The Trading Mind 2

BarroMetrics Views: The Trading Mind 2

When I last left off, we had just completed a consideration of the Reptilian Brain (Unconscious Mind).

We saw that it’s the oldest of the three brains and controls out biological functions and instinctive reactions. It’s designed to keep us safe, and it does this by looking to control outcomes. The problem is it was designed for a bygone era. Many of its solutions are out of place when it comes to trading. For example:

One of the hallmarks of trading is an uncertain outcome on a trade-by-trade basis. Seeking to control this outcome is doomed to failure.

Turning now to the Limbic System (Subconscious Mind)….

Its functions are well set out in the diagram above. I’ve also attached the image as a pdf file.

The unconscious and subconscious brains seek only the best for us. But, in their attempts to ensure our survival and to adopt the ‘right’ course, they prove to be a barrier to trading success. Our main adversaries are:

  • The desire to be right,
  • To stay with our within our comfort zone, and
  • The flight, fight or freeze response

Traditionally, in looking to defeat our nemeses, we have sought to control and reframe the impulses. In my experience, this approach has met with a distinct lack of success. Our most modern brain, the Neocortex (Conscious Mind), can’t control the other two, nor does it want to if it could. It needs to partner them for optimal results.

ACT (acceptance and commitment therapy) offers this option. I have written extensively about ACT in this blog.  (For past ACT articles, in my blog, do a search for ‘ACT’ and ‘Acceptance and Commitment Therapy’). 

Like anything else, the ACT processes need awareness and dedication until we integrate them. Once the processes become ingrained, they become part of us. Even better, we’ll see the results reflected in our trading bottom line.

Theory-of-the-Mind-Revised

The Theory of Mind (through the courtesy of Gemma Stone)

Breakout? Buy?

BarroMetrics Views: Breakout?

Today, the S&P appears to have formed a valid breakout (Figure 1):

  • The range is normal for the current conditions.
  • The estimated volume also appears normal. I stress estimated because my data sources’ final volume will not be available until 9:00 PM EST. Sometimes there is a discernible difference between the preliminary and the final volume.

Let’s assume the breakout is genuine, what now?

I use three filters to confirm a breakout:

  1. Time: Whole Point Count (borrowed from Joseph Hart’s Trend Dynamics)
  2. Price: The Maximum Extension. In this case bullish acceptance above 2418 (we have that).
  3. Momentum (what I call the LCC): three consecutive days of new highs (excluding inside days). In this context, we need to see another day that forms a higher high and higher low.

I don’t normally buy breakouts. I prefer to wait for confirmation of the breakout and enter on a retest – provided I see what I call an FTP form just before, or just after, the breakout.

An FTP is a congestion pattern seen on a 1-period swing on the daily chart or a 5-period swing on the 240-min (for the S&P).

Figure 2 shows the 240-min swing. Clearly, we have one.  The problem is part of the swing pattern was formed on Memorial Day. The support and resistance formed by patterns that occurred on public holidays tend to be less reliable.

Early days yet, let’s see what develops between now and July 7 (Non-Farm Payrolls).

One final point, if valid retest does occur, my price and time targets will be: July 15 to August 11 around the 2560 to 2640 zone.

FIGURE 1 Daily S&P 18-day Swing

FIGURE 2 290-min 5-period Swing

The Trading Mind

BarroMetrics Views: The Trading Mind

As my most recent course, Mastery, comes to an end, today, I looked to review the successes and failures. All of the attendees could be said to be driven to succeed. Yet some did, and some didn’t. By that I mean, over the course, some changed their behaviour, and some did not. For those that did change, I saw the changes in their trading results. For those where there was little or no behavioural change, I saw little change in their results. You can’t keep doing the same thing over and over again and expect to attain a different outcome.

So why do we do it? Why spend countless hours and countless dollars giving lip service to change but failing to follow through.

The answer I believe lies in our brain’s hard-wiring.

The Triune Brain model has been around for a while. Traders would do well to become acquainted with it.  Figure 1 has a summary and attachment 2, has a more in-depth explanation. Let’s see how the hard-wiring affects our trading.

The oldest brain is the Reptilian (unconscious). Our impulses and instincts reside here. Like the subconscious, its primary job is to protect us. Unfortunately. its hasn’t been updated for aeons. As a result, what it treats as ‘life-threatening’ (e.g. losses) isn’t so. It’s solution to our problems is to seek to control the outcome. But that’s not possible when trading – so the fight, flight or freeze response kicks in to deliver the losses we fear may happen.

Its partner in crime is the subconscious but more on this tomorrow.

FIGURE 1

The Reptilian Brain

Attachment 2

Paradigm Shift

BarroMetrics Views: Paradigm Shift

Of Mice and Men generated some emails. I was surprised; I didn’t anticipate the response.

I’ll look to answer the questions raised.  One batch was similar to Omran’s – why change when the process is making money? Because as traders we need to improve – you can bet our competitors won’t and if we don’t change and get better, they will leave us behind. Tudor Jones, for example, is now embracing AI. At one point, Tudor believed that men were better than machines. But over time, his views have changed.

Another theme was the difference between the two approaches.

In one sense, there was no difference: my first principle is ‘protection of capital’. That idea runs true for both approaches. The difference is, with that achieved, how do we go about producing superior returns.

There is a direct relationship between timeframe and size of return. The shorter the timeframe, the smaller the average win. Consequently, we need a high win rate.

The major difference between the two is found in that idea. In short-term timeframes, we need to:

  • Take profits more quickly and
  • Be more aggressive when managing our trades – to ensure that once in profit, we don’t let the trade turn into a loss.
  • The above ensures a high win-rate.

For example, in the EURUSD entry I failed to take, I’d have been stopped out after having exited some positions at the first target. Still, the result for the trade would have been a gain of 64 pips for every 600K taken. That’s a reasonable return when you consider that the trade failed to get to the 2nd target – the one I call the ‘core profit’ exit.

The final difference between the two styles is the amount of time spent in front of the screen. Undoubtedly, the shorter timeframe is more exhausting. I am going to have to lose weight and exercise more!

Of Mice and Men

BarroMetrics Views: Of Mice and Men

“The bestlaid plans of mice and men often go awry” (Robert Burns).

This month I went to live-testing of a new (for me) approach to trading. It’s quite a departure from my usual style. My style has been based on the 18-day swing, (monthly trend). And, my aim has been to hold positions until a 13-week (quarterly trend) line turn.

The new strategy holds positions usually for no more than three days; the first exit is usually in a matter of hours.

In this test period, I have been trading half-position size, generated a 71.43 win rate and a 6.37% ROI. (Full size 12.74%). Annualised that ROI would be much better than my average, around 25% p.a.

To say, I’m very happy would be putting it mildly. So, how did the best-laid go astray?

Well, I had planned to take every signal, unless I had a good reason not to. Yesterday, I had decided not to take trades because of Memorial Day in the US. I thought it unlikely that there would be sufficient range to generate the first exit.

I should also mention my FX day ends at 17:00 EST and begins at 17:01 EST.

The EURUSD set up nicely for a sell signal. I went to bed reasonably early and actually got up at around 4:00 am. I had a quick gander at the EURUSD, and it was dead as a dodo. So I went back to bed thinking to place the entry and initial stop around 7:00 am this morning.

Only problem?

At 5:00 am (17:00 EST), the EURUSD triggered the sell and got to first exit later in the day. Under my rules, I have missed the trade and will wait for the next one. Natch on a backtesting basis, the trade would be counted as one that (at least) got to the first exit.

I post this because it’s a reminder that backtesting merely provides data of positive expectancy. It’s still up to us to execute. And because we are human, there’s many a slip between the cup and the lip. (And next time, I’ll stay up until 5:00 a.m. and then place my order!)

 

 

Is China Turning Japanese?

BarroMetrics Views: Is China Turning Japanese?

That’s today’s FT ‘Big Read’ on page 7. I’ll let you read the article for yourselves. One thing is clear: the advantage of being 71 with full mental faculties is you see how true is the statement – the more things change, the more they remain the same.

I began taking an interest in politics when I was 14 (1961). You can thank JFK for that. At that time, the Soviet Union was all the rage. The talk was how it would overhaul the US and how (and why) the one-party state would prove superior to a republic protection individual rights.

Then in the mid-1980s’, the talk was all about Japan – how its system was overhauling free enterprise.

Both the Soviet Union and Japan failed at the same time (`1991). The bottom line is the effect of economic laws can be postponed but not avoided.

Today, it’s the turn of China, and sadly, the USA.

The FT article about China is a classic example of why this time it will be different – it always is until it isn’t.  At least FT, unlike the 1960s and 1980’s gives some reasons why this time it may not be.

At the other end of the political spectrum is the USA: same argument, this time we have the tools to make it different. We’ll see. The FED now needs to unwind its accumulated balance sheet without spooking the markets and without creating a major recession (unwinding may lead to high inflation which leads to unexpectedly high interest rates which lead to a recession). If the recession comes during the Trump presidency, no doubt he’ll be blamed for a recession/depression that was in the making before he took office.

That’s why I have shortened my trading timeframe. I don’t want to be caught in a 1987 type crash.

 

S&P On Track 2560-2640

BarroMetrics Views: S&P On Track 2560-2640

The Upthrust Sell signal triggered on May 17 looks like being negated: I need only see a bullish-conviction close above 2418 to say that has happened.  That would confirm that the strategy suggested in “Trump & the S&P…” was correct.

Assuming we do see a bullish-conviction close above 2418, then there is a strong probability we’ll be seeing 2560 to 2640. If we do see those prices around end July, early Aug, then we may have a possibility of a top.

In the meantime, I’ll take the view of ‘long or out’.

FIGURE 1 S&P 18-day Swing

Need for Public Participation

BarroMetrics Views: Need for Public Participation

Top S&P?

I had considered the sideways move in the S&P, commencing Jan 2015, to be a distribution pattern. The only fly in the ointment in this view was the lack of public participation. One of the characteristics of long-term tops is a massive investment by the public.

Well, with Trump’s election breakout on Dec 2, 2016, I needn’t worry about that aspect. Public participation has come back (see Mom and Pop Investors Are Behind This Historic Market Rally, 2017-02-28).

So, are we on track for a high in 2017?

So far – but I’d like to see the S&P get a move on to reach my price targets, optimally 2640 to 2560 (basis cash); my time targets are 2017-07-15 to 2017-08-11. Beyond that, I have another set of dates 2017-11 to 2017-12.

Apart from the S&P price and time objectives, there’s one more event I’d like to see take place: I’d like to see the St Louis Fed Reserve, Asset Monetary Base (AMB), start a sustained down move by the end of this month. The AMB move South is not necessary but would be an optimal factor.  (FIGURE 1)

(NOTE: I’ll be in Singapore this week so that the blog’s publication schedule will be interrupted).

FIGURE 1 Asset Monetary Base

 

Trump & S&P: Uptrend Ending?

BarroMetrics Views: Trump & S&P: Uptrend Ending?

On November 18, Trump’s election to the Presidency started a rally in the US stock market. True, the weekly volume and range have dropped in this upmove. Before QE, I’d have said that the drop characterised a top in the making. But with QE, we have seen a persistent uptrend unaccompanied by robust volume and range. Effectively, QE placed a floor below the markets.

Figure 1 is a weekly chart of an S&P (CFD) showing:

The difference between the trend up prior to the congestion that began on 5/22/2017 and the start of the Trump move on 11/11/2016. You’ll note that the mean range dropped from 43 to 36 and volume declined from 84M to 62M.

Figure 2 is the daily chart showing an 18-day Upthrust Change in Trend Pattern. Even if the pattern fails, we should see prices test the Primary Buy Zone at 2331 to 2320 (Maximum Extension comes in at 2304).

Normally, I’d take the Upthrust signal. But, given the situation with QE, I’ll wait until I see a confirmed change in the 18-d trend before looking to adopt a shorting strategy. That means I want to see:

  1. A momentum signal starting with a breach of 2320 (what I call an LCC – three consecutive bars making lower lows [inside days are ignored for the 3-day count]); and
  2. Acceptance below the Maximum Extension at 2304 (calls for a bar opening above the top third of the day’s range and closing below the bottom third where the close is below 2304. Also, at least half of the bear-bar’s range needs to be below 2304) and
  3. Most important, seeing nine consecutive bars whose ranges are below 2320 (what I call the WPC).

FIGURE 1 Weekly S&P

FIGURE 2 Daily S&P

 

 

Essential Thinking and Success 4

BarroMetrics View: Essential Thinking and Success 4

Only two more elements to go, folks!

So far we have covered:

The penultimate element: entry

The function of entry is to buy us some time and space: after entry, the instrument moves favourably for some profit for some time. If it does this, it allows the room we need to manage our trade so as to ensure the worst result is breakeven.

Take Figure 1. There is a world of difference between an entry at 123.99 (green arrow) and one at 124.91 (red arrow). The latter gives us no time and space to manage a breakeven trade within the timeframe we are trading. Since I am trading a 5-day swing, I’ve found that the 60-minutes is the lowest timeframe I can expect follow-through to the end of day. Shifting down to lower timeframes exposes the trade an unacceptably high risk of whipsaw.

Finally, we have instrument selection. This element is especially important in FX. Over a large sample size, selecting the instruments to trade that result in profit is important. For example in Figure 2, the trader entered both pairs on May 12. The EURUSD is showing a profit of 302 pips, the EURJPY a profit of 40 pips.

So there you have it. What I view as the essential elements for success. In the piece, I wrote in order of importance. Let’s summarise in chronological order of a trade:

  1. Instrument selection.
  2. Entry
  3. Initial stop
  4. Position sizing
  5. Subsequent Trade Management
  6. Consistent execution.

Figure 1 EURJPY 60-min

FIGURE 2 EURUSD cf EURJPY (Daily)