Balancing Point

BarroMetrics Views: Balancing Point

It appears to me that US stocks are a balancing point. Quite a few of the commentators I like are flashing amber warnings (e.g. see attached PDF from Zero Hedge). Gann Global has a time window for a possible turning point from now until April 4.

I take a slightly different view. I do not see the public participation that I’d normally associate with a ‘bubble’ market. I have assessed the move since Trump’s election (Nov 7, 2016) as the start of the ‘bubble’.  For a top to come in, I’d prefer to see a parabolic rise into end March/early April.

Figure 1 shows the S&P off the 2016 lows. I wanted to compare the Nov 2016 range and volume with the Trump move. The purple line is the drawn off the one std high of the H-L of an 18-day volume average.

Extend the horizontal line to the left off Feb 2016, we see volume easily matching the 2016-02 levels; extend it to the right, and the range and volume levels drop off – not the volume and range I’d normally associate with a healthy bull market. But, it is the volume and range I’d associate with the bull driven by QE. The difference between the current ‘Trump-hope’  drive and the QE drive is currently we are seeing much greater public participation, the participation that makes for a top.

Figure 2 shows a clearer picture of the current price action – looks like we are poised to move one way or another. A move down from here on the same volume and range would probably be a buying opportunity; a move down sustained sharply increased volume and range would be a warning that a top is in.

Let’s see what happens.

FIGURE 1 18-d Swing S&P Cash

FIGURE 2 18-d Swing S&P Cash

Will Mid-March Madness Maul the Stock Market in 2017

Global Headwinds Look Like Mother of All Storms

A Tool for Success 2

BarroMetrics Views: A Tool for Success 2

Although I have been speaking about journalling as if it were one, there are actually two aspects to it:

  1. The stats side and
  2. The psych side.

The stats side require the details of the trade. For example, date of trade, instrument, long or short, entry, exit, initial stop, size, setup and trigger. The minimum stats required would the Expectancy Details – either or:

  1. (Average Dollar Win x Win Rate) – (Average Dollar Loss x Loss Rate) = $X
  2. (1+(Average Dollar Win/Average Dollar Loss))x Win Rate -1 = %.

The two stats are slightly different. The first produces a dollar result, whereas the second produces a percentage result. The first says, given my results, each trade will generate $X; where the second says ‘for every $1.00 risked, I can expect, on average X% in the S’.

But other stats are useful, e.g

  1. What if I set my stop using a different method?
  2. What if I entered using a different trigger? etc
  • If you are trading mechanically, some questions:
  1. Has the system stopped working?
  2. Has the critical sequence of loss been exceeded?

The psych aspect seeks to record the conditions, internal and external, under which we trade best and under which we trade poorly. For example: under what conditions are we likely to breach our rules? Following a sequence of consecutive wins? Following a sequence of consecutive losses?

Before Edgewonk the answers were often difficult to find and certainly time-consuming. The software makes life a lot easier.



A Tool for Success

BarroMetrics Views: A Tool for Success

At least 90% of retail traders lose money in the long run. You don’t believe me, just Gooogle “90% of traders lose money”. For example, here’s a reported study from Tradeciety “Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics“.

So if I were to say to you: “Use this tool, it will guarantee improvement!”, Would you use it? You’d think so, right? Especially since the tool could be free or at most cost only a minuscule amount when compared to your trading capital.

Yet, this has been my greatest challenge – to help motivate at least most of our students consistently use the tool. And the tool? Keep a trading journal. Yes, I know, you’ve probably heard it a million times! But, do you keep one?

You do?

If the stats are right, you’d be one of the few.

So why is journal keeping important? Think of it as a performance metric – akin to the data a professional athlete keeps about his performance – and for the same purpose: it’s the info we need to improve. 

In this piece, I’ll be looking at the most common reasons why ‘I don’t keep a journal’.

I don’t have the time! I am too busy trading!

For scalpers and active day traders, this may be a legitimate reason. Still, it takes only a minute or two to write a few bullet points that can be filled in later.

It’s important to write down the key points as soon as possible – if only because the longer the time-lapse between entry and journalling, the greater the possibility we’ll miss a key point.

I appreciate that the shorter the trader’s timeframe, the greater the temptation not to journal because journaling distracts from trading. Still, no matter how active, there will be a spare minute or two for bullet points.

For the swing trader and longer time-frame traders, “too busy” is an excuse. You have more than enough time for your journal entry.  You need to ask yourself: “what’s stopping me?”

Usually, the answer is found in our avoidance of pain strategy. If we refuse to accept the pain losses bring, we tend to run from losing trades. So, we find ‘we don’t have to journal this losing trade’. If we have a couple of consecutive losses, we soon find that we are way behind in our journaling. Now we have another excuse – “I don’t have the time to journal because I am too far behind!”

The solution is to:

  1. Make an entry as soon as possible after the event: pre-entry, entry, during and review.
  2. Breaking a trade down into its parts makes it much easier to journal.
  3. Also, you have ‘sunk costs’ working for you even if a trade turns out to be a loser. You’ve done most of the entry, only the review needs attention.
  4. Accept the losing trades bring pain. I’ve been trading over 30 years, and I still hate to lose money. But, by
  • accepting that losses must happen,
  • seeing losses as a learning experience, and
  • anchoring the feeling to making a journal entry

I’ve been able to make sure that every trade is journaled.

Tomorrow, I’ll look at what to journal.





Interest Rates Rise – Impact on US Stock Indices?


BarroMetrics Views: Interest Rates Rise – Impact on US Stock Indices?

Non-Farm today and I am expecting a figure that is is at least on the better side of consensus (Consensus range: 162K to 240K, Consensus: 200K).

If I prove correct, that will clear the path for the FED to raise rates. That it would, provided the job figure produced no surprises, was made clear by Kaplan and Fisher. It was also confirmed by Yellen.

Let’s assume rates do rise. What effect will that have on the S&P?

I suggest very little in the way of a bearish reaction.

I see this current move as being the last leg of the   13-w bull market that started in 2008. It’s what I call an R2 move (parabolic rise) that is driven by sentiment. My sentiment tools rate the current move to be on par with the 1987 top. Gann Global has a possible date for the top in the time zone, March 17 to April 10.

However, I do think we’ll see a bullish reaction, given that the S&P is in a parabolic move up. Gann Global has a possible date for the top in the time zone, March 17 to April 10.  I’d like to see the S&P put on another 10% before I become overly bearish. In the meantime, I am keeping an eye on the corrections: a 3% drop will signal a top is in place.



Overcoming Bias 2

BarroMetrics Views: Overcoming Bias 2

Yesterday we saw how I have acquired a bias for the short side in the GBPUSD. By the way, this is inevitable once we form a view of the side that is likely to produce a low-risk, high probability profitable trade.

At this point, I analyse the pair with of my Trader’s Timeframe lenses.

The first step is to list my observations, then categorise them as ‘bull, bear, or neutral’. Following that, I look to integrate the information and assess the probability that the downtrend is likely to continue or change.

Before I move on to the next item in the analysis stage, ‘zone’ (where will I take the trade), I consciously look for information against the bias. This step seeks to ensure I am not suppressing information or falling prey to the heuristics that have proven to be my Achilles’ heel: representativeness, anchoring, framing and confirmation.

Let’s look at the ideas in action. (My trader’s timeframe is the 18-day swing).

In the GBPUSD, I have assessed a downtrend that is likely to continue to in the higher timeframes. Figure 1 shows the 18-day (red line), and 13-week (black line) and 12-month (green line) daily equivalents. They swing lines show the trends: monthly, quarterly and yearly respectively.

At first glance, the 18-day downtrend seems intact. If that were the case, my strategy would be to go long in the sell zone around the current swing highs, or upon a break of the most recent swing low.

But, when I actively looked for ‘long’ info,  I saw:

  • Since 2/28/2017, as the pair moved South, its ATR dropped from around 130 to 90. In Market Profile terms, the pair ‘is not facilitating trade’. In short, we do not see the price action that would suggest downside continuation. Most likely, if the longer-term downtrend is to prove itself, we’d first need to see higher prices.
  • The structure since 09/06/2016 has formed what I call a ‘rejection high, rejection low, value area 313’ – a label for a ‘bell-curve forming’ process.
  •  In this pattern, the next high probability move is:
  1. acceptance above the Value Area high at 1.2774 (red TPL) for
  2. a move to the Primary Sell Zone (1.3434 to 1.3210) of
  3. the structure bounded by 1.3448 and 1.1644.
  • However, if instead of an upside breakout, we see acceptance below the rejection low at 1.1985, we’ll probably see a re-test of 1.1644 and even more likely, its breach.

So, by looking for ‘non-confirmatory’ clues, I  have changed my initial views of where to take trades and the likelihood of an 18-d trend change. (A rally to the PSZ at 1.3434 to 1.3210 would break previous 18-d swing highs and thus negate the 18-d downtrend).

The process may seem complicated. But, as with most habits, it’s only difficult at the beginning. Once internalised it becomes second-nature – though I still use a check-list to ensure I consciously cover all bases.

We’ll never totally eliminate the biases occasioned by our mind’s unconscious reasoning – nor would we want to because they serve an invaluable function. But, by being self-aware, we can reduce their adverse influences when their use would lead us astray.

So, over to you: what are you common biases?

(By the way: ECB rate decision announced tonight at 16:30 HK time – may stimulate an increase in the ranges [at least of the majors and European crosses])

FIGURE 1 GPUSD 18-day and higher swings

FIGURE 2 GBPUSD 18-day swing



Overcoming Bias

BarroMetrics Views: Overcoming Bias

I was asked to give an example of overcoming bias, especially confirmation bias. I’m happy to oblige.

Let’s look at the GBPUSD.

You’ll recall that some readers (and I) made good money anticipating Brexit (see BarroMetrics Views: Brexit, A Trade Post Morterm).

After the ‘flash crash’ (red arrow, Figure 2), I decided to take the pair off my radar until the effects of the crash had dissipated.  I felt that the move had not only taken out all the stops that would have provided some directional move (around the 1.3000 level),  it also meant that the GBPUSD would need time to digest the volatility.

That was over five months ago, time enough for the effects to be forgotten. So recently, I placed the pair back on my watch list. When I do that, the first thing I do is the answers to two questions:

  1. What is the trend of my trader’s timeframe (18-day swing representing the monthly trend)?
  2. Is it likely to continue or change?

The answers provide me with my strategy (go long or short or stand aside). And, my first step to clarify the strategy is to review my long-term and 12-month swing charts.

Figure 1 is a long-term monthly chart going back to 1900. I suspect it is a spot monthly of the futures market because the prices and dates of swing highs and swing lows don’t quite match up with the FX data. Nevertheless, the chart is useful for perspective.

Notice from the chart:

  • There was a sideways market starting in Sept 1992.
  • Last year the GBPUSD broke out from the 25-year old congestion pattern last year.
  • The sideways pattern was the Value Area of a larger swing high (Nov 80) and low (Feb 85). Market Profile theory suggests that we should have seen an upside breakout (i.e. above Nov 07 high). The fact we broke down suggests a move to at least the Feb 85 low and probably a break below it.
  • We saw a similar idea in action with the upside failure breakout in Nov 07. The breakout ought to have fueled a move to the Nov 80 high. When it did not, we could say that was a high probability we’d see the Jun 01 and Mar 00 lows and probably their breach – the downside breach is what we saw in 2016.

Figure 2 shows the congestion pattern displayed with my FX data from MarketAnalyst

  1. I have marked the swing highs, and lows, with a tool MA calls Time Price Labels (TPLs).
  2. The two green rectangles identify what I call FTPs – possible areas of resistance and more: prices on corrections tend to be drawn to these zones more than they are to spike highs and spike lows.

The two charts provide the background, the context, to my trader’s timeframe (18-day swing line representing the monthly trend).

My conclusions are that the trend will probably be down, and likely to continue: a downtrend established by a break below a 25-year old pattern does not reverse in 12-months.

My conclusions also form my bias.

More tomorrow.

FIGURE 1 Long-Term Chart GBPUSD

Chart through the courtesy of ChartStore


Chart through the courtesy of MarketAnalyst

The Sale – S&P in Bubble? 2

BarroMetrics Views: The Sale – S&P in Bubble? 2

One of the main lessons I seek to drive to drive home to those attending my seminars is to ‘see the other side’. When you do this, you bypass a host of biases, e.g. the confirmation bias, and the anchor bias. By ‘see the other side’, I mean review your analysis with the assumption that it’s incorrect: what would happen if the alternatives prove true?

In The Sale – S&P in Bubble?, I took the view that an S&P top would occur later than Dent was predicting. In what way could I be wrong? Well,

  1. It may not occur at all. That poses no danger to my longs – the current trade management strategy would take care of the situation.
  2. It occurs earlier. This situation does pose a danger.

With (2) in mind, let’s look at the possibilities.

What evidence do we have that the S&P’s recent trajectory suggests a top?

I like to use Gann Angles when measuring acceleration. The MarketAnalyst software allows me to set the price-time ratio scale so that I can compare different times and instruments.

Figure 1 (log chart) shows the 13-week bull runs since the 1994 low. We see:

  • The run from 2009, showed an acceleration when compared to the two previous, and
  • The current run off 8/28/2015 low has accelerated again.
  • Indeed, the run since the Trump election (not shown) has again accelerated and is now above the 75-degree angle (1×4 for Gann enthusiasts).  This sort of move usually marks a blow-off, last move up of a structure.

Gann Global runs a newsletter that looks to identify possible tops and bottoms using prior stats and applying Gann’s ideas. In a recent public webinar, it suggested that there was a confluence of dates to mark a significant top (correction or final to be determined) in the time zone March 17 to April 10.

To identify if projected top has taken place, Gann Global uses the recent S&P pullback of 1.9% (2278-2233 cash S&P) as a trigger. I’d also use that corrective structure as a guide, but I’d need to see a move to 2224 before I’d say that the top is in.

So, how to use this info?

Watch the angle of ascent into the March 17 to April 10 period. If we maintain above the 1×4 or accelerate above it, I’d tighten my stops. If we reduce to the 1×2, I’d maintain my current strategy.

So, if you are long US stocks or US stock indices, how are you managing the trade?

FIGURE 1 S&P 13-week with Gann Angles




The Sale – S&P in Bubble?

BarroMetrics Views:  The Sale – S&P in Bubble?

I received a couple of emails challenging my assertion that the S&P is in a bubble. Rather than write a couple of blogs about my reasons, let me refer you to Dent’s excellent book pictured above.

In The Sale, Dent not only provides seven guiding principles for identifying bubbles, but he also sets the four cycles he uses for making his predictions (Figure 1).

This is a must read book for any trader-investor.

Dent’s view is we’ll see a major bust late 2015, early 2016 that will accelerate throughout the rest of 2016 into early 2018.

With that idea, I now disagree. I say ‘now’ because it wasn’t too long that I’d have agreed.

But, I have taken the view that Trump has changed market sentiment enough to upset the cycles. Postpone, for how long? I’m not sure, but it would have to be long enough to produce the disappointment necessary to reverse the bullish sentiment. So, it’s have to be a postponement for at least a year, perhaps two.

Just how bullish this sentiment is can be seen from today’s HK FT headlines where the 300-odd point rise in the DJIA was attributed to the belief that the FED will raise rates(!!??). It wasn’t long ago that the pundits were attributing every pull-back to a rate rise.

I wonder what they’ll say if we do see a rate rise in March (still unlikely in my book) and stocks dip? For me, clues of a bubble are when all news is seen through the lens of a rising market. We are seeing that at the moment.

My strategy remains, ‘long or out’. If long, reduce position size, use trailing stops and allow large slippage stop fills.

FIGURE 1 Dent Cycles

Broker Selection

BarroMetrics Views: Broker Selection

One of the most important functions we have as traders is finding a broker that we can rely on and feel confident in: that we won’t lose our hard-earned if they close.

For retail traders, there are only two jurisdictions I like: Singapore and Switzerland.

  • Singapore because MAS has a sterling track record. In the collapse of MF Global (2011) and Refco (2005), not a single Singapore client lost money.
  • Switzerland because the Government guarantees deposits up to 100,000.00 CHF. The drawback in Switzerland is the only licensed broker I know of is Dukascopy. I’m told, by my students and friends, that small accounts experience unacceptable slippage on stop orders.

I am not commenting on London’s FCA registrations because I have no experience with them. In the US and Australia, clients of failing brokers have lost some or all of their deposits. It’s true that in these situations, the brokers had failed to place funds in segregated accounts, in breach of regulations (e.g. MF Global), but the net result is the clients lost money.

Here is a link to an excellent article by Forex Peace Army on the subject:

Self-Awareness & Trading

BarroMetrics Views: Self-Awareness & Trading

Read what passes for education, and you’ll see that it focuses on METHOD – find the ‘right method’, and your fortune is made. Unfortunately, nothing could be farther from the truth.

That’s not to say any old METHOD will do. Our Method must have a positive expectancy. But while METHOD is necessary, alone it is not sufficient. We need to have proper Money Management and the discipline to make the best decision possible in the circumstances. That said, it doesn’t mean our decisions will always be correct. They need only be correct enough of the time to give us a positive result.

Let me give you a concrete example of what I mean. First, some context.

Since late 2014, early 2015, I have adopted an early exit strategy during ‘ebb phases’.

The result has been beneficial. My average drawdown dropped to 3%, and max drawdown dropped from 28% to under 10%. Moreover, my annual ROI improved, with 2016 being my second best year since 1990.

This year, the results have not been great. For closed out positions, I should see around -3.8% for Jan and Feb. clearly I am in Ebb Phase.

I started today with two open FX positions, the AUDNZD and NZDJPY. Of the two, I was most confident that the NZDJPY would run to target at around 72 (Currently around 80.75)

But this morning, in the 290-min equivalent of a 5-day swing, a buy signal was triggered (Figure 1, green arrow). In turn, the buy triggered a liquidation of the short position.  I do plan to reenter the short position on a downside breakout below 80.44 or a rally to 84.40 to 83.50.

Here’s the thing: I was most reluctant to exit.

I had convinced myself that the trade was solid and we would see 72 at some point without first seeing 83. Confirmation bias raised its ugly head, and I was seeing all sort of reasons why the buy signal would prove incorrect.

I did exit where I had pre-planned if the buy signal was triggered.

It may well prove, with hindsight, that the profitable decision would have been to hold rather than exit. But, we don’t have hindsight. We merely have the info in front of us; we can only make the best decision we can in the circumstances, given our knowledge and skill.

Why am I making such a song and dance about this?

Because in my coaching, I see the students berate themselves for making decisions that was ‘wrong’ only in hindsight! Then, they make a decision that breaches their rules  – and that decision is made because of the what had happened on  the last trade – compounding their error. And they wonder why they are long-term unprofitable? (!!)

How about you? How self-aware are you? Does self-awareness help or hinder your trading?