Boundless 2 – Structure

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BarroMetrics Views: Boundless 2 – Structure

Success in any endeavour requires a structure, a repeatable process that over time garners the results we week. In endeavours other than trading, some or all of the structure is externally driven. Trading is the only activity I know of where the structure is solely internally driven.

So what does this structure look like?

The best one I know of, at least at this stage, is the ACT model (Figure 1). Yes, I have written about it on more than one occasion – just search for ACT, and you’ll see the various entries. So, I won’t go into the model here. What I’d like to do is to consider the question: why is it that although we know the model helps us achieve our trading goals, we fail to execute its practices?

Among the participants of UIII, almost all have completed the left-brain aspects – they have completed the value elicitation exercise, they have formulated their SMARTER goals.

Where I see resistance is in the daily revision of their goals, and in the ‘right-brain’ aspects:

  • Daily mindfulness exercises or meditation.
  • Applying tools to ensure conscious awareness of when diffusion is required.
  • Learning to accept (intellectually and emotionally) the realities of the market –
  1. To win, we need to have a probability mindset.
  2. That risk and loss are an integral part of the game.
  3. The degree our trade preparation and trade management are effective is the degree to which we will be successful.
  4. To be aware of and manage our Default Futures
  5. Finally to prevent our hard-wired fight, flight and fear responses from taking control and sabotaging our decision-making process.

It’s important to note that I use words the ‘3Fs’ and not ’emotions’. The distinction is intentional and necessary.

The works of Antonio Damasio and others have clearly established that emotions are necessary for optimal decision-making. It’s not our emotions but the 3Fs that are the enemy.

And the best way to do that? My solution: accepting a state which I call ‘being comfortable with discomfort’ – with the key word being ‘accepting’. We can feel the discomfort, but our actions need not be guided by it.

So, if you feel your results could be better, have you looked into ACT? And if you have read or talked about it, to what extent have you put its ideas into action?

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FIGURE 1 ACT MODEL

Boundless

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BarroMetrics Views: Boundless

The market’s greatest gift – the reason why I love trading so much – is also its strongest curse: the market offers boundless opportunity for profit and loss. We, and only we, decide whether this trade will be a profit or loss.

Think of it:

  • Who decides when to initiate a trade? We do.
  • Who decides when to end a trade? We do.
  • What do we need to make a profit? We need only buy at a lower price than we sell.

Success is dependent only one person – we or me. And to succeed, we need to design a set of rules.

The first reason we need to create rules is to protect us from the damage we can do to ourselves (Money). The second is we need a set of rules to guide us towards the consistent success we all desire (Method).

Most newbies focus solely on finding the system that generates profits without loss – without realizing that losses are the entry fee to the game of trading profits.

And even if we have a Method that makes money over a large number of trades, human nature is such that we only have to strike a series of losses for us to stop executing consistently.

Now add to that is the knowledge that  our Method may no longer be operational under current market conditions and you have an understanding why 95% of traders fail.

So how do attain the success we seek? More tomorrow……

Is the US Stock Market Topping 2?


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Is the US Stock Market Topping 2?

I don’t normally post on Fridays, but the ABM was just released, and I figured that some readers may want an update.

In “A Warning: US Stocks Topped?”, I wrote that the St Louis Fed Asset Monetary Base could give us an advanced warning of a US stock market decline. I said we needed to see two ‘consecutive declines in the AMB’.

I have placed ‘consecutive’ in parentheses because I discount small one-period rises – like the one in Figure 2. If at the next reading, I see another strong move down, I’ll treat the two declines as ‘consecutive’ despite the intervening small rally.

Let’s see if the next release throws light on the picture.

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FIGURE 1 St Louis Fed AMB 2016-10-26

No Reason 2

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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.

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FIGURE 1 USDCAD 290-min

 

 

Stuart McPhee

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BarroMetrics Views: Stuart McPhee

Tomorrow I’ll conclude yesterday’s post. Today a worthwhile detour.

In our continuing series on what it takes to succeed as a trader, I recently interviewed Stuart McPhee. I first

I first met Stuart when NextView was conducting events throughout SE Asia. Great guy and knowledgeable. If you’d like to know more about him,. you can go to his site at:

Who is Stuart McPhee?

Here’s the link to the interview:

What Trading Success Requires

 

No Reason

noreason

BarroMetrics Views: No Reason

One of the very valuable lessons I learned from Pete Steidlmayer is I should have a reason for every trade, every entry. And when that reason is no longer viable, I should exit.

Today, the USDCAD provided a classic example of his teaching as well as illustrating why the hours 4:30 am to 7:00 am HK (16:30 to 19:00 EST) has become a dangerous time.

Let’s first consider the rationale behind the ‘dangerous comment’.

I must admit that it’s more a suspicion than proven stats. But, the ‘suspicion’ has been serving me to good stead.

I first made mention of ‘pattern’ in “Slow, Very Slow“. I then brought it up again in “Defended Levels“.  Today, we saw it in the USDCAD.

So, what’s the pattern? It tends to differ from pair to pair. But, its essential conditions are:

  1. A strong directional move between 16:30 and 19:00 EST; and
  2. A range that in a few minutes (5 to 60) that equates to at least 80% of the mean.

I was looking to enter the USDCAD. Nowadays, I ask: “are there any DPs (danger patterns) I ought to be aware of?

Just as well I asked. Figure 1 shows the pattern. I have used the 290-min so as to be able to show the prior occurrences; but, the characteristics are best seen in a 30-min or lower timeframe.

Figure 1 shows the pattern. I have used the 290-min so as to be able to show the prior occurrences; but, the characteristics are best seen in a 30-min or lower timeframe.

There were two occasions when the USDCAD  had had a daily range of less than 50% of mean coming into the end of the day. One each occasion, the pair spiked to new highs and then…….

……….moved down to at least 80% of mean range. Then, over the next few days, the USDCAD rallied back to the breakdown.

There was one occasion (09-21) when the initial range was larger: 84 pips. I took that day to be the start of the ‘trial’ for those trading the pattern to see if it had a real-time edge.

Today I saw the pattern affect my trading. Going into 17:00 (EST), the range was 33 pips (mean is 120). The pair then pushed to new highs followed by a drop of 116 pips in 90 mins. (Figure 2). Today though, the rally came almost immediately.

The USDCAD is now back to where it was before the breakup and breakdown.

Turning to the ‘no reason’ aspect of this piece – tomorrow……

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FIGURE 1 USDCAD 290-min

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FIGURE 2 USDCAD 30-min

A Warning: US Stocks Topped?

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BarroMetrics Views: A Warning: US Stocks Topped?

Figure 1 shows the warning: The St Louis Fed Asset Monetary Base has broken below the previous low point. In the past, if we saw two consecutive closed below a significant low, it would suggest that the deposits, currently with the St Louis Fed, will flow into Main Street. (The next reading is due around Nov 4.)

Should that happens, we can expect to see inflationary pressures rise about three months after the flow began. So, inflationary pressures should be seen, say about February/March 2017. This date accords with my work: we’ll see a market top in the last quarter of 2016 to the first quarter of 2017.

Where are we then on the rate rise scenario?

We can expect to see a rate rise in December in 2016 with a FED promise of “measured rises in the future – depending on data.”

The markets seem to have taken the view that once the rate rise in Dec 2016 is out of the way, there will be only one more rise in 2017, if that. (see for example, “Fed Forecasts See Lower Rate Path In 2017, 2018.”

An unexpected increase in inflation projections will cause the US stock market to tumble and USD to start a strong rally because the projections will suggest a more rapid rate rise.

The questions raised will be:

  • What will the FED do if US stocks head south?
  • And, will its action, given the deficit, be able to stop the bear market from gathering a head of steam.

Let’s see.

2016-10-21-slfr-ambFIGURE 1 ABM

Defended Levels?

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BarroMetrics Views: Defended Levels?

Figure 1 does not do justice to the move in the GBPUSD on October 7, but it gives you some idea. We saw 969 pips in 10-mins.

Let’s place the 969 into perspective. Ar the time, the average weekly range was around 250 to 320 pips; and the average monthly range was around 490 to 620 pips.

So, in 10-mins, we saw a range that would normally take over a month to attain!

Naturally, this caught the eye of the press and we saw ‘blame’ apportioned to a French comment about Brexit to an algo’s ‘fat finger’.

But, for me, an even more noteworthy event occurred yesterday – we saw a mini-October 7 move. There was a 155 pip move in about 30 mins. That’s a little more than the current average true range of 135 pips.

Apart from providing for a fab day trading opportunity, the price action is the preliminary confirmation of the need to change my idea for trading the GBPUSD. Until now, I have been shorting the GBPUSD at designated levels with a great deal of success.

October 7 and 12 suggest that it’s time to reassess. If my birthday celebrations don’t get in the way, I’ll discuss the new strategy tomorrow; if they do, I’ll blog Monday.

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Figure 1 GBPUSD 10-min

Slow, Very Slow!

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BarroMetrics Views: Slow, Very Slow!

My post this morning to the Ultimate Facebook Group (closed group) Page.

Too slow! I was way to slow!!!
I had 3 minutes to secure an exit at 1.1900 or lower for my GBPUSD short.

But failed to react in time to place the limit order – a market order would have ensured a poor fill.

The buy stops I was counting on to move the GBPUSD – in case of a bullish USD NFP – are now gone. I have just placed staggered orders to exit from 1.20810 to 1.17570, probably won’t be reached, but, I’ll leave them, in case NFP is favourable – but see last paragraph. Orders are good for today.

Stops now down to 1.26370.

The structure of the GBPUSD, short-term, has changed. The stops below the price action are gone, at least for the moment. Given this, to continue moving South, the GBPUSD needs follow-through news from the NFP. Even a neutral figure will probably send the pair North.

Starting at 6:00 PM HK time, I’ll be looking to exit 25% before NFP, if I can secure prices below 1.2150 i.e. I’ll be amending the limit orders I currently have in place from 6:00 PM HK

I attach a chart of the price action from my trading journal.

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FIGURE 1

 

Hurdles!?

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BarroMetrics Views: Hurdles!?

Unsuccessful traders face two major hurdles to their success:

The first I first learned from the late Mark Douglas, the Four Fears:

  1. The Fear of Missing Out.
  2. The Fear of Leaving Money on the Table.
  3. The Fear of Being Wrong, and
  4. The Fear of Losing Money.

Insidiously, the four fears set us up for failure. Imagine this: “We’ve just missed getting long by a tic or two. It then immediately roars up without us. We sit there stunned as the market keeps moving parabolically up – a humongous move and we are not aboard!”

So, the next time, with this memory fresh in our mind, we just jump in ……sure enough, this time, the trade goes against us, and we suffer a larger than normal loss.

In both trades, the market triggered at least one of the four fears. In the first, the fear of losing money and fear of being wrong and in second, the fear of missing out.

The second hurdle:

  • Seeking to control what is beyond our control – usually the outcome of a trade; and
  • Ignoring to manage what is within our control – usually our behaviour.

Successful trading requires a merging of our intellect and emotions – that’s the Holy Grail of trading – the road to profitability. But, newbie traders instead focus on a mythical holy grail method that does away with losses. The claims in my email inbox to the contrary, no such method exists (and if it did, would it be sold to you?).

Consistent profitability comes from producing a win rate x average dollar win greater than a loss rate x average dollar loss. And, we attain this positive expectancy when:

  •  we have a method that possesses a statistical edge,
  • marry the method with a money management approach, and
  • execute it on a consistent basis.

Pete Steidlmayer’s success equation remains as true today as when he penned it:

Market Understanding x ‘YOU” = SUCCESS

So how are you the ladder of success? Are you overcoming the two hurdles? If so, how did you do it? Care to share?