Essential Thinking and Success 3

BarroMetrics Views: Essential Thinking and Success 3

Today I want to look at ‘Subsequent’ Trade Management i.e. how do we manage trades once they have started to become profitable.

The strategy has to be different for individual traders – the approach depends on our trading stats and personality.

My philosophy is best expressed by Trader Vic in Principles of Professional Speculation. In order of importance:

  1. Preservation of Capital
  2. Consistent Profitability
  3. Pursuit of Superior Returns.

As a result. I employ different trade management strategies when in Ebb Stage (than when I’m in Flow). When in Ebb, I take profits more quickly, and I am less patient when prices go against me.

For example, on Monday. May 15 I bought the GBPUSD at 1.2907. After rallying to 1.29560, it retreated to 1.28908. I exited the position at 1.28997. It’s now trading at 1.29618.

Any regrets at the early exit?

Nope: the only way I’d have captured the current move would have been to hang in. And, my stats show doing that in Ebb Stage, would produce a drawdown of between 15% to 21%.

Executing the current strategy keeps my losses tiny – I’m effectively flat until I have a winning month or two. But when I do have a winning run, my profits don’t have to chase losses. Applying this approach, I had my second best year in 2016.

Essential Thinking and Success 2

BarroMetrics Views: Essential Thinking and Success 2

Carrying on where we left off in yesterday’s blog.

Most retail traders ignore the next Essential – and it’s easy to understand why. When losses are viewed as unacceptable pain and profits as desired pleasure, trade management is seen as something to be ignored. Here’s the quandary trader’s face:

If I exit a position, and then it goes my way, I’ll feel bad. If I take a profit and the trade continues making money, I’ll feel bad. 

If I don’t exit a position, and I lose even more money, I’ll feel bad. If I don’t take a profit and the trade then reverses, I’ll have left money on the table, and I’ll feel bad. 

It’s damned if I do, and damned if I don’t.

To act on this Essential, we need to accept that losses are inevitable. I always dislike to lose money, but I accept the loss as a necessary consequence of doing business. With that acceptance, we can turn to a trade management strategy that best suits our personality and available time.

For me, I prefer to take small losses (with the risk of missing the occasional big profit). And, since I am a full-time trader, I can manage exits on an intra-day basis.

The result of the strategy is: most of my money is made in a month or two. The rest of the time my results tread water. The strategy calls for exiting on two levels:

  • a ‘soft’ stop – a situational exit. For example, if the trade fails to do ‘x’, I’ll exit immediately, and
  • a ‘hard’ stop – a price stop, placed in the market. If the price is reached, I am automatically out.

Figure 1 shows a swing strategy I employ:

  • This is a momentum trade. I buy on stop on the expectation that by day’s end, I’ll be in profit.
  • My ‘soft’ stop: by day’s end, the trade must not be in loss.
  • I took two trades both at the same price 123.97. The first I exited because, at day’s end, the EURJPY had failed to follow-through. I took the trade again the next day.

An alternative strategy is the Buffett type approach: we exit when the reasons for the trade are no longer valid. I know of some traders who are very successful using this method. But, it’s not for me. I’ve seen too many wipeouts to be comfortable with it

More tomorrow…….

FIGURE 1 60-min EURJPY

 

Essential Thinking and Success

BarroMetrics Views: Essential Thinking and Success

What is Essential Thinking? Stripping down a concept or activity to its core components.

In trading, for example, what are the essential components?

The core objective is to make money over a large sample size. How do we do that? In two ways, via

  1. our win rate and
  2. the relationship of our average dollar win to average dollar loss. The larger the skew to the win, the more likely it is we’ll make money.

There is an inverse relationship between the win rate and dollar win: the larger the win rate, the more likely it is our dollar win rate will drop. For example, the highest win rate tends to be among algo traders, the majority of whom, tend to be scalpers (or at least very short term traders).

The longer the timeframe, the more difficult it is to eliminate losses. Focusing on reducing the average dollar loss is probably a more worthwhile endeavour.

So, the essentials for the longer timeframe trader in his quest to make money from his trading is to have a positive expectancy. To do this, he’d be better off focusing on reducing the average dollar loss.

How to do this?

Well, first off is to have a set of rules for both our Method and Money – then to ensure we execute our a high degree of consistency. Consistent execution (provided we keep psych and equity journals) provides the data for improvement.

Our Money rules provide us with our optimal position sizing. My ideas here are perhaps different to most. I adjust my position sizing according to whether I am in Ebb, Normal, or Flow State – with increased size during Flow and decreased size during Ebb. Within the State size, I also increase and decrease my size depending on the setup I am using.

For example: My normal size for FX is around 2M. But, when in Ebb State the size drops to no more than 600K. So, my best setups in Ebb State will carry 600K; but, different setups will have different position sizes. It’s important to track the effects of adjusting the size. I do this by keeping accurate records and doing ‘what if’ scenarios. Here Edgewonk is very helpful.

Essentials so far:

  • Our objective is to make money over a large sample size.
  • Consistent execution of our Method and Money is a must.
  • To optimise our ROI, we need a set of position sizing rules. I prefer to vary my rules according to firstly my State and then my setup.
  • Journal keeping is essential because it provides the assessment data.
  • We also need……

More tomorrow

The more things change, the more they stay the same

BarroMetrics Views: The more things change, the more they stay the same

Flashback: When I first started trading some 45 years ago, a very popular seminar was doing the rounds. The promoter promised ‘no loss trading’. His strategy called for ‘hedging’ a loss. By that I mean, you would take the side of the open position and hold it as an open position.

For example, I sell the AUDUSD at 0.7380. The pair moves up, and at 0.7410, I buy. Effectively that’s a loss of 30 pips. Instead of taking the loss, I hold open positions of short at 0.7380 and longs at 0.7410.

At some point, I lift the ‘hedge’ for one leg (usually the one in profit) and look for the other to retrace to breakeven. In Figure 1, the hedge is created in the ‘recover zone’: we have bought at the buy level and sold at the sell level. The market moves to the Profit Target, and we lift the buy leg. When the market moves to at least the recover zone, we lift the sell leg, thus allowing the trade to reduce the loss or to even breakeven on the trade.

I’ve done countless stupid things when trading, but accepting the ‘hedge’ insanity is not one of them. The fact is when you have a ‘buy’ and a ‘sell’, you have a closed postion, period. Moreover, when you ‘lift’ a leg, you are, at that point, instituting a fresh trade. To think otherwise is to engage in a self-deception of massive proportions! For example, when you lift the buy leg in the example above, you are in fact going short at the new sell price.

Flash forward: The insanity continues.The

The other day I found that MT4 does not permit part exits of open positions, unless you use a market order – which means we need to be sitting in front of the computer to exit part of our position.

BUT MT4 does allow hedging!

Now if there were a demand for partial exits, I’d expect MT4 to provide it. The fact that it does not, but does allow for hedging, tells me much about the way retail trading is being conducted. No wonder over 90% are losing – they refuse to accept that losses are an integral of trading. As traders, our only choice is to limit losses; we cannot eliminate them.

FIGURE 1 Hedge Strategy

Comey Circus

BarroMetrics Views: Comey Circus

It’s impossible to ignore the circus events posing as US politics. The problem is the ‘circus’ has the possibility of impacting market volatility.

Let’s see if we can take an objective view of the situation.

There is no doubt Trump has the authority to sack Comey UNLESS the sacking is for reasons of self-protection or self-aggrandisement. What do I mean by that? If it is subsequently established that a reasonable man could infer that the sacking was Trump’s attempt to block or hamper the FBI enquiry into possible Russian links with Trump’s staff, that would probably constitute grounds for impeachment.

Trump detractors argue:

  1. The dismal was due to the FBI’s investigation of the Russian connection, and not for the reasons stated in Roenstein’s memo recommending dismissal. (Figure 1)
  2. They point out that had the real reason been the handling of Clinton’s email server, the dismissal would have come once Trump became President.
  3. There are reports “A longtime friend who talked to the President over the weekend described him as “over Comey investigating the Russian meddling and not investigating enough the leaks from the White House”.

The fear is not the dismissal but that the replacement will kill the FBI investigation.

  • Trump supporters argue that:
  1. Trump acted within his constitutional powers
  2. His failure to sack Comey earlier was because having sacked Yates, Sessions need to be approved before a move could be made against Comey. The matter was further delayed when Sessions had to recuse himself from the investigation. It was only when Roenstein was appointed that Comey could be sacked.
  3. Comey brought the sacking upon himself through his poor performance at the Senate testimony on May 3. Moreover, he refused to preview his testimony with Trump.

If we bear down on the essentials, we are left with this picture:

  • The FBI is investigating the Trump team (and perhaps Trump if the evidence leads there)
  • To date, the FBO has not disclosed any evidence that the Trump was involved.
  • In an ongoing investigation, the FBI seldom reports on its findings, doing that only when it concludes.
  • It’s a convention that ‘justice must not only be done but must also be seen to be done’. Sacking the head of the FBI at a time when there is an investigation that may link you and your staff to a wrongdoing breaches that cannon.

All the rest is fluff and smoke. Trump did the wrong thing by sacking Comey at this time. Let’s see if he makes the next error – appoints a head who puts an end to the Russian investigation.

Roenstein memo

FIGURE 1

Impact of French Elections Results on EC

BarroMetrics Views: Impact of French Election Results on EC

The French elections are over. With Macron in place, can we say that Frexit is dead and buried? After all, the pundits say that one of the reasons he won was because the French want to stay in the EC.

It seems to me, the threat is there – just dormant for the moment – ready to raise its head unless Macron delivers on his promises. But, that is easier said than done.

Let’s have a look at the challenges facing him.

Firstly, his party, En Marche, needs to win enough seats in the elections on June 11 and 18 to pass his program. The first poll by Opinionway suggests En Marche will not win an outright majority and will need a coalition to govern – casting doubt on whether Macron can deliver.

Opinionway projects:

  • 240-286 for En Marche
  • 200-210 for centre-right Republicans and their allies UDI
  • 15-25 for Le Pen’s NF and
  • 28-43 Socialist Party (down from the current 280).

Secondly, he has promised to improve the French economy. Two of the fundamental planks are:

  1. Reducing Government expenditure from the current 56% of GDP. Here he’ll face resistance from the far left and far right, the Unions and some politicians. To date, all attempts to slash spending have been defeated.
  2. Persuading Merkel that his demand for less austerity is a request by a fiscally responsible state and not one from a spendthrift nation. To do that, he needs to reduce Government spending.

The internal challenges are linked, and unless he can overcome them, the door is there for a Frexit party to walk in 2022.

In the meantime, the EC has to face the German elections on September 24 and the Italian elections, possible in 2018.

For traders, those dates are a long way away. So is the EUR likely to move North or South against the major currencies? Yesterday’s blog, “Impact of French Election Results on ECImpact of French Election Results on EUR” set the short-term picture. Let’s see which way that goes before we guess the longer-term outlook.

Impact of French Election Results on EUR

BarroMetrics Views: Impact of French Election Results on EUR

I was wrong: I thought Macron’s win would give the EUR one more up day. Instead, we saw the currency head South from the time my platform opened for business.

So what now?

Turning first to the technical aspects. I’ll use the EURJPY as a proxy for the EUR complex.

Figure 1 shows the 12M Swing. I see this as a Market Profile pattern seeking to establish a sideways congestion between ‘A’ and ‘B’. The current price action bounded by ‘a’ and ‘b’ is seeking to form the congestion’s Value Area by establishing a swing low at ‘b’. When complete, we’ll see a move to ‘A’. But, an acceptance below ‘b’, suggests at least a retest of ‘B’ and perhaps its breach.

Figure 2 shows the 18-day price action. You’ll also observe the gap created following the first round French elections; you also see that the Primary Sell Zone of ‘c’/’d’ held yesterday’s move south.

A bearish conviction close below 122.93 will suggest at least a test of the 114.84 to 116.00 Primary Buy Zone and probably its breach. A bullish conviction close above yesterday’s high (124.48) suggests we will see a test of ‘A’ in Figure 1.

Tomorrow, I’ll consider the challenges facing Macron since his success or failure in meeting them will impact the survival of the EC.

FIGURE 1 12M EURJPY

FIGURE 2 18d EURJPY

French Voting Turnout Favours….?

BarroMetrics Views: French Voting Turnout Favours….?

Tracking the numbers voting I read that the turnout so far is said to be the same as the first round. If so, the turnout favours Macron.

So what can expect from a Macron win?

May 8: we should see a strong rally in the European Stock indices, especially the CAC and Dax.  Will the rally continue into next week? I am not too sure – indeed, I’d say it’s only a 50-50 bet that it will. Here’s problem as I see it.

Macron (or Le Penn) does not have enough seats in the legislature to carry out his policies. Yet, the markets have been behaving as if a Macron victory will guarantee reform. (See Figure 1 DAX Daily). It seems to me we’ll probably see selling pressure coming into the European indices after Monday. If the selling does come in, the probability is we’ll see a retest of 12000.

What about the EUR pairs? Similar story: strong rally Monday, followed by a break possibility.

So, the safe trade is long EUR pairs and European Indices Monday. Then monitor to see if a sell signal transpires.

Figure 1 DAX Daily

Backfire Effect

BarroMetrics Views: Backfire Effect

I received a couple of emails and one comment against my assertion that Macron would probably win the French Elections. Before I comment, I thought a brief excursion into the ‘Backfire Effect’ would be in order.

“The ‘backfire effect’ is a name given for the finding that, given evidence against their beliefs, people can reject the evidence and believe even more strongly” (Rational Wiki Backfire Effect).

Can Le Pen win? Of course. But, as a trader, I would not be taking a position on her success. Here’s why:

  1. She failed to win the first round, even though she had the best conditions for her campaign, viz, the terrorist attack just before the voting commenced.
  2. French polls, unlike the US and UK, have been remarkably accurate.
  3. Based on their findings, Le Pen can only win if there is a 50% abstention rate. While possible, the rate is unlikely. The polls have the rate at 25%, in which case, Macron will win.

So how am I going to the elections?

I’ll be focusing the EURJPY – win or lose for Macron, this pair should offer opportunities. But, I’ll need to see the result and wait till around 9:00 am HK before I am willing to devise a strategy.

Non-Farm 2017-05-05

BarroMetrics Views: Non-Farm 2017-05-05 

As expected, the FOMC meeting left rates unchanged. In fact,  in its statement, it said little outside expectations. As far as market reactions go, it was a non-event.

The next event for ‘inflexion week’ are the Non-Farm Payrolls due 8:30 am EST on Friday.

Expectations:

  • Consensus:  185K
  • Consensus Range: 150K to 225K
  • Unemployment Rate Consensus: 4.6%
  • Unemployment Rate Consensus Range: 4.5% to 4.6%

One thing the FED made clear: it feels a need to raise rates twice this year and a need to change its balance sheet program. I expect the balance sheet announcement to made in December 2017. So, that leaves only the timing of the rate rises. The FED has signaled it wants one in June, so that leaves only the final rise to determine.

If the rate rise is to occur in June, then Friday’s data will have to come in at least within consensus, especially given the 98K number last month (expectations were for 175K).  And, given my view that the job numbers are driven by FED needs, normally I’d say that my confidence rating for a consensus (and above consensus) number would be 8 (where 0 is ‘no confidence’ and 10 is ‘certain).

This month there is, however, an additional wrinkle. Studies show there is a correlation between the ADP month to month trend with the Non-Farm month-to-month.  This month’s ADP came in at 177K (consensus 170K) BUT down from last month’s 263K.  If the indicator is on track, then we should see a Non-Farm number below 98K.

So, we have a conflict between my two indicators. My resolution is an easy one: I’ll go with my gut with an allowance for the ADP signal. This means I’m looking for a number between 150K to below 175K.

Such a number will probably produce a ho-hum reaction in the USD and US stock market.

Let’s see what happens.

(Message for Michael Hack: Please see my comment to your request posted at ‘Trading A Fundamental Event)