see? An old woman, a young woman or both?

What about the Bitcoin’s prospects of continuing higher? Higher, lower or unchanged?

If you accept Teek’s thesis, Bitcoin is destined for USD 100K with ease.

And, tradingview believes we are seeing a continuation Head and Shoulders.

What do you think?

Up, down or rally around? This is not an academic question if you have bought Bitcoin or are thinking about it. It doesn’t matter that you may be thinking of buying one of its substitutes, be brave! Tell me, what do you think: ‘up, down or rally around?

Below is a chart for Bitcoin since inception. What do you think now?

What point am I making?

In an uncertain environment, we can’t control an outcome. All we can do is, give it our best guess, and control the risk. That’s why loss is part of the cost of doing business. You want to be a successful, trader? Then accept that you can’t win without losing – period, no ‘ifs’, no ‘buts’.

Where do I think Bitcoin will do? Sure next Tuesday, same time, same place. I’ll give you an answer then.

 

 

High Yield Bonds – Sounding a Warning?

 

Tom McClellan (https://www.mcoscillator.com/) provides a free weekly report called Chart in Focus. I like Tom’s work because he comes up with novel ways to view the market.

This week he refreshed the High Yield Bond Advance-Decline Line.

Figure 1 shows the chart in his email. You’ll see that we are seeing a divergence between the S&P and the Bonds A-D Line.  That doesn’t mean we can expect to see an immediate decline in US stocks.

In 2007, the S&P peaked in October but the Bonds A-D line peaked in May (Figure 2). As a rule, the Bonds A-D line precedes a peak in the A-D line. For example, in 2007, the NYSE A-D line peaked a month ahead of the Bonds  A-D line (the NYSE peaked in May 2007).

Tom McClellan believes that we’ll see a stock market top in March 2018. The date is certainly in line with Harry Dent’s ideas that we’ll see a top in 2018 – 2019, and sooner rather than later in the period.  So, we’ll see.

I’ll be relying on the Fred AMB and the NYSE A-D line to provide early warning signals of a significant top. In the meantime, how about short-term highs?

That’s a little more complicated because:

  1. The 18-day swing is an R3 uptrend – where stats play less of a role. For the record, the latest 18-day impulse swing has over an over 95% probability of a correction: exceeded mean +2 in both time and price.
  2. The 5-day swing shifted to an R3 move on Jan 12. Usually, R3 swings end within mean impulse. The 5-d’s mean is 16 trading days. So, we could see a short-term high around the end of the week (probably 1-day swing magnitude. Remember for my charts, a 1-day swing is the same as a 290-min, 5-period swing).
  3. The Ray Wave has a price target for a minor top around 2820.1 to 2828.8.
  4. At that level, price-wise, the 5-day would have an over 70% probability of correcting (greater than mean +1 stdev).
  5. Figure 3 shows all the various strands. Putting all of them together, once the 2820.1 to 2828.8 level is seen, we could see a 290-min, 5-period swing correction.
  6. If we do see the expected 290-min, 5-p correction, we should see a correction of 7.40 points (stdev 3.32).
  7. Can we see a larger one? Sure, given how stretched is the 18-day. But, let’s worry about that once we see the what sort of selling pressure appears at a 290-min, 5-period swing high.

SUMMARY

We could see this week, around a 7-10 point correction, once prices reach the 2820.1 to 2828.8 zone.  (All figures basis cash).

As always, you need to make your own trading decision. I am expressing my views and they should not be taken as trading recommendations.

FIGURE 1 High Yield Bonds and S&P 2017
FIGURE 2 High Yield Bonds and S&P 2007

FIGURE 2 High Yield Bonds and S&P 2007

FIGURE 3 S&P 18-day and 5-day swings

 

Good News! Schedules

 

Great news! Quite a few have asked me to consider using a weekly format schedule.

OK, guys and gals – I agree.  So, here it is:

  • Monday and Tuesday, market commentary
  • Wednesday, improvement advice. And I have a beaut series to start. You won’t want to miss it.
  • Thursday, mystery day where I scour the net for ideas applicable to trading but not directly connected. Wait till you see the left-field topic for this week!
  • Friday, I may or may not post.

There you have it. See you Monday!

 

You’ve Made a Ton! Luck or Skill?

A

The worst thing that can happen to a newbie? Make tons of money when you first start trading. I fall into that camp. In my first foray day-trading the HK Gold Tael market, I made enough money to buy my wife a first-class fur coat!

“How easy is this?!”, I thought!

The experience convinced me to sell my legal practice and become a full-time trader. Easy? It took me all of seven years and bucket loads of dollars lost to become profitable finally.

And that’s the difference between trading and other professions – luck plays such an important role for success.

Think of it this way: let’s say you have been charged with murder. Would you hire someone with no training or experience to defend you? What would you say would be his chances to get you acquitted – somewhere between 0% and -100%? In short, no knowledge, no training means no chance of success.

Not so the trading game. You can be a total ignoramus, and for a while, appear to be God’s gift to the trading world. And, the ‘unfairness’ doesn’t stop there. You can be the most knowledgeable trader, you can do everything right on any one trade, and still lose money on that trade!

It’s this randomness and uncertainty that makes trading so hard.

So, how do we overcome the hurdle? Accept that on a trade-by-trade basis trading is random and uncertain. Our profitability, our edge, comes from the consistent execution of our trading and risk management rules.

Superman Stopping a Runaway Train?

Is FEAR keeping you away from trading the stock indices? Perhaps you feel that trading the indices will be like Superman stopping a runaway train?

Perhaps and perhaps not. Continuing from yesterday..……

We’ll use the GFA’s angle of ascent to identify the current S&P momentum.

The 13-week shows that since August 25, 2017, the quarterly trend in the S&P has started to accelerate. And, since Trump’s election, the rate of acceleration has increased to an R3. If the price structure aligns with the momentum grading, we’ll see corrections only in the second lower time frames, i.e. in 5-day swings.

13-week Swing S&P Cash

The 18-day and 5-day swing chart show the momentum acceleration increased on December 29, 2017: from an R2 to an R3. For R3s corrections will be seen only in the intra-day charts, the 290-min or 60-min.

18-day and 5-day Swing Cash S&P

The next chart is the 60-min CFD. I’m showing this timeframe because it’s easier to see the patterns and zones. I am expecting a 290-min 5-period swing correction.

The first chart shows the stats for the 290-min. The current 5-period swing has moved 91.80. A normal swing is around 36 point, and the swing has a standard deviation of about 20.60 points. Statistical theory suggests there is an over 95% probability that the 290-min swing will correct. Because of the probability rating, I am unwilling to add to my S&P positions until the correction occurs.

The next question is: what is the price structure telling us?

We are seeing a decrease in momentum – what I want to see if looking for a corrective move. Notice that the S&P 60-min is now below the 4×1, and last night, was unable to close above it. A bearish-conviction close below the 2×1 will suggest a normal corrective 290-min move is underway. A normal correction in the 290-min is 20.60 with a standard deviation of 8.80. This gives us a range for the correction of 16.4 to 29.60, (2741.2 to 2728.0 basis the S&P CFDs)

60-Min GFA S&P CFD

Finally, two services:

suggest that we’ll see a top around January 10 and a low around January 22.

Seasonal Chart (through courtesy of SignalTradingGroup)

A correction of more than 50 points will sound an amber warning that the momentum has shifted and we may be on the way to seeing a larger correction. In that case, I’ll review my current strategy of buying the dips.

Why 50 points? Fifty points is greater than the 290-min, 5-period swing corrective mean + 3 stdev!

So to summarise:

  • I manage my stock indices by relying on three indicators, Libor Rate, AMB, and Advance-Decline Line, to warn me of a top.
  • I also rely on time and the price structures to provide warnings.
  • So far, no amber signs have been thrown up. Until these appear, I’ll continue to buy dips.
  • I’ll use trade size to manage the risk. I’ll also use my trade management rules to protect my capital, e.g. I’ll add to my existing longs only when the risk to the existing positions is as close to ‘0’ as I can get it. Trailing stops assume a large slippage on fills.

So, what do you think?  Would you trade the indices? Leave a comment and let me know.

Trade the S&P?

Yesterday, Lee Shui Sing  asked:

” Do you mind to share during this period
• how would you prepare yourself for the warning you mentioned about?
• How do you manage your trading account?
• Stay away from stock market?
• Only play shorterm?
• What about forex market?”

I have interpreted the questions to mean:

  1. Given the risk in trading the stock indices, how do I manage the risk?
  2. Why am I not trading the forex market?

To answer question 1, I need to refer back to my trading philosophy, one I borrowed from Trader Vic. In order of importance:

  1. Protection of capital
  2. Consistent execution
  3. Superior returns

My context to the stock indices is based on Austrian economics, cycles and price structure. A short summary:

  • QE by all the major Central Banks has created an asset bubble which must burst – it’s not a question of if, but a question of when.
  • The cycles I rely on suggest there is at least a tradeable (if not a major top) occurring sometime in 2018-2019. The shorter cycles will narrow the period.
  • The price structure suggests we’ll see a blow-off wave before the top occurs.

How do I manage the risk?

The normal way: by position sizing and relying on my trading rules. I don’t usually reduce my trader’s timeframe (the monthly swing, 18day).

Let’s look at the current structure. You need to know that one of my tools for measuring momentum is the Gann Fan. See Understanding Gann Angles.  The price structure and the GFAs need to align.  When they don’t the price structure takes precedence. You’ll see what I mean when we consider the current S&P position.

I have four grades of momentum:

  • R0 – retracements greater than normal
  • R1 – normal retracements
  • R2 and R3 – retracements seen only the lower timeframes……

More tomorrow

A Warning for the Stock Market?

I’m near-term bullish on US stock indices. But, I am also wary of signals that warn of reversal. Last week, I mentioned two indicators I keep a close eye on, the FRED Asset Monetary Base and the Adance-Decline line.

Today, I’ll introduce the third of the Musketeers, the Libor rate in US Dollars.

I use the Libor rate as a forecasting tool. As long as they are more or less in line with the Fed Fund Rate, in this context, I expect to see more upside in US stocks. But, a rising Libor rate spells danger. And, that is what we are now seeing.

Figure 1 show the November Fed Fund Rate at 1.16. Figure 2 shows the various term Libor rates all at multi-year highs and all above the Fed Fund Rate. True, not at divergent levels that call for an immediate exit of long positions; but, the divergence in momentum does call for caution.

Fed Fund Rate
Libor Rate

S&P Trade

Thanks, Baz, Lee and Ryan for the comments! Appreciate…

The 60-minute chart above shows what I did. I exited the entire long position taken at 2667.3  because:

  1. Traditionally, the end of year sees an up close in the S&P because fund managers want to close their books with a strong showing. Instead, we saw a down day: a warning of a larger correction ahead?
  2. The Upthrust Change In Trend is a very reliable pattern. The minimum target for the move was 2678 to 2676. For me, if 2676 gave way, the next support zone was 2669.5 to 2656.3. Given the narrow ranges in the week, I thought it highly probable I’d see 2676 breached.
  3. Exiting the position meant I’d have a clear mind to see if the new year brought a rally. My mindset was I could always re-enter if I thought a rally was on the way.

I was prepared to buy on the close on Jan 29 (US time) if the S&P reversed and formed a rejection day, by closing near the highs.

By the way, if you click on the chart above, it will expand to a new window.

Thanks again for the participation!