DAX Revisted 2015-03-30

BarroMetrics Views: DAX Revisted 2015-03-30

In ‘The Start of a Heavy 25 Days“, I suggested that the DAX would provide a low risk, high reward trade.

Today the DAX provided an entry scenario.

Figure 1 shows the Ray Wave Count. Wave (2) was a simple wave; this suggests Wave (4) will be complex – the most usual complex is a sideways market. If a sideways structure is to form, we should see the DAX move to the Primary Sell Zone (12,189 to 12220), and then head down to the Primary Buy Zone (11649 to 11619). The minimum retracement would be the 21.4% line, 11747/11748.

A breach of 11177 would invalidate the wave (4) count.

This allows us to prepare for an entry at the Primary Buy Zone, with stops below 11177. With the 13-week swing in a strong uptrend (what I call a R2 Trend), it is difficult to project a reward. I’d deal with that once an entry is executed.

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FIGURE 1 Ray Wave

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FIGURE 2 Sideways Zone

Greece 2015-03-25

BarroMetrics Views:Greece 2015-03-25

The Greece issue may be close to a resolution. Depending on the news source (Reuters 4-20) or Deutsche Bank (4-24), Greece will run out of funds by April 20 or April  9 respectively. What is clear, is we are nearing an inflection point. Who will blink first – Greece or the EU? If there is no comprise and Greece defaults will that mean a Greek exit? And if so, will the exit rock the markets?

We’ll see.

In the meantime, the DAX gave me a buy signal last night. Tonight, I’ll need to see an upside continuation to hold the long position.

The S&P’s pullback was on reduced range and volume. This suggests a retest of the support at 2076. Acceptance below 2039 would provide a sell signal (Figure 1 for S&P).

No blog tomorrow. I am leaving today for Sydney.

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FIGURE 1

The Start of a Heavy 25 Days

BarroMetrics Views: The Start of a Heavy 25 Days

I shall be leaving for Sydney on March 25 and will be in Hong Kong on April 19. In that time, I shall be giving five presentations, two in Sydney, three in Singapore. The two in Sydney and one in Singapore are private events. The remaining are public events. More about those in the coming days.

But that was not the title refers to.

What I was referring to there were the European indices, in particular the Dax. QE in Europe has only just started.  Since the S&P broke out in 2007, we have seen about a 33% rise. We may see a similar rise in the DAX. It’s now only a question of finding an appropriate level to enter where the reward:risk is appropriate to your trading system and capital.

Why Dax rather than other EU countries?

Because Germany has the strongest economy.

How about the S&P?

QE is rather long in the tooth and the FED is facing extrication problems. If I am going to invest in indices, I’d rather switch to a country where QE is only beginning.

What are risks?

Two. Greece may raise its head – it’s simmering in the background. And, the proverbial Black Swan that may cut the sentiment that Central Banks can keep stock markets afloat indefinitely.

FOMC 2015-03-19

BarroMetrics Views: FOMC 2015-03-19

I have to admit that I am full of admiration for the way the FED handled the FOMC decision. It was faced with delivering a result that would:

  • Halt the USD momentum and not spike down the US stock market (i.e. imply there would be no rate rise or at least delay it)
  • Keep their options open to raising rates in June (in case the BLS employment numbers and CPI continued to move up); and
  • Do this by dropping ‘patient’ and still maintain some degree of credibility and integrity.

Did they succeed? You only need to look at the USD and stock markets to know the answer to that question.

Did the FOMC change any trends? Probably not. I rate it as ‘surprise’ event i.e. after a few days, prices will resume the original trend:

  • for stocks grinding up (and threatening to break); 
  • USD up 
  • Gold seeking to make a bottom.
  • Crude Oil – not sure on this one. Before FOMC, it may have been forming a bottom in the 18d – the decision merely gave the process a boost. Let’s see what happens. 

The Path To Success III

BarroMetrics Views: The Path To Success III

In this blog, I’ll consider some ways to build new habits and break poor ones.

First, we need to understand that we need to view formation of habits as ‘moment to moment’ decisions, not a transformational event. To start building a habit, I’d look deeply into the ‘why’?. Ideally, the habit will fit our values.

Secondly, I build the structure of a habit to fit our daily lives. The habit structure is ‘Cue’, ‘Behaviour’ and ‘Benefit’. The cue is the stimulus that raises the behaviour we’d like. The ‘behaviour’ is want we’d like. And, when we execute the ‘behaviour’, we reward ourselves. The ‘cue’ is the key starting point. Find some daily action and anchor that to the desired behaviour. For example, the first thing I do when I arise is check my email. So, I can anchor ‘checking email’ with checking ‘GTC orders’, ‘Open Positions’ etc.

Thirdly, I’d log that habit as a set time on my calendar. I’d stick to the schedule even in a reduced way. For example, if I want to write a blog 3 times a week, and today I am time pressed to this, I’d, at least, write a paragraph.

Fourthly, I’d create an environment that supports the habit. For example with ‘check GTC’, I’d make sure I leave my desk tidy before heading for bed. (Tidiness is important to me).

Finally, I’d develop a bounce back plan. Allow for set backs; learn from them – how not to repeat the drawback, what to do differently next time etc, and reward myself when I get back on track.

So far as breaking an old habit, I’d remember it is more like replacing not breaking. The first consideration is to be aware – discover the ‘cue, behaviour and reward’; then create a new cue and new behaviour to provide the same outcome as the old habit.

The Path To Success II

BarroMetrics Views: The Path To Success II

It’s now established that our conscious decision-making process is limited to 7 items +/- 2. It is also like a muscle:

  1. The more we use it, the more we need to take a rest to replenish
  2. The more we use it, the stronger it gets.

The subconscious, on the other hand, appears to have unlimited capacity. It is also highly energy efficient. Consequently, the more routine activities we can assign to it, the more energy we have it for our decision-making process.

It is for this reason that habits and routines are important.

What sort of activities can we assign to routine and habits?

  • Our daily procedures e.g. checking our open positions, checking our GTC orders, ensuring initial stops are in, market preparation, etc.
  • If we are discretionary traders, using a checklist for our analysis format.
  • Daily routines that assist our decision-making process, e.g. exercise, eating and sleeping.

You get the idea.

How do we form good habits? One small step at a time. The initial step should be so easy we could do it in our sleep. We can then take progressively more difficult undertakings until the habit is installed.

How long will it take to install? Studies show a wide range, 21 to 224 days. The more complex, will take more time; the simpler will take less time. The mean time is 66 days.

The main barrier to forming a habit is to view the formation as one transformational event. We try to achieve the outcome as soon as possible rather than taking a series of moment to moment decisions.

“What you repeatedly do (i.e. What you spend time thinking about and doing each day) ultimately forms the person you are, the things you believe, and personality that you portray”. (James Clear)

More tomorrow…

The Path To Success

BarroMetrics Views: The Path To Success

Trading success, any success for that matter, has two elements:

  • Knowing what to do, and
  • Doing what we know.

In the next couple of blogs, I’ll be reflecting on the latter.

Our age may be called ‘the instant age’ – we look to attain outcomes ‘yesterday’. Not as frequent today as in yesteryear, but the content in ads for trading seminars have changed little – promising instant success for minutes of effort a day.

But what does the science for success say? We’d like to think that success comes down to one eureka moment; the truth is success comes from the decisions we make moment to moment. And it comes from the habits we create to attain the outcome we want. That outcome depends on the person we are and we are that person because of our daily habits.

“What you repeatedly do (i.e. what you spend time thinking about and doing each day) forms the person you are, the things you believe, and the personality you portray”. (James Clear)

In the next couple of blogs, I’ll consider why good habits are essential to success, how we form great habits and lose poor ones.

S&P Update 2015-03-11

BarroMetrics Views: S&P Update 2015-03-11

Before I turn to today’s blog, an answer to Irene’s questions….

———

A quick question about your recent blog post where you’d written:

“Today, we are likely to see a rally; if that comes about, I’d like to see the high capped at 2085 (basis cash), and then on Tuesday, I’d like to then see a bearish conviction bar closing below 2067.”

While I understand the “closing below 2067”, can you explain how you obtained the “2085” cap?
Separately, do you have any updated comments on Gold, following your blog post on Gold in mid Feb?

——————

Figure 1 shows how I came up with 2085. No magic: 2085 is within the 45% to 55% zone of March 6’s range. It also represents resistance (shown with arrows in Fig 1).

I’ll look at Gold next week.

Turning to the S&P. We now have a probable 13-week (quarterly trend) Upthrust Change in Trend pattern. Confirmation would be a bearish-conviction bar, weekly close below 2085. I usually take the trade on a daily close. But, given the S&P closed 44 points below 2085, I’ll look for a rally to sell into after the weekly confirmation. If this is a top, there will be loads of time to get on aboard.

If you think I am showing less aggression than  normal, you’d be right. I am very wary that the sentiment the ‘FED will come to the rescue’ has abated. The strong sell volume (and other indicators) suggest the abatement has occurred. To get me to risk my hard-earned, I want to see the quality of the rally after the weekly sell signal has confirmed.

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FIGURE 1

Top S&P 2015-03-09?

BarroMetrics Views: Top S&P 2015-03-09?

Has the S&P formed at least a 13-week swing top? Certainly the technical signs into Friday suggested it may have:

  • Sentiment
  • Price Action and Volume
  • Time

were all saying, a top was possible. In addition, my non-technical indicators, like the St Louis Fed AMB  (Figure 1), had generated sell signals.

Still, because the belief that is so prevalent – the belief that the Fed won’t allow a US stock market bear to form – I’d like to see confirmation before jumping on the sell wagon. In this case the confirmation is another bear conviction bar without an intervening bull conviction bar that closes below 2067 (basis cash) (Figure 2).

For new readers, here is a definition of  bear conviction bar:

  • a day with at least normal true range
  • a day with at least normal volume
  • an open no lower than in the top third of the true range
  • a close no higher than in the bottom third of the true range (better is a close in the bottom 25% of the true range).

Clearly Friday’s bar was an ideal bearish conviction bar. Today, we are likely to see a rally; if that comes about, I’d like to see the high capped at 2085 (basis cash), and then on Tuesday, I’d like to then see a bearish conviction bar closing below 2067.

The best confirmation will be to see the bearish bar today.

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FIGURE 1 AMB

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FIGURE 1 Daily S&P

Two Interesting Questions

 BarroMetrics Vieews: Two Interesting Questions

An interesting question came in from ‘John’ and Paul raised a great question in comments. I’d like to share my answers.

John is a subscriber to our weekly, free video-newsletter. In the most recent video, I said I’d only short the AUDUSD if it moved above the high at 0.7875 before generating a sell signal (See Figure 1).  In part, John wrote:

“By insisting on a…(break above) 0.7875, aren’t you behaving like the spoilt kid who won’t play unless you get your way?…Aren’t you risking missing out on good trades?”

Well, you could frame it that way.

I prefer to see it this way……….We are trading the right-hand side of the chart; hence, have no idea what the future will bring. We can only assess the subjective probabilities and choose to take the trades that we assess:

  • to provide a high probability of success and
  • an adequate reward to risk.

Without a doubt, I will miss some very profitable trades. Those who turn out to be very profitable, but I have not taken because

  1. I assessed them as being too high risk, and/or
  2. I assessed them as having an inadequate reward to risk .

The fact is I will always miss some trades that, with hindsight, I ‘ought to have taken’.  That is the nature of the game we are playing. It’s the same as choosing to exit a trade only to have it subsequently move in my favour. If we trade long enough, this will happen.

It’s important to remember that as traders, our job is not to be on every winning trade – our job is simply to make money. We make money by having a positive expectancy return. This means keeping our losses small enough so that our profits, given our win rate, will be in excess of our losses.  There are times when this is more difficult than others – what I have called an Ebb State.

In the past few blogs I have shared that when in Ebb, I am better off using structural stops rather than price stops. This strategy has allowed me to turn, in Feb 2015, a negative return to a small positive one. And, this brings me to Paul’s question: what allows us to be wrong about a trade and not lose is time i.e. we can be wrong about the market is likely to do if have time to exit before price proves the trade wrong.

For example, let’s say in Figure 1, I had gone short at .7887 and let’s say that my stop is .8037. After the price action on Mar 3, I decide that the AUDUSD is likely to accept above .7846, and if this happens, it will invalidate my sell setup and trigger. So, I decide to exit the trade.

This trade has given me time to exit. By exiting early, I have missed being stopped out for a loss when being stopped out at .8037. If the AUDUSD had moved directly to .8037 after my entry, I would have less (or no) time to make an early exit and thus less (or no) time to avoid the loss.

Of course, at time of exit, we have no idea if the AUDUSD will break .7846, and even if it does, whether the AUDUD would then move to .8037. We can only be certain of this when it happens.

What prevents me from executing this preemptive exit is fear – the fear that “I’ll exit a great position, only to have the market move ‘humongously’ in my favour BUT I won’t be aboard!” This is the same fear that keeps traders in losing trades. And, it’s the fear we need to manage if we are to become better traders.

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FIGURE 1