Video 2 Link

 BarroMetrics Views: Video 2 Link

Here is link to second video: http://www.barrometrics.com/opening-range-swing-system-video-2/

BTW I am not sure what I do that encourages emails rather than comments. Please do post your comments to the video site or this blog rather than send emails. Thank you.

In yesterday’s video, I made a comment that  emotions are a necessary part of the decision-making process. We had a few emails about this – essentially asking for research. 

If you Google “emotions necessary for decision-making process”, you find the research by Damasio, Bechara and others.

Also…..below is a comment by Denise Shull (therethinkgroup). She not only supports the idea we need our emotions to make decisions; she also suggests a device to bring our intuition into play: we imagine how the counter-part to our trade would react.

Unfortunately, that does not work for me – the device seems to cloud my intuition. But that’s me; I pass it on in case it may work for you.

“A variety of research studies conducted in the past decade reveal that great trading stems from qualitative, not quantitative, thinking. Whether watching the brain of someone who is correctly reading price or talking to someone who successfully manages billions of dollars, the researchers find the same things. Market Intuition – a form of people prediction and Risk Differentiation – a form of self-knowledge, distinguish the great traders. 

It’s not that quantitative data is irrelevant. It just doesn’t hold the whole answer. Probabilities are one clue and in fact, even looking at a distribution of possible outcomes produces a qualitative response in the human brain. A normal bell-curve induces a feeling of confidence whereas a skewed curve produces greater anxiety. It’s called anticipated affect and if you think about it, it makes perfect sense.

According to the latest neuroscience, emotion is not only NOT to be avoided, it “organizes our memory and determines our perception” (Brosch, 2012). This means it is a data point worth investigating.

So — how do you develop these qualitative thinking styles to superimpose on your objective, quantitative inputs?

You first accept the idea that you need to. Once you embrace these realities of risk decision making, you work on imaging who exactly is on the other side of your trade or will be on the other side of your future exit? Ask yourself if everyone is seeing what you are seeing, will they see it later or will they not see it at all?

In Risk Differentiation or self-knowledge, get to know your emotional cycles as well as you know your market cycles. This way you can separate your impulsive feelings from your intuitive pattern recognition – and have more of the first thinking style, Market Intuition”.

Ultimate Video 1

BarroMetrics Views: Ultimate Video 1

There will be 4 videos over 4 days, starting today:

  1. Mind
  2. Money
  3. Method
  4. Example 

Here is the first link:

http://www.barrometrics.com/opening-range-swing-system-video-1/

Please do make some comments. This is the first time I have attempted this, and I would love to improve. You will benefit with a improved info next time I do it. But, to improve, I need your help. So, your comments are appreciated.

Thank you in advance.

Now, turning to some emails I received asking:

1) Whether the videos would make Ultimate available

The answer is ‘no’.

The next Ultimate will take place in March, 2015. I want to see, if the massive interest rate hike I am expecting, will come to pass; and if  does, when the hike will happen.

A hike in 2013 may have flow on effects that could affect our costs for running the 14-week event. Hence the reason for postponing when to announce the next Ultimate’s details. 

If you would like to be notified on the details of the next Ultimate, please write to Peter Ow,  peterow@tradingsuccess.com.

2) Whether I would be making the mechanical system mentioned in this series available to the public. 

The answer is ‘I don’t know’, at least at this stage.

Initially, I had intended it as only a bonus for Ultimate, Mar 2015. On the other hand, the emails suggest there is a strong demand for a low hurdle entry method to trading success.

Please give me time to discuss it with my partner, Peter Ow. I’ll let you know by Video 4.

Here again is the link to Video 1: http://www.barrometrics.com/opening-range-swing-system-video-1/

And again, do let me know what you think by leaving a comment.  

 

Videos: Introduction to Ultimate Methodology

Hi!

I have decided to put out a set of 3 videos as a summary on the Ultimate methodology.

I’ll be covering the 3Ms: Mind, money and method in sufficient detail so that all traders should derive some benefit from them.

The videos will be posted on Monday, Wednesday and Thursday. Details  for the videos will be posted on Monday, Sept 29

Emotional Blind Spots II

BarroMetrics Views:  Emotional Blind Spots II

Today, I’ll look at the first question:

if I have a system that makes money, why won’t that guarantee I become wealthy?”.

My answer is having a robust system is necessary but insufficient to deliver a promise of success. 

Trading success is comes from:

Mind x Money x Method

The mind delivers the mindset that delivers the discipline to execute the ‘rules’ of our plan, and to constantly achieve improvement; money balances risk of ruin with optimization of profitability; and method provides the process by which we determine whether the probabilities favour the entry and continuation of a trade.

Notice the multiplication sign – it means that our trading returns are determined by the weakest link in the chain. Normally this will be ‘mind’.

The reason is most traders focus on the the left brain when making trading decisions. And, if you understand the educational context, it’s little wonder. How often in trading have you heard: “To succeed, don’t trade emotionally!”.

The problem is no decision can be made with emotion. This is true even if you are trading a computerised mechanical system. You don’t believe me?

See what happens the next time you computerised computer system hits a deep and prolonged drawdown. I guarantee you that your emotions will be part of the decision-making process. Are you saying that ‘no matter what’, I have the discipline to stick with the system through thick and thin?!

Problem is there are times when you do have to pull the plug (if only temporarily) because the conditions supporting the system have changed. If LTCM proved anything, it proved that risk management sometimes requires we stop trading.

Finally your email indicated you were in a hurry to acquire wealth. You are looking at returns for 50% pa. A word to the wise.  Trading can make you wealthy, but only if you employ the power of compounding i.e. wealth will come in time.

The best traders in the world focus on keeping their drawdowns small relative to their annual return. In trading, a consistent 12% per annum with a maximum drawdown of 4% is preferable to a 100% return per annum with  a 50% drawdown. The latter sails to close to the brink of ruin.

Emotional Blind Spots

BarroMetrics Views: Emotional Blind Spots

I received a very long, and interesting email. The author has asked me not to quote any portion, so I’ll honour the request.

The thrust of the email was to pose the questions:

  • if I have a system that makes money, why won’t that guarantee I become wealthy?  
  • why do so many players of the markets, lose money if there are so many methods claiming to be successful?

Let’s take the second question first. My reading between the lines suggests that the real question is: can I trust the vendors of trading systems?

The short answer, ‘yes’, sometimes. It’s a matter of ‘caveat emptor’.

Undoubtedly, many systems and methods sold have no chance of making money. But, there are many teachers who are providing a valuable service e.g. in my case, I owe a debt to Pete Steidlmayer (Market Profile), a genuine educator; but for his instruction, I may not have achieved what I have.

The bottom line is you need to do your research and determine if the claims made for the system have a probability of being genuine. And yes, there will be times when you will be conned. Get over it. Treat the money spent, and money lost, as lessons learned.

And before, you decide that a course is a con, ask yourself this: have you done everything you can to lean and implement the course? Have you kept written records of your efforts and results so you know you have done all you can to make the course ‘work’?

You’ll be amazed at how many attend a course and then fail to implement it the material in the way it was meant to be implemented.

If I had only one bit of advice to give you: discard your unrealistic expectations of easy, instant wealth. Becoming a successful trader is probably one of the most difficult things you can do. It requires a special kind hard work (deliberative practice); the highest degree of self-honesty and self-awareness and a commitment to constant improvement.

For more on deliberative practice and trading success, Google  “deliberative practice and trading success”. There is a wealth of information available. 

On self-honesty and self-awareness: we are built to project our best image. And so, few are willing to admit that their studies have not brought them the success they desire, admit especially to themselves.

And yet, this admission is one of the first steps to success. Without it, you will probably not look into the causes of your failure; and unless you are aware of the causes, you are unlikely to take the steps you need to take to change ‘failure to success’.

On constant improvement: the trading  environment is constantly changing. Unless you evolve with it, you will be left behind (i.e. if you have been making money, you will fail to achieve the returns you used to achieve). Improvement is not a luxury but a necessity.

If trading is so hard, why not take an easier path?

If the answer were only a matter of returns, I’d say: “in what other profession are 90% (and more) of your competitors so willing to hand you their hard-earned money?”

But, it’s not just about the money….for me trading provides an independence not available in any other field. In trading I am solely responsible for the results I receive. I can’t say that for any other profession.

The first question is more difficult to answer, I’ll deal with it tomorrow. 

S&P 2014-09-24

BarroMetrics Views: S&P 2014-09-24

Figure 1 shows the S&PP threatening to trigger an 18-day Upthrust change in trend from up to down – if we see a bearish conviction close  1988. This close would suggest a move to at least the Primary Buy zone at 1920 to 1909; and normally we’d expect to see the start of the down move by acceptance below 1904.

The 13-week swing change line price this week is coming in at 1894. If we do see a valid 18-day Upthrust, we’d need to watch this price to see if  provides support for a bounce.

It’s a sign of the times that I am not going to take the sell signal. Figure 2 shows why. The FRED AMB is shows no sign of a decline. I’d need to see that occur before changing my current strategy of being ‘long or out.

sp-18d.png

FIGURE 1 S&P cash 18-day Swing

fred-amb-2014-009-19.png

FIGURE 2 FRED

Q&A The Thin Line

BarroMetrics Views: Q&A The Thin Line

Most of the questions can be classified under four headings:

Q1: What is the difference between a discretionary rule-based method and a rule-based method (mechanical system)?

A1: At the most basic level, the difference lies in the addition of one rule for the discretionary rule-based: “follow your trading rules but there will be times when you need not”.

This addition allows for intuition to play a role. The problem is, for novice traders, this additional rule allows not for intuition but for ‘into  wishing’ – they hang on to losing trades long after the used-by date. 

But, the difference can be much greater than merely adding one rule. To understand this difference, we need to be aware that technical analysis can be split broadly into two main camps:

  1. Richard Schabacker. Robert Edwards’ Uncle (Edwards was the co-author of Technical Analysis of Stock Trends). His approach was to categorise patterns and trade the patterns. Thomas Bulkowski has a site that tests the efficacy of patterns, Bulkowski’s Pattern Index.
  2. Richard Wyckoff. For Wyckoff, the principles of how markets operated came first. The model was an extension of the principles. If a model stopped working, the principles provided the answer to the question ‘why’. (NB: although I have used Dr. Gary Drayton’s introduction to Wyckoff, I rate the Wyckoff Stock Market Institute as the best source to secure a Wyckoff Education. Dr Drayton is the next choice).

Most Rule-based systems adopt Schabacker’s approach, very few adopt Wyckoff’s. As a result, most Rule-Based systems lack context, and do run into periods of lon drawdowns. Long drawdowns is one of the reasons I have preferred the Discretionary Rule-Based approach. Now thanks to my friends, Mic Lim and Joshua Fong, I have been able to develop a contextual Rule-based approach.

Q2: Since Discretionary Rule-Based trades are trader-dependent for their results, shouldn’t we expect to see different results for different traders, even if they trade the same instruments and use the same method?

I alluded to the answer in yesterday’s blog.

The question confuses ‘results’ with ”positive-expectancy’. ‘Results’ are the magnitude of the return; ‘positive-expectancy’ defines the robustness of the method.

Results will differ, of course. This is true of even Rule-Based (let’s call them mechanical) systems. The famed Turtle experiment produced a wide divergence of results among the traders. However, if a group of traders execute, with consistency, the rules of a robust method , the ‘expectancy return’ ought to be positive among all the members of the group. 

Q3: Why use stops?

A3: I am not sure how this question arose in the context of the discussion; but, since quite a few asked, I’ll answer it.

Long-time readers know that this issue has popped up from time to time in the blog. Some readers take the view that trading without stops is best. And they tend to equate ‘stops’ with exit strategy.

I take the opposite view.

I believe that you must always have an exit strategy – otherwise, one trade is may wipe you out. (For a more detailed view of my risk management principles see “Routines and Habits IV (B))”.  Figure 1 shows what I mean. The pair happens to be the AUDUSD, it could have been any instrument; it’s a daily chart, but it could have been any timeframe. Position sizes tend to be larger when traders day-trade. Depending on his size, a trader could have wiped out his profits and even his account on just one trade.

I use two types of exits:

  1. A hard stop i.e. a fixed price to exit – once the market hits the price, I exit and 
  2. A soft exit i.e. should certain conditions occur, I exit even if the hard stop is not hit. 

Q4: Would I be willing to make available an introduction to Ultimate?

A1: Not as a blog. But, I am considering a two or three video series. Let me see if I can organise that. I’ll let you know by Thursday or Friday.

exit-strategy.png

FIGURE 1 Exit Strategy

The Thin Line III

BarroMetrics Views:  The Thin Line III

The answer today. Let me first give credit to those in Ultimate who have diligently kept their journals (equity and psych, without which it would have been difficult, if not impossible, to track the reasons for the divergence).

Secondly, this is a long blog; so tomorrow, I’ll be answering the questions submitted in this forum and by email.

CONTEXT

Today, we are looking to identify the reasons why there was a divergence in expectancy returns….divergence in situations where method and instruments were similar.

Note, we are not talking about the results, but expectancy. Clearly results will differ for a variety of reasons. However,  we should see positive expectancy converge – if the method and money tactics are robust, and the traders are executing consistently. 

The givens are: we have a group of trader who……

  • Have a discretionary rule method that is based on the same theories; as a result, the core setups are identical. 
  • Have a set of money management rules.
  • Have a process by which they record their trades which provides the means to make the corrections for constant improvement. 
  • Execute consistently.
  • For the most part, trade the same instruments at any given moment. 

To trace the answer, I found I needed to return to our brain’s hard wiring. One aspect of the hiring is we humans, move towards pleasure and away from pain (i.e. ‘towards life’ and ‘away from death’).  And, it’s more the physical pain we move away from: anything we perceive as ‘pain’ is likely to cause discomfort and anxiety.

When trading we are constantly assailed by:

  • Uncertainty
  • Possibility of loss
  • Possibility of being wrong
  • Possibility of Missing Out
  • Possibility of Failing to Maximise the results of a trade.

And, they all cause cause discomfort and anxiety. Dr. Andrew Menaker calls these Pressure Points.

When we encounter Pressure Points we usually behave in one of two ways: we become aware and accept the discomfort: despite the anxiety, our response is based on reason (left brain) and intuition (right brain). Or, our response is shanghaied by ‘fear, freeze or flight’ (3 Fs) – what I call ‘impulse trading’.

(BTW, an aside……It’ s important to draw a distinction between behaviour resulting from an intuitive response and impulse behaviour. Both are emotionally based. Damasio and others have shown that emotions are essential to good decision-making. Decisions based solely on reason are not possible; and, if even they were possible, the decisions arrived at would be far less than optimal. It’s not emotional trading we need to manage; we need to manage impulse trading).

In short, in the context I described above (i.e. the ‘givens’), it is our response to Pressure Points that determines our results. 

Solution

The studies show that one way to reduce  the incidence of impulse trading is to have a plan that suits our personality. There are two types of plans:

  1. “A”: one with few decision-making parameters where the resulting action is specific e.g. If X happens, I go long with stops at ‘price a’ and a target at ‘price b’. Let’s call this a mechanical method.
  2. “B”: one with numerous decision-making inputs where the resulting action is probabilistic and constant verification is required. 

There is a gulf of difference between the two.  What I found was, those with negative expectancy returns were ‘type A’ personalities using a discretionary rule-based system i.e. their plan and personality failed to mesh. As a result, they constantly made poor decisions, usually involving where to enter and where to exit.

To test the idea that they could alter their expectancy by altering the form of the plan – from ‘B’ to ‘A’, I engage in the first of two tests. In fact, I found that by changing the type of plan,  the trader was able to change the expectancy from negative to positive. I am currently engaged in the second series of tests. 

Recommendations

What does this mean for you?

If your trading is not bringing the results you want. First ensure you have a robust method (positive expectancy), you have a money set of rules (at the minimum  have a set governing position sizing), and you are keeping an equity and psych journal.

Then seek to execute this simple strategy: do all you can to reduce the impact of Pressure Points that lead to impulse trading.  Some ways of doing this……..

1) Assess your personality. Are you better suited to a mechanical system or to a discretionary rule based? If you need assistance for the personality assessment, there are a couple of sites you can go to:

2) make sure your plan and personality mesh. If not, change the format of the plan.

3) Finally do what you can to make your analysis and execution, habitual.

For example, use a checklist for your analysis. Before executing, take a moment to visualise:

  • the trade being stopped out and 
  • exiting the trade at your profit target. 

The aim here is to make the loss and profit a reality in the mind – in this way you seek to exit as a matter of course – when the stop price is hit or the exit conditions occur. 

The Thin Line II

BarroMetrics Views: The Thin Line II

Let’s recap the context:

  • We have a diverse results from the application of a rule based discretionary method. We are talking about divergence in positive expectancy i.e. one group had a negative expectancy and another strongly positive. 
  • Both groups can be said to have executed their trading and money management rules on a consistent basis.
  • Most of the students trade FX. Ultimate has a process for trading the pair with one strong instrument and a one weak one. For this reason, many of the trades were of the same instruments. 
  • Most traded end-of-day.

In short, we have a proven robust method and the usual culprits for the wide ranging results, method, timeframe, instruments, position sizing, consistent execution etc have been taken out of the equation.

Why did I care about the difference?

One of my goals is to make a difference. I felt that if the usual culprits out of the equation, the reason may provide an important stimulus for trading success. If true, the insight may ramifications for each trader. And so, for the reason, the difference and its reasons was also important for you the reader.

Before I start the discussion….one more piece of context.

Ultimate is based on the Wyckoff Model with Barros Swings defining the timeframes. Market Profile ideas add value when in a mark up or mark down phase; the Ray Wave provides a roadmap to the developing structure – this helps identify when the end of a trend or correction is probable.

But above all, Ultimate is based on the Wyckoff idea that the principles behind price action are more important than the model or its patterns. The principles allow us to change the model when conditions dictate; and this principle, in this QE environment, had allowed me to make the changes to my plan to successfully trade the stock market indices.

Monday, I’ll complete the series; and in the blog, reply generically to the questions raised in the emails rather  than provide individual replies.

FOMC II

BarrOMetrics Views: FOMC II

I was going to conclude “The Thin Line” today but the FED decision takes precedence. Besides, I received a flood of emails commenting on the ‘The Thin Line’ that needs to be read. I’ll conclude that piece tomorrow.

Yesterday, the FED tried to have it both ways: it did not drop ‘for a considerable time’ (commit to keep rates low) but did indicate that it would raise rates at a faster rate. It now is looking for a rate rise to 1.25% to 1.5% by end 2015 (instead of a max 1.25% by end 2015). This suggests that the latest rate rise would have to begin by June 2015 and this would be followed by a rate rise at every meeting thereafter to reach these levels. This is because there are only 8 FED meetings a year.

Also note that the FED expects the rate to be 2.75% to 3% by end of 2016. This suggests another 6 rises in 2016.

My question is whether Yellen will have the stomach to keep to this roadmap if the stock market starts to tumble.

The reaction to the FED was pretty much as anticipated:

  • The USD went up (except against the GBP, we’ll need to await the result of Scottish vote  for that decision)
  • The S&P gyrated around and ended with a neutral. To shake the belief that the FED will jump in to save any decline, it appears we’ll need to see clearer evidence that the punchbowl will be withdrawn. Let’s see what happens.