Backfire Effect

BarroMetrics Views: Backfire Effect

I received a couple of emails and one comment against my assertion that Macron would probably win the French Elections. Before I comment, I thought a brief excursion into the ‘Backfire Effect’ would be in order.

“The ‘backfire effect’ is a name given for the finding that, given evidence against their beliefs, people can reject the evidence and believe even more strongly” (Rational Wiki Backfire Effect).

Can Le Pen win? Of course. But, as a trader, I would not be taking a position on her success. Here’s why:

  1. She failed to win the first round, even though she had the best conditions for her campaign, viz, the terrorist attack just before the voting commenced.
  2. French polls, unlike the US and UK, have been remarkably accurate.
  3. Based on their findings, Le Pen can only win if there is a 50% abstention rate. While possible, the rate is unlikely. The polls have the rate at 25%, in which case, Macron will win.

So how am I going to the elections?

I’ll be focusing the EURJPY – win or lose for Macron, this pair should offer opportunities. But, I’ll need to see the result and wait till around 9:00 am HK before I am willing to devise a strategy.

Non-Farm 2017-05-05

BarroMetrics Views: Non-Farm 2017-05-05 

As expected, the FOMC meeting left rates unchanged. In fact,  in its statement, it said little outside expectations. As far as market reactions go, it was a non-event.

The next event for ‘inflexion week’ are the Non-Farm Payrolls due 8:30 am EST on Friday.

Expectations:

  • Consensus:  185K
  • Consensus Range: 150K to 225K
  • Unemployment Rate Consensus: 4.6%
  • Unemployment Rate Consensus Range: 4.5% to 4.6%

One thing the FED made clear: it feels a need to raise rates twice this year and a need to change its balance sheet program. I expect the balance sheet announcement to made in December 2017. So, that leaves only the timing of the rate rises. The FED has signaled it wants one in June, so that leaves only the final rise to determine.

If the rate rise is to occur in June, then Friday’s data will have to come in at least within consensus, especially given the 98K number last month (expectations were for 175K).  And, given my view that the job numbers are driven by FED needs, normally I’d say that my confidence rating for a consensus (and above consensus) number would be 8 (where 0 is ‘no confidence’ and 10 is ‘certain).

This month there is, however, an additional wrinkle. Studies show there is a correlation between the ADP month to month trend with the Non-Farm month-to-month.  This month’s ADP came in at 177K (consensus 170K) BUT down from last month’s 263K.  If the indicator is on track, then we should see a Non-Farm number below 98K.

So, we have a conflict between my two indicators. My resolution is an easy one: I’ll go with my gut with an allowance for the ADP signal. This means I’m looking for a number between 150K to below 175K.

Such a number will probably produce a ho-hum reaction in the USD and US stock market.

Let’s see what happens.

(Message for Michael Hack: Please see my comment to your request posted at ‘Trading A Fundamental Event)

The French Elections

BarroMetrics Views: The French Elections

The results are in, even before the elections are held: Macron will win. He will secure 64% of the vote – and he has been endorsed by Fillon and Hamon.

So, is there any chance of Le Pen winning? If she does, what market reaction can we expect? If she loses what market reaction can we expect?

I must admit to not following French politics as closely as I follow the US and UK. Consequently, I don’t have a feel for the French outcome. The bookies say Le Pen is a 13/2 chance. Are these odds true? Because I don’t have a feel, I’ll assume they are.

So, what can we expect to see if she loses?

EUR and European stock markets up. If the first round results are anything to by, the move North should be something to see. I expect US stocks to follow suit. (Figures 1 to 3)

The more interesting question is: how will both asset classes react if Le Pen wins?

Undoubtedly, the EUR and the CAC will dive. I expect the FTSE and DAX to follow suit. The US? I am not so sure. It did follow the European bourses following the first round results. But, we didn’t have the Non-Farm ahead of the 1st Round as we do this time. Will a Le Pen victory overturn a poor Non-Farm?

What will I be doing on this occasion? Probably standing aside, but I’ll make up my mind closer to the event.

Figure 1 CAC Daily

Figure 2 DAX Daily

Figure 3 EURUSD Daily

Figure 4 S&P Daily

Budget Deal?

BarroMetrics Views: Budget Deal?

I am commenting today rather than tomorrow because it looks like the markets were correct about the potential of a US Government shutdown.

Last night, Democrats and Republicans agreed on a USD 1t spending agreement.  The bill needs to be passed and signed off by Trump by Friday, May 5.

The agreement has something for both sides. For the Democrats, money for funding the National Institutes of Health (Obamacare), and continued funding for federal government activities. For Trump, there will be increased spending for the military.

Because of the Democratic support, Trump does not need to worry that the House Freedom Caucus will upset the deal like they did the Health Bill.

Once thing is certain, it doesn’t look like Trump, despite all the promises to the contrary, will be doing much to balance the budget. This spending bill will clearly increase rather than decrease the deficit.

So far as the markets are concerned, it’s unlikely the news will have much impact.

Inflection Week?

BarroMetrics Views: Inflection Week?

It’s shaping up to be an interesting week:

  • I expect today to be quiet given that for the most influential Asian countries (Japan and China) as well as many European countries (notably the UK, France and Germany), we have the Labour Day hols.
  • May 3 is also likely to be quiet because HK (where much of the Chinese trade is done) and Japan have another holiday.
  • On May 3, 14:00 EST the FOMC announce their decision – rates should remain unchanged given last month’s GDP, inflation and Non-Farm.
  • Then on Friday, May 5, we have an important Non-Farm Payrolls number.
  • On May 7, we have the French elections.
  • Sometime this week, but no later than Friday. May 5, the US Funding Bill (funding the US Government to Sept 30) has to be passed – UNLESS there is another stop-gap vote. So far, the stock market and dollar have ignored the possibility of a Government shutdown.

Today, I’ll have a look at the Non-Farm payrolls and on Thursday, May 4, I’ll comment on the French Elections as well as sending out the video to those who requested it. I’ll comment on the Funding Bill on Wednesday, May 3.

This month’s Non-Farm will be important as an indicator to the FED’s interest rate raising roadmap. Yellen has signalled a rise in June followed by one more rise.

Last month the consensus number was 175K new jobs and an unemployment rate of 4.7%. The rate came in at 4.5% (better than expected), but new jobs came it at 98k. The shortfall was attributed to the weather.

On Friday, the consensus number is 185K with a range of 150K to 225K; the unemployment rate is expected at 4.6 with a range of 4.5% to 4,6%. Numbers below the consensus range will cast doubt on the three-rise plan; numbers above the range will probably give birth to the idea of more than three rises in 2017.

My view is we’ll see consensus numbers. This result should pretty much keep the USD and US stock market on an even keel. Below consensus numbers will send the USD down; above consensus numbers, the USD and stock market, up.  I’m not sure what effect a below consensus number will have on the US stocks.

OCD Help

BarroMetrics Views: OCD Help

The Mastery blog hit a nerve with quite a number of you. I received emails along the lines in the attached doc (Posting it to this piece would have made the entry too long). Essentially, all were asking for help. I wondered how many readers were, are, suffering the same issues but did not write in.

(The author of the email suggested that he may be suffering from OCD given he had not learnt from his mistakes. Hence the title of this blog).

Here are some general words of advice.

Make sure you Method has an edge. Optimally, you will backtest the system (or setup), then forward test before you start trading it. This testing forms your first step to acquiring confidence in the Method. If you don’t know how to test, then find a service to do it for you. Drop me a line in the comments section if you need referrals.

After backtesting, test it on a micro account. The best asset class for this is CFDs. Unfortunately, they are not available in some jurisdictions, like the US and HK. I’m not sure if US residents are allowed to open overseas accounts. If you are, then I’d take that step. Just be careful, there are more than a few brokers that are less than legitimate. The best jurisdiction is Singapore – its Monetary Authority is the strictest I know of. Or you can go to Forex Peace Army and do your own due diligence. Most Forex brokers offer CFDs.

I emphasise, use the micro account size. Your objective is to get a feel for your method. Around 15 or so trades should do the trick. To give you an idea of the micro size: the S&P mini is USD 250.00 per point. The S&P CFD is USD $1.00 per point. Consequently, the CFD allows you to practise without being a danger to your wealth.

If you can’t or won’t use CFDs, then at least spend some time trading a simulated account using Deliberative Practice. The practice will acclimatise you to the way your trading rules react to market conditions.

Have Money rules: a way of calculating your position sizing, portfolio risk and when to add profits to your capital and when to subtract your losses. The Turtles ideas are a good starting point. I have attached some info here.

Finally, you need to manage your impulse trades. Having a Method in which you have confidence helps – immensely. Also, use Acceptance and Commitment Training (ACT). The Happiness Trap book is a great starting point. There are some free resources at the Happiness Trap website.

ACT Made Simple is a more complete introduction but is also more difficult to read. The Happiness Trap resource page also has some freebies for this book.

You could also Google ACT. But, be warned, much of the material is for practitioners, and I found the reading heavy going.

The 5 Money Management And Position Sizing Secrets Of The Turtle

Traders turtle rules

2017-04-28 email

Mastery

The current Mastery course is proving to be a gold mine of information.

Participation was only by invitation  – perhaps that accounts for the fact that the commitment to succeed is so high among the attendees. That’s not to say that the commitment is uniform – in any group, there will be those with a higher drive to succeed than the others. But, it is to say, that as a group, the commitment is higher than most.

Perhaps I should take a step back and outline the purpose of the course. Mastery assumes you have integrated the basic knowledge for trading success: you have a method with a positive expectancy, you keep your journals, you apply ACT so as to remain calm enough to allow your neocortex to manage the fight, flight or fear response, you execute your risk management and method rules with a high degree of consistency, etc., etc.

Mastery assumes you have integrated the basic knowledge for trading success:

  • you have a method with a positive expectancy,
  • you keep your journals,
  • you apply ACT so as to remain calm enough to allow your neocortex to manage the fight, flight or fear response,
  • you execute your risk management and method rules with a high degree of consistency, etc., etc.

Its objective is to move to the next level of discretionary rule-based trading: rather than see the chart as a series of individual patterns & processes; traders start to see the whole picture, they start to see what is important, in this instance, and what is not.

Think of the as a course designed to produce chess grandmasters. They scour the board and see the patterns that are developing rather than merely seeing individual tactics.

What I’ve found with my group is while they are competent in seeing trading as a single pattern e.g. they see a Spring Change in Trend Pattern, they aren’t quite there when it comes to seeing the whole picture e.g. why in this case, the pattern is likely to fail.

BUT, the fab thing is I am seeing such rapid improvement that it has made the endeavour well worthwhile. In the process, I’ve been taught what works and what doesn’t. The course has certainly put paid to the idea that you can become a master by attending a tw0-day or three-day seminar.

The course has certainly put paid to the idea that you can become a master by attending a tw0-day or three-day seminar. The attendance is but a start. After the seminar, you need to put in the work – first attain competence, and then to seek Mastery.

So where are you at? Beginner, Competent, Master? And what are you going to do to get to the next level?

“Trading A Fundamental Event”

BarroMetrics Views: “Trading A Fundamental Event.”

Yesterday I posted a video about how to trade a setup I call ‘Trading A Fundamental Event’. The conditions are:

  1. There is a fundamental event capable of moving markets strongly in one direction e.g. Britexit
  2. The trader perceives that the market has mispriced the odds of a variation of the event e.g. the probability of a Britexit.
  3. The mispriced variation occurs.

In the video, I took the view that the polls and betting had mispriced either:

  • A Le Penn victory where she secured at least 40% of the vote, and
  • A Le Penn, Melenchon victory.

As it has turned out, I was wrong. The polls got it right; the May 7 run-off will be between will be between Macron and Le Penn (24%and 22% on votes cast as at 1:13 am BST).

The expected result produced a gap on the EUR and risk-taking currencies of around 200 pips.  A gap because the results started coming out while the FX markets were closed.

As far as my trading is concerned, no gain, no loss. I did not get the scenario I needed to trigger a trade. To round off the series, we’ll be producing another video on May 7. But, you will need to leave your contact details to received the follow-up.

BarroMetrics in Action: The French Election

We created the video for some students. Then we decided to share it with you.

Trading the French Election

The usual disclaimer: The video is for educational purposes only.  All care and no liability so far as we are concerned.

The polls close 2:00 am (HK). We should start seeing some exit polls results by 4:00 am (HK). Official results are due at 11:00 a.m. But, we should have unofficial results by 6:00 am (HK).

The French Elections and You 2

BarroMetrics Views: The French Elections and You 2

What’s the worst that can happen when the election results are in – at least so far as the EC is concerned (as well as the EUR crosses)?

Melenchon and Le Pen being the only contenders for the May 7 run-off.

The second worst?

Le Pen securing a vote in the high 40s against either against Macron or Fillon.

The best?

Outright victory for Macron by his securing over 50% of the vote. 

I doubt if we’ll see any of the above results.

The polls are suggesting a Macron-Le Penn face-off on May 7. But, let me throw in a spanner. The momentum of Melenchon has been so strong, I would not be surprised to see him figure in the results.

It seems to me anything but a strong Macron showing will cause a drop in the EU crosses. And, given the doubt about the turnout and the terrorist attack in Paris on Friday, I rate a strong Le Pen win more likely than a Macron.

So, how to take advantage of this view?

I don’t normally trade the CHF. But, I will on this occasion – mainly because of the Swiss decision on immigration will serve the CHF well.  Moreover, the long-term chart of the EURCHF shows the strong downtrend that lately has seen only dead cat bounces (Figure 1).

Figure 2 shows a clearer 18-day swing picture.  Acceptance below 1.063 will probably see a test of the 1.0305 to 1.0238 zone. That would be my target for this move down – if we see it happen.

FIGURE 1 12-m EURCHF

FIGURE 2 18-d EURCHF