Tag Archives: trends

A glimmer of hope

Note: I’m not suggesting anyone do the following. It ‘kinda’ worked out but a test group of ‘1 trade’ is not statistically significant in any way 😉 so I need to find some more opportunities to do this.

This last week, following my sojourn in a field in the Welsh hills, I’ve been trying to appreciate the small things in life more than usual and to just bloody well relax.

We all run around like freaking lunatics half the time worrying about all sorts of things that are frankly a complete waste of energy. I’m not going to make any attempt to link anything metaphysical to trading 😉 but it’s been great to take some of the mental pressure off myself and just re-examine what I’ve been doing. Looking at a couple of things with fresh eyes and a more chilled perspective…

Now, I’ve not had any significant ‘lightbulb’ moments but I have come to a new respect for RSI divergence. No, it’s not happening all day/every day for everything however when it happens (and you spot it) then it’s worth paying attention to…

On this basis I was looking at a bunch of stocks (yes, you read that correctly) because IG Index Advanced Charts has a module in it called ‘Pro Real Trend Detection’ that will filter instruments against mechanically generated support, resistance and other pattern criteria. This is still supposed to be a business and manually wading through hundreds of charts isn’t a good use of anyone’s time.

I’d seen a number of interesting results from RSI divergence. In truth I’ve probably read at least three books that highlight this as useful or at least something of significance and I’ve probably ignored them all 😉

However, with my slightly more relaxed mind I’ve been spotting these more and more often… So girding my loins, grabbing my 1 hour chart and a suitable candidate I plucked up the courage to go long on Wolseley (WOS) somewhere mid-Tuesday afternoon. There’s a 4pt spread off 1800 points so not bad at all plus the down-trend seemed to have halted forming a pretty solid ‘base’ under which to plant my stop.

If anyone’s under the impression I know what I’m doing go to my results page then keep reading. Just thought I better point this out before I continue… clear? Good.

Now in the trade but relaxed about the whole thing. Committed. Number of other factors in my favour…

  1. Price has got down to 6+month low from previous resistance in Nov 2010 – should provide some support now
  2. Price fall has not dropped below 1812 all day on the hourly chart
So on this basis I’m in long at 1834 and the following morning WOS gaps up >10 points and end the day with me +46 which is sweet. Now I, more than most, appreciate examples after the fact are completely sod all use to anyone so the rest of this post will not bang on about RSI divergence and how it’s the answer to my trading woes so far 😉

There are probably a stack of other technical and possibly non-technical reasons why this entry worked that I’ve not looked at yet. Maybe the 200 EMA got hit, maybe there was some news release or some other reason I don’t know about.

What I will say though is I’ll be looking for more opportunities like this to check which criteria (levels/price action/others) result in creating similar successes. Watson! The games afoot!

The bit I got wrong (again) was my stop management.

Having seen a +40point gain at the end of the day I moved my stop to something like +18 above my entry. Retrospectively this was due to lack of emotional management and wanting to bank something. I didn’t consider the context of what I was doing.

All prices retrace and I’m going long at the bottom of a six month low. So I’d assume that there are people desperate to get out of their positions but looking to claw back at least something before getting out. Had I personally not been greedy or anxious I could have put my stop just a point above my entry, been in ‘profit’ (psychologically), survived the retracement drop and been >60 points up the following day rather than getting stopped out about +18 as well as still being in the trade with a good ‘buffer’.

Hindsight is awesome. However the main point being is that even with my new found appreciation for green hills, rolling countryside and inner calm I still managed to get too ‘graspy’

Slight detour back to the RSI divergence point on Gold in the last few days…

Ok, so you could also make the point that 1580 is the new support but this is also backed up by RSI divergence too… Hence, a glimmer of hope 😉

Look mum, I built a strategy!

Before anyone reads this… first, a disclaimer… These are my own random ideas and half formed thoughts. Let’s be clear that if you decide they have merit and you might want to copy what I manage to vaguely explain then it’s your own responsibility entirely. I’m assuming you’re an adult so don’t expect anyone to trade these ideas and them blame me for something going AWOL. This is mainly to help me attempt to clearly communicate the ideas in my brain to myself. You have been warned…

So… over the past couple of weeks I’ve been thinking and researching about for a longer term strategy that means I can actually work at my job, not get fired and not attempt to deal with emotional over-exuberance while making trading decisions.

It’s been something of a struggle to say the least.

However, based on a number of threads and extremely limited testing I’m thinking there may be some indications of some cautious progress. This post already feels like it might be quite a long one so possibly go find tea before proceeding… Got it? Onwards!

Look mum, I’ve got a strategy

Part 1 – Follow the yellow brick trend

So lets begin with the fundamentals. Trend following and how to define one… I’m going to use a shorting example below.

Well on a daily chart for almost everything it’s dead obvious. Everything is down against the Swiss Franc, Gold is going up and the Euro is all over the shop. Aussie dollar is up versus the US dollar etc. Daily trend? Up or Down etc. If it’s sideways I’m going to leave it alone cause I’ve no clues about that right now…

With this in mind I’m attempting to take advantage of the crowd (consensus) and only trade in one direction for each instrument. It doesn’t matter what it is. Lets use EURCHF as an example. The trend is down. Therefore I only want to short it… Why?

Well I definitely want to take advantage of the 10-25% advantage you get from going with the trend. Of course I don’t know that whenever I’m in a position it’ll go down (for shorts) but having the ‘crowd’ on your side is all the advantage I’m looking for at this stage.

Yes, but Rob, what about all those ‘up’ (opposite direction) trades you’re going to miss?! True, I’m sure I’ll miss a couple of really long runners but think about it for a moment. The price is dropping and you’re essentially suggesting that you can spot when a proper retracement is going to begin then hang on as all that downward pressure is temporarily restrained, there’s a gain over a number of days, suddenly everyone gets out and you spot the exit point?

Hmmm… sounds a little optimistic to me. I’m going to take less trades but they should be less risky and, over the long term, more profitable for less mental effort. Last point on this – there are always other instruments to trade. Price is price is price. My belief is what should work in stocks, should work in FX, should work in stocks. The basic psychology of the people in the market is the same.

It’s possible lots of people will disagree with this opinion and yes, I’ll agree there are environmental and news related factors that need considering for each. However, fundamentally all the data is displayed the same way so one strategy in FX should work the same in indices. It’s only your track record in making money from each instrument that should really count. I’m digressing a bit 😉

Part 2 – Timeframe

Daily? Too long for FX… 4hours? I’ve not got enough patience, frankly… 15 minute? Too short and I consistently lose money… Hourly? Yes.

Why hourly for me?

  1. I don’t have to keep too keen an eye on what’s going on
  2. Requires development of patience on my part
  3. Strong enough ‘signal’ i.e. if a bar falls consistently and far for an hour it’s unlikely to stop on a pinhead and reverse straight away (forgiving)
  4. Moving stops about seems pretty straight forward
  5. Allows me to get out if the impact of news send the position into reverse… not a big consideration but worth keeping in mind
  6. Allows the development of strong trends on easy to read charts
I did look at 4 hour charts for FX but it’s just too long for me. In a market that ranges quite wide but can be volatile it’s just a little bit too ‘committed’ for me to be comfortable with at the moment.

Part 3 – Simplicity

Being simple myself 😉 I need to be able to understand what it is I’m attempting to do. So in non-technical terms I’m trying to hitch a ride on the coat-tails of the market when the overall trend resumes… A lot of the next piece of thinking comes from things that Richard Farleigh came out with about trading as well as points from Malcolm Pryor in his book ‘Winning Spread Betting Strategies’.

Now… How do you tell when a trend resumes? Look at the price. Yeah, right, that helps a lot! Cheers! Ok… You need to have the confidence that the market is backing your opinion. How is the market going to tell you about this? Price movement. What’s the most un-‘disguised’ or clearest way you can see this sentiment? Moving averages based on certain periods… Does it matter which ones? Possibly not but there needs to be a slow one and a fast one.

Malcolm Pryor uses 10, 20  and 40 period EMA’s. So let’s use those then. He’s applying these on weekly charts but I’m not that patient, as I mentioned before.

So with EURCHF I’m going short when the 10EMA drops down through the 40EMA…

Enough of the market should have moved enough of the way down so that two things happen…

  1. The price drops for at least another period (1hr) so that I can move my stop to break-even
  2. People pile in to the resumption of the trend further reinforcing the likelyhood of 1. happening
This ties in with using hourly charts because people need time to notice things happening, you’ve got the time to get out if you’ve royally ‘effed up and lastly it actually doesn’t seem to happen very often when the price drops over an hour period then immediately reverses taking you right out.

Notice how I’m also trying not to lose cash here! 

On this basis my stop movement is pretty aggressive. As my example from yesterday will show… possibly a little too much…

Part 4 – Stop loss placement

This is what levels are for. DO NOT ENTER a trade where the stop loss you need to place is a thousand light years from your entry point and negates your risk reward criteria. Unless you have a large trading account stay the heck away from Crude Oil 😉

From an aggressive perspective you could place your stop above the previous high if you’re shorting…  Then once the price has fallen for a couple of hours go to just below entry – enough to buy a latte… Then, depending what happens next you could close the trade early or do a dance as the price continues to plummet.

I’m actually considering using a time stop here, rather than a figure or percentage. This comes from Simon Townshend who uses a 4 period stop as a way of retaining cash. In other words if the trade isn’t going your way after 4 hours, days or whatever you’re trading on then get out.

Or maybe look at the half way point of the last longest bar as the point where you might want to start considering whether to get out. I might also pick an arbitrary figure – 50 points say.  I need more data before deciding this. Maybe it’s just the second or third bar then out after you enter the trade… I really don’t know yet.

Part 5 – Exit Criteria

Apart from your stop getting taken out the next thing to consider is whether to have an actual signal on the chart to indicate it’s time to get out of a trade…

I’m looking for a bit more real world experience before I try to decide this part. There are a number of reasons for this. The exit point depends on the behaviour of the price relative to the support/resistance levels surrounding it.

Also depends on your own number targets, the amount of time you can dedicate to monitor the position, if it’s fairly sideways and only pausing before resuming it’s drop or if it’s now bouncing back to eat your profits. This is a judgement that needs to be made based on experience. I need more problems like this 😉

So here’s breakdown of my EURCHF trade from Wednesday (22nd)

Happened to be looking and spotted EURCHF heading down off some resistance. With this overall trend down this is on the ‘right side’ of the crowd. Initially I made a mistake and entered long by clicking on the wrong button!! 😦 Cancel and reverse it for a small loss (dumbass!)

Right… in the trade proper now from 12,085 shorting with the trend and my stop is somewhere above 12,150… the drop continues beautifully and about 2 and a half(?) hours later I see the price bounding up again and I get out for about 36 points…

However, all my mistakes are in exiting this trade early… Apart from the price going back up I don’t really have a reason to get out. The EMA’s still indicate the trend is down. There’s another strictly price based indicator I created that shows the trend is still down… Hence my comment earlier about needing an exit strategy 😉

Here’s the proof from today…

Yep, had I had some balls, more faith and an actual exit plan I’d be pretty much £200 better off at the middle of this afternoon!

Still, rather than self recrimination – let’s look at the positives…

  1. I learnt some stuff
  2. I didn’t lose money doing so
  3. I have a good entry strategy
  4. I looked at this today across a number of other markets and it looks promising 😉
Will be paying attention to this in the future as I intend to trade this approach for another 29 trades and record my aggregate results. The only valid testing is ‘real world’ with real money.
The challenge isn’t the entry point, it’s managing your ‘self’ between that and exiting. More practice is needed but I’m happy and looking forward to testing 🙂

Timeframes, levels and trends

I’ve really struggled, as a novice trader, to make sense of timeframes… Believe me when I say I’ve read a lot of books on trading and have yet to find a really coherent explanation of how to use timeframes or an explanation of the value/weighting to ascribe to levels and trends across multiple timeframes.

Maybe it’s because this is something that requires dynamic explanation which is of course a little difficult to get across in a book! Anyway, I’m going to make an attempt at describing how I use timeframes and especially how different levels and trends in different timeframes influence my trading decisions.

After I’ve had a really strong cup of coffee 😉

In this example I’m talking about a trend following strategy on long bets because with a few exceptions most trades I’m looking to get into are on the long side.

Relative weight between levels and trends

At all timescales it seems that levels of possible support and resistance have more ‘weight’ or significance than trends lines. A daily level in gold has more significance than a daily trend… In other words the up trend might get broken temporarily but if the price falls back to a significant level it’s less likely to drop below this point.

From a psychological/market perspective this is simply illustrated by thinking of supply and demand or perceived value.

If the price is trending up it will surely get to a point where people think it’s rising too fast and in the short term their motivation is to sell, or at least not to buy. In their mind the price is perceived as ‘overextended’, ‘expensive’ or likely to fall to a relatively ‘cheap’ level if they hold on long enough… Once the majority of players feel this way the price will inevitably stop rising.

The upwards movement will cease and only when the price drops down to a point (level) that’s nowrelatively cheap to the previous price (which was formerly rising) will the buyers come back in force. The return of buyers is motivated in part by fear of losing out as the price continues to climb. Trends at shorter timeframes (15 minutes for example) are much more likely to be disrupted by news events as there’s an immediate knee jerk reaction which might well be part of the price and included in everyone’s thinking about the ‘value’ of a currency or commodity 4 hours later.

When a price drops back to a level, especially if it’s held for a significant number of days, then there’s an even greater incentive for buyers ‘en mass’ to all reach the same conclusion. The price is back at ‘x value’ which is relatively cheap and it rose to ‘y value’ from here over the last few days. Assuming the commodity or whatever returns to it’s original value (which you remember was trending up previously) then it’s a good bet with a high probability of success.

Now I know that on a daily timeframe crude is going up but it’s also really clear that recently whenever the price gets down to 11,111 the ‘market’ perceives this to be good value. Now, the fluctuations on crude are very large and I don’t have the account size where I’m comfortable taking punts on this as the next realistic level is down at 10,575 and a 500+ point stop makes this a completely un-necessary risk for me personally.

It is however a good example of levels being more important than trends. If I’d have been attempting to follow the crude price based on trend lines I’d have been knackered several times over the last week. My experiences have shown me that intra-day trends are quite a risky proposition to trade off of. However, prices hitting a previously established level and then bouncing off that level during the day (in an upwardly trending market) are good bets.

Relative weight between timescales

So here’s how this works out. Higher on the list = more significance

1. Daily level
2. Daily trend – market direction – must be obvious, right?!
3. 4 hour level
4. 4 hour trend – It’s got to be really working for me to pay attention to these
5. 15 minute level
6. 15 minute trend – I try to ignore these.

So clearly where these values intersect i.e. you’re looking at a 15 minute chart but you’re also about to get to a massive 4hr/daily level it’s highly probable that the level will remain in place as support and you can feel confident in taking the position. I also don’t use moving averages on my charts anymore and frankly feel all the better for it. In the 75 or so minutes it’s taken me to write this up crude is back up to 11,185 so I could probably move my stop to entry and go do something else 😉

To ram the point home further… Where a 15 minute level has held over multiple days it’s very worth paying attention to and also becomes a 4hr and daily level because it’s held on and on.

The longer something remains in play the more significance it has and therefore the ‘easier’ it is to predict and trade off of successfully. It’s interesting to look at how many days or what time period the level has to exist before you begin paying attention to opportunities that might arise so I’d suggest the minimum is 2 occurrences. The example I’ve used is occurrence number 5 but as I mentioned earlier crude is out of my risk range at the moment. Oh well 😉

Other advantages to levels

Make risk:reward calculations simple. Pretty easy to spot. Don’t rely on patterns or setups

When I come up with a more coherent exit strategy than the finger in the air method that I’m currently using for this type of trade then I’ll post it here under ‘comments’

I guess there’s also a ‘counter-trend’ strategy available here for shorts on up-trends that bounce off new highs and fail to break through immediately. One advantage of this would probably be the potential to use tight stops once the retracement is confirmed but I’m attempting to keep it simple at the moment!

long trades in a down market

Basically this is a no-no. It appears I’m rather slow in catching on that we’re actually in a bear market – actually this is the second time I’ve been caught like this. On the one hand it’s a valuable learning experience but of course it’s a little galling financially!

This week I’ve closed my MF Global account and will be re-routing some of it towards my IG Index account because from the beginning of April they’ll be allowing funded roll-overs rather than closing/re-opening positions at the end of day.

So essentially I need to stop and complete a number of steps before getting back into the market. Steps like – completing my business plan. Actually come up with an end-of-day (EOD) strategy which I can test (and backtest) in prorealtime. Finish the Van Tharp course I bought and sort out my psychology.

Also something else that needs addressing is the base amount of funds in my account – which will take longer to address. However, it seems the foundations are still not in place for me to avoid getting excited (or bored) and throwing money away 😉

Week4(a) 24th Jan 11

So I thought I’d look at what the FTSE is doing in light of the book I finished reading (see Book Review thread) and sure enough Tuesday was an up day, Wednesday was a ‘Bearish Engulfing’ candle – good signal of a strong reversal coming and Thursday everything dropped through the floor Friday saw indecision which may hint that prices will bounce off the support at 5900 but it’s of course not confirmed yet…

Certainly wouldn’t put on any long trades next week until there’s a bounce off the trend line, previous support/resistance or you get some sort of reversal candle pattern

If things keep selling off then it’s time to find shorts instead

Yes, I realise I’ve got way too many momentum indicators on my chart but all they’re doing in this case is backing up what the price action says.

You wouldn’t need all of these to come to the same conclusion.