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

One Overlooked Tool for Improving the Bottom Line

So, how can one tool, improve the bottom line? Don’t do what the majority of the 90% do and that is…….

The 90% focus on ‘getting the entry’ right. While getting in at a price where your open loss is helpful, it’s not the end all and be all. The reality is we are very unlikely to go long at the exact low or go short at the exact high of a correction. Far more important is how we manage our trade.

So,  two questions:

  1. Do you have trade management rules? And,
  2. Do you follow them?

The problem with many traders is they get married to the trade once they have taken a position. Rather than listen to the market objectively, they enter and then manage their trade on a wing and a prayer.

That’s not the way to trading success.

A profitable trade has two facets – an entry and an exit; where you exit is the key to long-term success. And for this, you need some way of objectively exiting the trade.

Here’s an example of what I mean.

Figure 1 shows a trade I took on Dec 15. A trade that in part was relying on the ‘December End-of-Year Up Close’.  On Dec 29, I was faced with this picture:

  1. I have a formula that indicates when a sideways pattern is ready to breakout. That indicator said the congestion that started on Dec 18 was on the brink.
  2. In the London session, the S&P gave an Upthrust Change in Trend sell signal:
  • it made new highs and then
  • formed a bearish conviction bar close below 2692.

The choice before me was a stark one. One the one hand, I was emotionally committed to an up close on Dec 29; on the other, my trading rules said to exit the trade.

What choice do you think I made? What choice would you have made? Don’t be shy – post a comment and let me know.

Figure 1 S&P 60-min

 

One Tip that WILL Increase Your Pofitability

Would you like to see your profitability increase? Well, here’s one tip you can use straight away:

“Check to see if your trade management can be improved.”

The 90% who fail to make the grade share many dispositions. One is the need for a high win rate – you know somewhere above 80% or 90%. Never mind that the world’s best hedge fund traders average just under 50%.

Just recently, a fellow trader-coach told me that one of his newbie coachees rejected a system because it had a 47% win rate (??!!). The newbie focused on the win rate and ignored the more important stats:

  1. The Expectancy Return, and the important (very important),
  2. Average Dollar Win and Average Dollar Loss

Expectancy Return =

(Win Rate x Average Dollar Win) – (Loss Rate x Average Dollar Loss)

The newbie had this decision to make (and it’s one we all face):

Did she want to make money or did she want to be right?

The answer is a critical one. Let me illustrate by comparing a couple of examples:

  • Avg$Win = $30, Win Rate = 33%
  • Avg$Loss = $10, Loss Rate = 67%
  • Expectancy Return = $3.20 per trade.
  1. Avg$Win = $1.00, Win Rate = 95%
  2. Avg$Loss = $50.00, Loss Rate = 10%
  3. Expectancy Return = ($1.55) per trade.

Over time: the trader will make money; the second MUST lose money. It’s as simple as that.

So, have a look at your trading records (if you don’t keep an equity trading journal, start in 2018!), and calculate your Expectancy Return.

Tomorrow, I’ll look at one tip on how to improve it.

 

 

 

No Reason 2

noreason

BarroMetrics Views: No Reason 2

  • ‘Once the reason for a trade is gone, exit’.
  • What’s the best trade? ‘Being wrong and not losing money.’

These are among my two favourite sayings by Pete Steidlmayer. In today’s blog, we’ll see both principles in action.

Figure 1 shows the USDCAD setup:

  • The Rule of 4: on the 4th attempt at an extreme, the odds favour a successful breakout. If the breakout fails, expect the start of the move to be breached. In this case, the extreme is 1.33650 and the start, 1.3005.
  • The reason for the trade: because of the Rule of 4, I was expecting a valid breakout. For this to be true, we should not see acceptance below the FTP (yellow rectangle) low (1.3318).

The early morning manipulation first saw a breakout. So, now it was time to enter.

I enter on a retest of the FTP zone. I decided to reduce my position size to 50% (because of the pattern I mentioned in ‘No Reason‘). I had my stop below the start of the latest 1-d swing directional move (1.3226).

After entry, the USDCAD broke below and accepted below the FTP low at 1.3325 – the price action negated the assumption behind the valid breakout. For this reason, when the pair rallied, I exited the position at breakeven.

So, what now?

The trade is still on with a slightly lower FTP low (1.3368). My process:

  1. I wait for a valid breakout;
  2. Then I look for a retest of the FTP within
  3. (Usually) 6-16 bars (of the execution timeframe) of the breakout.

Let’s see what happens.

2016-10-27_08-41-38-usdcad-290-min

FIGURE 1 USDCAD 290-min

 

 

FTP: A Breakout Filter

bob-volman-price-action

BarroMetrics Views: FTP: A Breakout Filter

Breakout systems have a win rate of around 30% to 35%: one of the reasons I prefer to be a responsive trader (sell corrective highs, buy corrective lows).

But, Bob Volman in his book, Understanding Price Action suggests a filter which raises the breakout win rate considerably. He calls his price action pattern, ‘False, Teaser, Proper’ (I call it FTP).

What’s an FTP?

A: Congestion price action occurring at different price levels in a congestion market. The ‘False’ (F) occurs at the other end of the boundary of congestion to a breakout, the ‘Teaser’ (T) around mid-range, and the ‘Proper’ (P) around the Primary Zone or just beyond it.

Proper patterns show a struggle between the buyer and the seller which, if resolved in favour of the dominant trend, create directional pressures that increase the odds of success. In addition, the opposite extreme of the congestion to the breakout direction provides a key reference point to anchor an initial stop.

I’ve added a couple of wrinkles. For example, Bob focuses on 5-minute patterns. I’ve found that FTPs are effective in any timeframe. They can be observed in the Second Lower Timeframe.

For example:

Brexit was accompanied by a downside breakout of the GBPUSD from a sideways pattern that began in 1985.

Figure 1 shows the 13-week swing and a lower timeframe FTP forming between 1.3480 and 1.2964. Within the larger FTP, we see a smaller on.

Figure 2 shows, nesting within the larger FTP, a smaller one. So, now we have 3 FTPs:

  • One clearly visible in the weekly
  • One, in the weekly, needing clarification. The Daily confirms this FTP.
  • One, in the daily, needing clarification which the 290-min provides.
  • The 290-min draws our attention to a 15-min FTP.

Why is this important? Because it allows us to lower our risk. The weekly FTP proves a risk of 534 pips; the 15-min FTP allows for a risk of 50 pips.

What the FTP has done, in this case, is not only increase the probability of success but also the return on ROI.

2016-09-30_16-18-10-13w

FIGURE 1 Weekly GBPUSD

2016-09-30_16-11-28-daily

FIGURE 2 Daily GBPUSD

2016-09-30_16-22-55_290-min

FIGURE 3 290-min GBPUSD

2016-09-30_16-30-35-n15-min

FIGURE 4 15-min GBPUSD