Angles of Ascent

BarroMetrics Views: Angles of Ascent

In this Blog, I review ‘angles of ascent’ as a tool for measuring momentum.

As a general rule, I seek to avoid indicators in my trading. So, I don’t use momentum indicators like RSI, MACD etc.  Instead to assess momentum, I prefer to use ‘angles of ascent’ as shown by the Linear Regression Line.

In an uptrend, there are 4 main angles:

  • 12:00 – 1 (unsustainable thrust)
  • 12:05 – 2 (normal thrust)
  • 12:10 – 3 (below normal thrust)
  • 12:15 – 4 (sideways trend)

In a down trend the angles are at:

  • 12:30 – 1
  • 12:25 – 2
  • 12:20 – 3
  • 12:15 – 4

In uptrends, you are unlikely to see perpendicular moves (position 1). A Linear Regression Line that is between 12:00 and 12:05 is so steep, you are likely to see either a pause or pullback before making a new, final high. In position 2 (normal momentum, 12:05 and 12:10),  you may or may not see a pause or pullback before a final high. In position 3 (12:10 to 12:15), the slope shows a sloppy directional move and probably you will see a sustained sideways move before making a new high.

The trade I made on the AUDUSD yesterday illustrates how I use the angles.  For reasons, I won’t go into here, I was keen to sell the AUDUSD. Figure 1 shows  my entry zone as being the Primary Sell Zone in the potential sideways action. My stop for the trade? Above 0.8615

Figure 2 shows a 15-min chart with Linear Regression Bands. At ‘A’ I had a setup and entry within a zone. But I did not take the trade because Linear Regression Line did not show a decrease of momentum in the (1) position. When the market gave a sell signal at ‘B’ (see Figure 3), we see that the Linear Regression Line showed a decrease in momentum. When the entry setup and trigger came, I was happy to take the trade.

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FIGURE 1 290-min AUDUSD

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FIGURE 2 15-minute AUSUSD

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FIGURE 3 15-minute AUSUSD

Ebb & Flow Management II

BarroMetrics Views: Ebb & Flow Management II

Last night in the S&P provided an great example of what I was referring to in my previous blog.

I was looking for the S&P to hit a minimum target at 1037 to 1019 with a preferred target at 1019 to 1025. This meant that as far as Maximum Extension (1220 to 1044 range), we’d see penetration but non-acceptance below it. I had been short from 1156 and my normal practise is to exit the second third of my position size within the Primary Buy Zone, and hold the last third with a breakeven stop.

On  Tuesday May 25, the S&P had given a buy signal off my favourite setup: the S&P dipped below the previous low, 1044 and ended the day with a bullish conviction bar; the sell-off on Wednesday, May 26, held above the Primary Buy Zone, with the Market Delta showing only light selling control. Usually, I’d have closed my shorts and taken a light long position. Then yesterday on the open-gap up, I’d have used the open-gap rule to add to my longs.

But here’s the point. My Psyche Capital was so shot that I had failed to notice the Buy Signal and frankly would not have closed until the end of trading yesterday. Exiting on May 25 or 26, would have meant exiting at around 1136 to 1137; exiting on May 27, would have seen an exit at 1103. That’s quite a difference.

I'[d love to say my exit on May 25 was due to the fact that I saw the buy. But truth be told, I had exited in ‘night’ session when I decided I had enough trading. And truth be told, there would have been a good chance that I’d have missed the buy signal and held on too long.

I couldn’t have asked for a better illustration of my point.

So what now the S&P? Back to the Primary Sell Zone  1199 to 1183 (basis cash). Of course we’ll need to watch the Death Zone at 1153 to 1132.

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FIGURE 1  13w S&P

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FIGURE 2 18-day S&P

Identifying Pauses

BarroMetrics Views: Identifying Pauses

One of the stronger features of the Barros Swing approach is its ability to identify short-term complex correction boundaries.  To do this, we need to be aware of three tools:

  • The 1-period swing
  • The idea that a retracement of a sideways market needs to be at least 78.6% of the boundaries of congestion and
  • That complex corrective waves will accept beyond the Primary Buy Zone in a downtrend and the Primary Sell Zone in an uptrend.

We identify complex correction boundaries because:

  1. They provide us with entry zones and
  2. Provide us with benchmarks of the short term trend.

A chart will flesh out the ideas:

In Figure 1:

  • Acceptance above 1.2536 signals a complex correction bounded by 1.2562 to 1.2506.
  • In that event, we’d be selling the Primary Sell Zone of the range 1.2562 to 1.2506 [1.2562 – ((1.2562 – 1.2506)/8)] and looking to buy at the Primary Buy Zone [1.2506 + ((1.2562 – 1.2506)/8). 3)].
  •  Non acceptance above 1.2536 keeps alive the possibility of a zig-zag correction which means that acceptance below 1.2506 will lead to further downside

This simple idea has prevented many losses because it allows me to identify the zones where I ought to be looking to trade.

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Figure 1 EURUSD 5-minute

(NB: I don’t trade the 5-minute chart. But it did provide today an example of a classic pattern)

Change in Methodology (II)

BarroMetrics Views:  Change in Methodology (II)

Our trading methodology needs to fit our personality. That being the case, my search for a new approach meant that I would need need to look for an answer among indicators and moving averages. My personality looks for ‘price structure alone’ rather than ‘price structure as moderated by some indicator’.

I had some other requirements: the approach had to be price-based and had to provide a more refined measurement for trade management.

It took a while. But I finally found an idea I could adapt. The initial tests have been excellent. The Expectancy Return per trade is just under 1% of capital. It is unlikely the results will be maintained over a large sample size but even a 50% diminition would be very acceptable.

Those following the Forum-Twitter service were exposed to the idea yesterday when I said that I was looking for a move to 1.3281 over the medium term; but to do that, we needed to see acceptance below  1.3438.

Instead we saw 1.3438 provide support. So,, for now, as long as we do not see acceptance below 1.3438, the probability is we’ll see 1.3594.  From there we’ll need to see whether the EURUSD will turn down and retest 1.3438 or move to 1.3750.

Following on from yesterday’s comment, today I placed a specific day-trading recommendation on the Forum. It will be interesting to see how the idea turns out. And no, I shall not be teaching the support/resistance method – at least not in the foreseeable future. If you are following the Forum recommendations, remember that I look for setup and an entry bar at the zone.

I have some more real-time testing to do. But I am sure that the support and resistance levels add a new dimension to my set of tools. Even better, is there robustness is apparently unaffected in the lower timeframes

Figure 1 is the Daily EURUSD containing only the new levels. I have omitted Barros Swings and MIDAS lines.

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FIGURE 1 EURUSD Daily

Change in Methodology

BarroMetrics Views:  Change in Methodology

Two readers have raised important questions about the change in methodology and timeframe.

The questions will take up a couple of blogs.

I’ll take Joe’s question because that will also answer Peter’s. Joe asks: “I assume that you are now trading with much shorter time frames with more frequent entries and exit( hence more opportunities) in order to generate the income to meet your target.

My question is has your methodology changed- setup, etc , been modified to trade these shorter time frames?

If so in what way have they changed?”

Before I talk about the change in methodology, I need first to address what I believe may be an erroneous assumption.

The first part of Joe’s question seems to associate the shorter timeframe with more opportunity and therefore more profit. But more opportunities can also mean more opportunity for loss. The key question is whether the trader can utilize the opportunities to increase his Expectancy Return [(Avg$Win x Wrate) – (Avg#Loss x Lrate)].

And that brings me to the nub of the problem that has been facing since last year.

I’ll use the S&P as an example but the problem runs the gamut of the instruments.

Figure 1 shows the S&P weekly since the March 2009 lows.  I’d have liked to have used the daily chart but it was far too compressed to illustrate what I wanted to show.

Notice the areas in red, the market was climbing without support of the volume and range studies I adopt. Moreover, if you bring up a Barros Swing chart (Figure 2), you’ll note that the 18-day has not had even a 5-d pull back in the move up since February 2010. Now in a strong market, that’s not a problem. I would treat it as an R2/3 (see Nature of Trends) and I have tools to deal with that type of trend.

But in this case, since the Volume and Range were not confirming the price move, I could not classify it as an R2/3.

So the S&P represented the first problem: where the ‘internals’ I use were not confirming the price structure. A lack of internals usually means a lack of swing structures,  and I use swing structures not only to identify the trend but also to provide change in trend patterns, setups etc.

The second problem was the failure of trades to reach their normal targets – too often, my trades were retracing  before they hit the profit target.

The end result was my Expectancy Return moved below the minimum $0.80 of my Expectancy Return range. I have been here before. The last time was ended around 1999-2000 when for 3-years, I was unable to return a profitable return.

When markets adopt this environment, I have a two-fold problem:

  •  My normal approach fails to identify the change in direction early enough to enter to provide an adequate return when the market changes direction and
  • My stops are too far away so that the profit targets become more than the market is willing to give.

Those were the problems. Tomorrow I’ll deal with the generic solutions.

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FIGURE 1 Weekly S&P

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FIGURE 2 S&P 18-day Swing

The Education of a Trader (4)

BarroMetrics Views: The Education of a Trader (4)

And now we come to the trading plan. This is what most focus on; yet for me while a robust plan is essential, the focus is over-the-top. If you have never made money, then looking for the best-wham-bam plan probably is a waste of time. It would be better to start with a plan of few rules and learn to execute as consistently as possible.

Now I am not going to tell you that you should never vary  your rules. The most recent research shows that since trading is based on subjective probability, our brain will treat trading as an ambiguous event. That being the case, we (as humans) have no hope of being 100% mechanical – unless of course you use the computer to place your trades.

What I am going to say is if you do vary away from the rules, record the event in both the psyche and equity journal. Keep track of your variation trades. Identify what leads to profit and what does not.

It’s difficult to provide a template for a robust plan given that your best one  will be the one that best fits your personality. That does not  mean I haven’t tried. In fact, I have written a series on the subject, with the first in the series at: http://tradingsuccess.com/blog/the-trading-plan-1067.html

At the end of the day, a plan answers the key questions:

  1. Do the probabilities favour the trade?
  2. How do I manage my trades – from initial entry to ultimate exit?

If you answer these questions in a way that meshes with your personality and in a way that provides an edge, you have your plan.

How Do I Set Stop Levels? (3)

BarroMetrics Views: How Do I Set Stop Levels? (3)

This blog looks at the way I manage a trade. As you may expect, my approach is based on firstly protecting my capital base and only then looking at protecting profits. To do this, I use the Rule of 3 and the Expectancy Return Formula.

The Rule of 3 in strongly trending markets will result in a diminution of returns; on the other hand, in choppy markets, it will decrease the losses. In effect I am surrendering maximization of returns in some periods for a smoother equity curve.

The Rule of 3 provides:

  • Exit first 1/3 at a level where the return is twice the initial stop. The initial stop is unchanged.
  • Exit the second 1/3 at a logical target. The initial stop is brought to break even.
  • Exit the last 1/3 when the trader’s timeframe trend changes or when the trailing stop is hit.

The Expectancy Return is the benchmark by which I test my ideas.

I tell my friends and students that so far as a trading plan is concerned,  start your trading career with any plan that has an edge. It need not be the one that will bring you the greatest return – having the best doesn’t really matter until you have some competency in consistency of execution of your risk management and trading rules.

Think of it this way, the type of equipment will make little difference, if any, to a golfing duffer. But to Tiger Woods, the best equipment can be a match-winning  difference. So too with a trading newbie, in the beginning all that matters is we have a plan with a positive expectancy so we can learn to execute consistently the trading plan and risk management rules. Once we develop some mastery of consistent execution, we can go about developing our trading plan.

What usually happens is our mastery of execution and plan development go hand-in-hand. This I think is a more difficult route to consistent success but seems to be the way success occurs among those I have helped.

Once our plan has positive Expectancy Return, the  stats it provides tell us when a profit is a profit and when an open position plus is merely noise.

For example if our trading system has a 30% win rate, we know that to breakeven our average trade needs to return $2.33. Hence, any open profit that is below $2.33, is ‘noise’. So, unless we see some sign that the trade is not behaving like it should, we wouldn’t consider any open profit below $2.33 as being ‘profit’ we have to protect.

Well those our my idea. I hope this has helped those looking for ideas on risk and trade management.

How Do I Set Stop Levels? (2)

BarroMetrics Views: How Do I Set Stop Levels? (2)

Ranadagger asked: “could u please also guide as to when do u put ur stop to breakeven and how do u start trailing the same. how much of paper profits do u protect, when do u decide to take partial profits and when do u take complete profits and run.”

I could write a book on the excellent questions you have posed. Let me try to answer them as succinctly as possible.

Firstly, the answers to the questions are founded on my trading philosophy:

  1. The key principle is the protection of capital through
  2. Consistent execution of my trading strategy and risk management rules. Once that is achieved
  3. Pursuit of superior returns.

I implement the philiosophy from the initial stop. Yesterday I introduced the idea of technical stops with filters. This tool is augmented with:

  • The stats derived from Maximum Adverse Excursion studies
  • The stats derived from the Expectancy Return data and
  • The Rule of 3.

I’ll look at Maximum Adverse Excursion today and the rest in subsequent blogs.

I took the idea of MAE from John Sweeeney but I apply differently.  From memory (I read the book eons ago), John uses the maximum loss. I don’t like since the maximum loss since it may represent a Black Swan event. Instead I use mean and standard deviation.

The idea is a simple one. What we want to know is: what is likely maximum loss I have to endure before the trade subsequently  proves to be a winner?

But rather than define the Maximum Loss in terms of a single loss, I define Maximum Loss as “mean +2 standard deviations” (i.e a theorectical probablility of a 95% occurrence).

This means I need to keep the necessary stats to produce the numbers. But I believe it worthwhile. The stats allow me to finess my stop levels:

  1. If the technical stop is too close, I increase the stop to just beyond the MAE.
  2. If the technical stop is much farther than the MAE, as soon as possible, I look for an opportunity to move my stops to just outside the MAE.

More on this next week……

How Do I Set Stop Levels?

BarroMetrics Views: How Do I Set Stop Levels?

A subscriber to the Forum-Video service asked how I set my stop levels.  In my weekly video and daily updates on the EURUSD, I said, “stops above 1.3525”. But how far above was his question.

The best way to answer that is to say that I set stops beyond a level, which if reached, would render the reasons for the trade ‘null and void’.  So there are two components to my stop setting:

  1. A reason for taking a trade and
  2. A price plus filter. Usually the filter is 10% or 20% of some range.

Take the current EURUSD trade:

Figure 1 shows a potential 5-d Spring Change in Trend pattern which if valid projects prices to a minimum of 1.3848 (18-day swing line change price). Since the current positions were on the basis of a 5-day trend continuation, a confirmed 5-day Spring would negate the reasons for the trade.

So, the next question is: what has to happen for the Spring to be confirmed?

Answer: A bullish-conviction bar above the Primary Buy Zone at 1.3471.

But, a bullish-conviction is not known until the close. If I were to exit on the close of the bar, my positions could be severely under water. On the other hand, a price-stop could easily shake me out and by the end of the day, not provide the conviction-bar I need to see to say that the Spring is confirmed.

So, I have two stops:

  • A stop that is elected on the close and
  • A price stop which if hit, ought to mean that we’ll see a bullish-conviction bar by day’s end.

In this case, intra-day resistance starts at 1.3525 and ends at 1.3567. So, my stop would be somewhere around those prices plus the filter.

Let’s say, for example, I decided that above 1.3567 would be the place because:

  • It is above the bottom of value (natural resistance) and
  • the start if the directional move down.

I’d place the stop above that price and ‘x’ points as a filter.

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FIGURE 1 EURUSD

Gold, March 22 2010

BarroMetrics Views:  Gold March 22 2010

Gold is providing a low risk short.

I see usually see a sideways  market as a Market Profile bell curve. Figure 1 shows how I ‘see’ Gold’s structure. The key levels to watch are 1149.00 and 1095.00

Since the market is in congestion and we are coming off the Primary Buy Zone (1048 to 1063), what should happen after the market completes its formation of the Value Area, is move to the Primary Sell Zone, 1029 to 1230, The theoretical Value Area High is 1143 but there is a spike high at 1149 so I’ll use that price as the top of value. The bottom of value is 1095.

Now if instead of accepting above 1149, Gold accepts below 1095 before accepting above 1149, we can expect to see 1048 breached . Acceptance below 1048 will suggest a move to 1025 to 1028.

The stop for a short below 1098, would be above the high of the start of the directional move down on March 19. Let’s say 1133.7. If we assume that  we get a fill around 1094, we’ll have a risk of about $40.00. Since the pattern suggests a breach of (but not necessarily acceptance below) 1048:

  1. I would exit the first third at 1050 to 1052 and
  2. move my stop to breakeven on the second third as soon as I exit the first 1/3.
  3. The stop on the remaining 1/3 would remain at the initial location.

Normally I would not exit the first 1/3 until twice the value of my initial stop; and after exiting the first 1/3, I would leave the initial stop at its original location on the remaining positions.

I would take a different course on this occasion because:

  1. The Primary Buy Zone is strong support
  2. To get to the Primary Buy Zone,Gold needs to get through a MIDAS support.  While the nature of MIDAS usually means a break below, the breach of MIDAS seems to exact a price; and often after the breach, the market rebounds.

So, since the pattern usually attains the minimum target of breaching the Primary Zone, I vary the 1st 1/3 exit.

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FIGURE 1 Gold Market Profile

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FIGURE 2 Gold 18-day Swing