Trends II

BarroMetrics Views: Trends II

Let’s first look at the assumption I was referring to in the previous blog.

Before I talk about the assumption, let’s first consider why we seek to label the type of structure an instrument may be in.

For me it’s a matter of providing:

  • a strategy (i.e. a) long – or short, rotation or one timeframe,  b) where do I get in i.e. a zone), and 
  • a way of assessing my risk. 

So, in a sideways congestion and in an uptrend,  may both provide a buy signal, but where we enter and the manner of entry (breakout or retracement) is a function of personality and the market structure.With that in mind let’s turn to the ‘assumption’.

My friend assumed that all trends offer the same opportunity i.e. all trends are the same. In fact, of course, they are not.  If you consider Figures 1 & 2, both may be said to be trending but I’d find the trend in the USDJPY easier to make money in than the AUDUSD. Indeed, if you use a  breakout strategy, you may find that you’d be losing money trading the AUDUSD.

One tool useful in this context is the Kaufman Efficiency Ratio. I don’t use the tool, but students who do use it, have given it 5-star ratings. 

What tools do I use and how to I assess the trend? More on Monday.

———-

Turning to the competition.

The key item here was my friend says he makes money in trends. The question I posed: what was a possible dangerous assumption? The answer I was looking for was ‘one strategy for all trends’. That is, he failed to distinguish between the different types of trends.

The most popular reply (i.e. we can make money trading congestions) failed to take into account that by not trading congestion markets may mean he could be sitting on the sidelines for long periods, and may mean he may forgo opportunities, these would not cause losses. And, for this reason, I would not rate the ‘assumption’ as dangerous.

No one came up with this so, the first 3 answers,  Shui Sing, Ryan and Paul will win a prize. In addition, I liked the answers from Michael, Sorin, Baz and Gassah. So, I’ll send you a copy as well.

Congrats to all winners! The prize has been sent out. Let me know if you haven’t received it.

Trends

BarroMetrics Views: Trends

Yesterday, I was having a conversation with a fellow trader:

I said: “How has it been going?”

The replied: “The FX Markets have been trending, so I have been doing well!”

Coming from the mouth of a competent-successful trader, I’d accept the words at face value; but, if the words come from a novice-less successful trader, I’d say that the words mask an erroneous assumption. And, that erroneous assumption, can lead to trading losses.

So, let me put it to you, what might be the erroneous assumption behind the words? First three correct answers wins a copy of the original:

The Richard D Wyckoff Method of Trading and Investing in Stocks

If you check the link, you’ll find that the course sell for US$250.00 even though copyright has expired.

What if there are no correct answers? Then, the first three posted replies win the prize.

By the way, do not send posts to my email address. Only answers posted here qualify. Competition closes 9:00 am HKST.

A Review

BarroMetrics Views: A Review

I have been locked out of my office since Friday afternoon when there was an overflow on the 9th floor that flooded the lifts. So far, no repairs yet. Only in HK. Of course, I could take the stairs; but I’ll give a miss to walking up and down to my 21st floor.

The lift situation is bit like the markets…..

In the US indices…..

On Friday. the S&P closed above 2058.98 Maximum Extension, but I would not rate the bar as a bullish conviction bar. At time of writing, today’s price action is no more convincing. We have a gap that is either a breakaway or exhaustion gap; at this stage, I’d rate it as a breakaway because of QE (Europe continued jawboning and China joined the party yesterday). But time will tell. (Figure 1)

In the currencies………

For the majors and minors, except for the USDJPY, we see a  congestion market that started around end Sept, early October. The AUDUSD is a good illustration of what I mean. (Figure 2)

In Gold…….

A suggestion of a bottom. There is a possible Spring if we see a bullish conviction. Ideally, I’d like to see a weekly bullish conviction close above 1236 followed by a test of the 1132 low on low volume. Notice that the volume has increased on this run without a corresponding commensurate increase in range – classic ‘Wykoffian’ automatic reaction price action following a possible selling climax. (Figure 3)

Hopefully, we’ll see a resolution of the various possibilities by month’s end.

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FIGURE 1 S&P

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FIGURE 2 AUDUSD

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FIGURE 3 Gold

The Upside of Your Dark Side

BarroMetrics Views: The Upside of Your Dark Side

I just finished a  book, “The Upside of Your Dark Side“, by Kasjdan and Biswas-Diener. The authors argue that in our quest for happiness, our negative emotions have a role to play. If we suppress, ignore or bypass most of our negative emotions we are unlikely to achieve our full potential.

I thought how applicable their thesis is to trading success.

We have fours fears that can sabotage our trading:

  1. Losing money
  2. Being wrong
  3. Leaving money on the table
  4. Missing out

The fours fears trigger our survival impulses and our ‘fight, flight or freeze response’. When under their control we are unlikely to make an optimal decision.

But notice that it is not the ‘fear’ that is the problem, but the response to that fear.

In fact the ‘fear’ may serve a useful purpose. For example, we enter a trade without defining an exit stop loss price or scenario. The market goes against us. We feel fear – fear generated by the fear of loss and the fear of being wrong. But instead of allowing the fear to generate the 3Fs, we exercise our pre-frontal cortex and consider if the movement against our position shows that:

  • Our trend definition was wrong. If I should be selling rather than buying, it means I should exit the trade…
  • Our trade is wrong i.e. the trend definition was correct, but my timing for the trade was wrong. Do I hold or exit? The answer is a function of our money management rules.
  • The movement against our position is ‘noise’ for the timeframe we are trading – in which case, as long as our maximum loss is not hit, we can hold the position.

In this case, we have used the fear to come to an informed decision.

But, the authors’ message go beyond this. They take the view, that if we are to evolve and achieve our full potential, we need to learn from our mistakes. And this involves examining situations in which are uncomfortable.

As a trainer and coach, the one question I am constantly asking myself is: how can I help you attain the success you desire and deserve?

The more I coach, the more the answer is: I have to find ways that will allow you to recognize the reality of your situation.

It’s amazing how many traders hold themselves out as being successful – when their trading statements say otherwise. And, as long as they are only kidding the world, and not themselves, then there is hope they will achieve their dreams. The problem becomes a critical issue when they are not only kidding the world, but also themselves. At that point learning is not possible.

If there is one reason that prevents success it is this: unrealistic expectations of what is possible.

The reality of trading is there is an inverse correlation between our win rate, the timeframe  we are trading, and the avg$win and avg$loss: the shorter the timeframe, the higher the possible win rate and the lower the possible avg$win (higher possible $loss).

End-of-day retail traders I have met walk around dreaming of achieving year after year, 60% and over, win rates. They focus on the win rate as if it were the ‘holy grail’; they fail to ask if that rate is achievable for the ordinary Joe; they fail to ask if the win rate is the main vehicle to making money.  In their quest for it, they lose sight of their goal – to secure long-term profitability; and they jump from trading system to trading system.

If you truly want to succeed, you need to identify what needs to be secured (a positive expectancy), and how you will go about securing it (i.e. find the process that involves ‘mind, method and money’ that works for you). 

S&P – Topping?

BarroMetrics Views: S&P – Topping?

Back from Switzerland – in time to see the S&P breakout to new highs accompanied by below average volume and range – a condition that, until QE, I’d be calling for a change in trend, from up to down. In this QE era, you may hazard a guess – you may suggest I’d say:

 ‘I need to see some sign that ‘The Belief has been shaken; you know, the belief that FED can keep up their magic act and prevent a bear market’.

Well, this time you’d be wrong………Why? Because this time, the Nov 12, AMB Fred Graph, shows we have dropped US$200B from the high (Figure 1). In the past, this type of drop has signaled some sort of top. Moreover, the CAPE system signaled that the Oct drop warned of a topping process. So, in addition to the technical evidence, we have two ‘QE’ indicators suggesting a possible topping pattern.

But, what the QE indicators don’t do, is tell us the magnitude of the correction (assuming it is only a bull market correction). Here where the Barros Swings come into play.

FIGURE 2 shows that a sell signal would trigger a 13-week change in trend pattern (the daily proxy is the 73-period Hart Swing, the black line in Figure 2). A 13-week change in trend suggests a minimum move to the 12-month line turn. Currently this price is at 1715.36 (basis cash).

So, if a sell signal is triggered, the minimum price would be the 12-month line turn price, a price that is currently well below the market. And, the maximum?

Based on previous bear markets, a correction of the 60-month swing trend, would result in a move back to the 1987 yearly bar, 340.45 to 216.88. Those prices sound extreme even to my bearish ears. So, let’s just aim for the 1715 area until a bear market is proven.

What would trigger the sell? A bearish conviction close below 2011. By the same token, a bullish conviction close above 2059 would negate the bear setup. And, this time, unlike other occasions, if a sell is triggered, I’ll be willing to take a short – provided we see rising volume and range on a decline.

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FIGURE 1: FRED Graph

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FIGURE 2 73-day Hart Swing

Geneva, S&P & USD

BarroMetrics Views: Geneva, S&P & USD

What does Geneva have to do with the S&P and USD?

Absolutely nothing! Just happens that I am writing this in Geneva. I must say I prefer the trading hours to those in HK. Awaking at 6:00 or 7:00 am means I have missed the Asian time zone’s trading ( or at least most of it – Geneva being 7 hrs behind HK). It also means that the US time zone ends at 11:00 PM rather than 5:00 am! Very civilized trading hours. 

And speaking of trading…..

The S&P continues its QE grind. Last night, the S&P made a 1.50 point new high on below average volume and range. Indeed, as Figure 1 shows, the breakout has been on below the 10-day average of volume.

Prior to QE, in this situation, I’d be looking for a sell-off. But, since QE, what I’d expect to see is a consolidation holding the Primary Sell Zone at around 1984 (basis cash) before continuing higher.

The other ‘long or out’ strategy is the USD.

On Friday, we has the Non-Farm: BLS numbers were about 10K below expectations but the BLS revised the prior two months up and had the unemployment rate down. Nevertheless, the USD headed South for the night. This price action continued into yesterday’s Asian time zone. The USD then recovered in UK and US trading.

For the pairs I trade, the Primary Buy Zone held where the USD is quote currency (e.g. AUDUSD) and the Primary Sell Zone held for the USD is quote currency (e.g. UDSCAD).

I saw the price action as a ‘normal’ retest of the breakout. Of the pairs, I see the EURUSD and AUDUSD as being the weakest against the USD and the pairs offering the best opportunities for gain with the lowest risk.

BTW I’ll be home next week so publication of the blog will be back to normal.

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FIGURE 1 S&P

QE Ended?

BarroMetrics Views: QE Ended?

Probably not because the markets know that while the US$85B per month has stopped, the funds created by QE are being reinvested and that is still being made available. In addition, judging from what the Yellen has said, it may be end 2015, before we will see a rate rise.

In addition, for FX traders, we now have the EU and Japan all continuing with their QE.

It seems to me that we now have a trending US$ and a trending US stock market – both up. The only fly in the ointment is a Black Swan event that will deflate the belief that FED action can forever postpone economic reality.

So, until that happens, my strategy for both the US$ and the S&P is ‘long or out’.

The US trade is still in its infancy. You have a chance to get on-board by selecting a US$ pair of your choice. The various currency strength meters will help you decided on a pair. Just Google ‘currency strength meter indicator’ and choose one that you like.

Single Most Important Reasons for Success III

BarroMetrics Views: Single Most Important Reasons for Success III

A reader took me to task for my grammatically incorrect English. True enough – strictly speaking you can’t have ‘single most important reasons….”.  But, on this occasion, allow me some latitude. There are two reasons; but both are so joined at the hip that they form a single most important.

In my last blog we saw one-half of the equation. Today, we complete the second half. Think of persistence as the ‘motivator’ and today’s quality as the ‘actor’.

The second half is ……’self-honesty’. Now, we all lie for myriad of reasons; but in trading, self-deception is  deadly sin. For a start, unless we face the reality of our results with respect for reality, we will never progress – we will be doomed to repeating the same mistakes, over and over again, expecting but not attaining different results.

And, self-honesty goes deeper than that. We need to identify the crucial characteristics of our flawed actions and change those – not just change the surface details. To explain what I mean, let me tell you about John.

John is willing to invest time, effort and money to become a profitable full-time trader; yet despite his best efforts, success eludes him. He came to me seeking  solution. When we examined the courses he had taken, they all had similar characteristics:

  • grandiose results – consistent ROI’s of 100% of more
  • most offered ‘success without a learning curve’ 
  • most offered success for mere minutes a day or week. 
  • few spoke about position sizing and the need to keep equity and psych journals.  

Interestingly when we outlined a series he had to take with one of the more realistic courses he purchased, John decided to invest in yet another ‘get-rich’ scheme. The last time we spoke, he was still searching.

John certainly has perseverance; but perseverance without self-honesty as a guide leads to fruitless actions.

The great thing about trading is you have an in-built bullshit detector – your results over a large sample size. If that is in the red, you need to identify what needs to be changed, and then take the action necessary to effect the change. And you need to keep taking remedial actions until you find a course of action that delivers the results you are seeking.

So, you are in the red? Are you keeping a psych and equity journals for all your trades? If so, what trades work? Under what circumstances? If so, what trades don’t work?  Under what circumstances? What actions will you take next? Etc…..etc…..

In the next blog we’ll sum up why so few succeed and why so many fail.

Single Most Important Reasons for Success II

BarroMetrics Views: Single Most Important Reasons for Success II

There are two ‘single’ most important reasons……the first is an unwavering commitment to do whatever we need to succeed. Some call this ‘drive’, others call it ‘persistence’ ….whatever we call it, it means:

  • Never giving up  the goal (i.e. the end remains constant); and
  • Taking the necessary consistent action that leads to success. (i.e. taking the necessary means to attain our end. The means can and do change).ki

Trading success does not come easily. From first hand experience, I can say that success requires foregoing money, time, effort and most of all, psychological comfort. I placed my first trade I the late 60’s and sold my legal practice to become a full-time trader in 1980. The start of my consistently profitable years was 1987. In between, I lost a ton of money and more…

Luckily for me I had a fantastically supportive wife – both in terms of providing moral support as well as financial. For my part, I kept trying – changing what wasn’t working, keeping what was.

It was  a long, hard road. If I had known how hard, I may not have embarked on the adventure, and I would have been so much the poorer as a result.

Most successful traders have had similar journeys (for their stories a good read is Market Wizards); indeed, many who have been recognized for their successes outside the trading arena have travelled a like road – Stephen Hawkins, Walt Disney, etc…..

What distinguishes those who have succeeded and those who have not is this quality of total commitment AND…….more in next blog.