Common Sense takes a Powder as Britain Votes to Leave the EU

brexit

“Brexit”, the media created cutesy lingo for the British referendum on whether to stay with or leave the European Union. I’ve heard it discussed backwards and forwards and sideways throughout the days, weeks, and months leading up to the vote that just took place.

Despite all the fear mongering and artificially induced drama by the media, I never actually considered the possibility of Britain actually leaving the EU. It seemed so absurd that there would be enough people that would want to turn the clock back with actions that will surely spawn negative unintended consequences.

Well, I was proven wrong tonight as polling states that the vote for Britain to leave is expected to be the winning consensus.

I’m not the only one caught by surprise, as the futures markets are roiling with a nice big fat after hours crash that will translate into crashed markets on the open Friday. The value of the Pound has plummeted. The majority of businesses were counting on a “stay” vote winning, and this just adds a boatload of uncertainty for both Britain and the EU going forward.

I truly believed Britons had more common sense than this. Color me wrong.

There will be lots of analysis on how this wound up happening, but it’s likely due to the same old things that breed surprise outcomes:

  1. Voter apathy – which favors those who have more motivation, typically the conservative vote. People love to complain about government and politics and then find other things to do when it comes down to taking the time to cast a vote.
  2. Low information votes- people voting on something without doing their due diligence to figure out the true pros/cons of their choices. What are the odds that the majority of people who voted YES on leaving did so out of xenophobia and border control without thinking through the economic consequences of their actions.
  3. Media stupidity of focusing mostly on ratings rather than trying to educate people on the actual facts rather than false arguments and hyperbole.

The irony is the first unintended consequence of this action besides crashing global markets will likely be layoffs as British companies retrench over fears that current trade agreements are now in flux.

 

brit_hype

Trading Chart Analysis Enlightenment – Achievement Unlocked!

enlightenment

 

I’ve once again fallen behind providing updates on my trading, but events that occurred this week provided my most significant milestone to date.

When it comes to investments and trading, my main tool of the trade is chart analysis, that is analyzing price and volume movements over time as an indicator of future market moves. As prices tend to be pretty volatile and jumpy, trying to see the order in the seeming chaos is no easy task. Like looking at cloud formations, it’s easy to see what you “want” to see rather than what is actually happening.

So my focus over the months and years was to develop a system approach to interpreting prices moves, which are a collection of reactions of support (buying) and resistance (selling).

Going back in time to my banner year in 2012, I had a great intuitive feel for market price movement using trendline analysis, but over time lost that intuitive focus the following year. This is the problem with just using intuition or gut instincts- they come from the sub conscious and as such can be elusive to hold on to since you can’t evaluate on a conscious level. One is basically doing things without knowing the details of how and why certain actions are taking place.  My focus then shifted into making that intuitive subconscious knowledge into conscious knowledge.

Last year I made a big discovery that helped me lock in some conscious mapping of resistance and support price action and improved trendline drawing and analysis. This helped immensely with helping to refine my system to make it a better predictor of future price action. My last posted performance results were the fruit of that work.

Despite the major progress, there was still one significant problem- while I had developed a system of chart trendline analysis to predict moves, I couldn’t explain the action it was doing. I could tell where the price was going to go by chart constructs, buy it didn’t make sense to me logically. So I would place trades that my analysis told me would succeed, but I felt would fail, because the movement didn’t “look” right. The trades succeeded, but that disconnect between my trendline analysis and intuition eventually led to problems and my search for more clarity.

More grind work and chart analysis R&D ensued with a healthy amount of trial and error over the next several weeks which culminated in yet a new breakthrough discovery this week.

The discovery came as I was analyzing my failed trades after market – which is where most of my big breakthroughs occur. I realized that my assumptions made for constructing trendlines were not all correct. In some cases the rules of behavior I had made were incorrect. In other cases, the rules were correct, but my application of them was off.

I did some recalibrating, refining, and adjusting of my trendlines and price behavior assumptions when a new level of enlightenment started seeping in. I was now able to do chart analysis that perfectly captured price moves based on support and resistance. The key difference with this new modified analysis was that I now understood the market movement and there was no longer a disconnect between my intuition and analysis.

I could now look back on the market moves of 2012 and understand the behavior by both intuition and reason, which is what I did when I tested my new understanding on past years data to verify consistency.

Long story short, I’m as about as close to achieving the holy grail of creating a system of both high precision and high probability trades as I think I will get.

Now as usual, I write this ahead of fully implementing my system as this discovery is hot off the press. I also know that seasoned traders would take what I said with a grain of salt as we’ve all heard bold claims before on trading forums that came up short. Performance results going forward will show the reality. But I’m stating my discovery and assessment now because that’s how confident I am based on back testing and preliminary results.

 

 

 

Market Takes a Breather and Drops over 9% in 4 Days

Dow_Jones_week_aug_24

What a difference a week makes! Last Tuesday, the Dow closed around 17500. Today the Dow closed at 15781, about 9.3% lower – erasing all its gains for the year.

Of course all the market talking heads have plenty to say about it after the fact, but what were they saying before it happened? If they don’t have the ability to warn of impending market reversals, then how much weight should you put in their “after market” analysis?

Mega moves like this is a great illustration of why one should always employ stop losses and risk management when in the market. The only absolute control you have is when you enter the market and when you exit.

It’s a guaranteed fact that there were traders who were long in this market without employing any stop losses. It’s also a near guarantee that those traders had their accounts wiped out.

It’s also likely that there are traders who were short without using stops, and those who didn’t blow up their accounts with the market’s move up during this year likely made a killing these last few days, but these type of traders are doomed to give their returns back to the market because eventually they will be on the wrong side of a massive move and suffer the same fate as the traders who wiped out their accounts. Trading without using stop losses is equivalent to engaging in Russian Roulette on a continual basis- it’s not a question of if you will suffer devastating losses, but when.

The true professionals love downdrafts like this as they look for some good bargains that were oversold due to excessive fear. Of course low prices can head even lower, so risk management and stop losses are still needed.

Those like myself, analyzing market price behavior, have been given a golden year of data. The market spent several months in a pretty narrow trading range that heavily favored a delta neutral style of trading. The big drops now favor trending and momentum players. Seeing how the market behaves in both a tight range and trending environment provides great insight opportunities.

 

Trading Update: 2nd Qtr Performance Stats – The Ugly, The Bad, and The Good Part 3 of 4

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More humble pie was to be served during the second quarter. Results were still in the dumpster (Bad), just not as ugly as the 1st quarter…

 

April 2015 Performance

Apr 2015 Perf

April 2015 Performance Vs Indices

 

May 2015 Performance

May 2015 perf

May 2015 Performance Vs Indices

June 2015 Performance

June 2015 perf

June 2015 Performance Vs Indices

As you can see, it’s been a tough slog with working on my trading system. Working with relatively narrow stop losses  leaves little room for  error. Either my entry is accurate or I’m getting stopped out.

With month after month of bad results during this time, the question may arise as to why not trade on a sim during this time until the trading “kinks” are worked out? The answer is I am switching back and forth between the two. I test my refinements on the sim and also via back test tracing, then try it on my real account. I likely should stay on the sim account longer, but even though the sim is identical to the real account, the critical difference is risk of loss. It’s very hard to duplicate the fear of loss on a sim account. That fear of loss, when correctly channeled can give you a much higher level of clarity during a real trade – it’s similar to “battle awareness” where your focus becomes extra sharp.

Nuance is everything in trading- all the seemingly minor moves or zig zags add up in setting up for bigger moves, and clarity of insight is key in how to properly group and interpret market price action. Being able to identify, prepare, and act on trading set ups is the separator between gains and losses. Understanding proper nuance can only come with time, practice, and after trade analysis. This is where perseverance comes in  – to keep refining the process to account for these nuances inside one’s trading system.

The charts don’t show it, but R&D is telling me my system is almost there, save for these minor nuances. The tight stops are forcing me to come to terms with resolving the issues rather than try to guess with wider stops. Allowing those unknown nuances to remain in my system only increases uncertainty and risk of loss. Every trading loss gives me another opportunity to locate and resolve these errors with proper post trade analysis.

 

2nd Quarter 2015 Performance

 

2015 2nd Qtr

2nd Quarter 2015 Performance Vs Indices

 

Looking at these results makes me long for the days of 2012 when I was posting all those months of double digit gains, haha! =)  One of the key differences between now and then is it was more “instinct” and a rough trading model than precision back then and I wasn’t using stops. My instincts proved to be correct, but there were times when I had to also endure gut wrenching negative double digit swings in volatility due to a bad entry with no stops.

I knew that to establish long term consistency, instinct would have to be replaced by more precision and a better mastery of market entries and my trading model would need to be updated accordingly.  July’s results begin to show the fruition of the improvements made.

 

Trading Update: 1st Qtr Performance Stats – The Ugly, The Bad, and The Good Part 2 of 4

good-bad-ugly

Anyone who has ever invested knows taking on a market position is synonymous with risk. The market sword cuts both ways with either profits or losses.

The first quarter was some rough sledding (Ugly)…

 

Feb 2015 Performance

Feb 2015 Perf

 

Feb 2015 Performance Vs Indices

Feb 2015 Vs Ind

 

March 2015 Performance

March 2015 Performance Vs Indices

Mar 2015 Vs Ind

One word- ouch. Posting losing months is no fun – it feels like taking a failing grade and parading it around at a social gathering. there are very few blogging traders that post ALL their monthly trading results rain or shine as it can really do a number of your ego as well as attract lots of critical feedback. I salute traders who continue to diligently post despite having a string of big losses- that’s true transparency. Trading is after all, a risky business and people should be made aware of the risk that is involved by seeing actual losses.

So performance was awful, and the “after trade analysis” is where you can convert losses into future gains by figuring out what the trading system problems are. In my case, I was working on refining my trading system that was now incorporating what I observed to be a great pattern reaction. I thought I had implemented in the system correctly with prior results – and I did based on early trades. But looking back, I realize it was a partial implementation where I had yet to fully understand the patterns I had noted. This caused me to get stopped out of my trades time and time again being just a little off before the market would reverse and go in the direction I had anticipated. Then on one or two occasions I made some wide stops to try to mitigate these reversals and Murphy’s Law went into effect with me being wrong and the market still stopping me out with a big stop loss.

Trying to find a working trading system can be frustrating, but when you know you have the keys to a great system and you are still messing up only adds to that frustration. Trading is a lesson in self discipline since you have to solve all your own problems. Having no boss means the freedom to keep making the same mistakes if you choose. Losing performance was the price I paid for trying to take the “fuzziness” out of my trade system.

1st Quarter Performance

2015 1st Qtr

1st Quarter Performance Vs Indices

2015 1st Qtr Vs Ind

As I stated in part 1, the account size is smaller, so losses or gains will project out as bigger swings. The initial gains were under the “fuzzy” system where I was looking at a complex set of patterns that took time to develop, but worked. While the system worked, there was still too much uncertainty in terms of target estimation once a trade was entered. If I had stayed with it, I likely would have developed losing performance anyway over time due to those uncertainties.

The lesson here is even if you are certain of a winning pattern, you may still need more time than expected to figure out all the details.

 

 

Trading Update: Charting Analysis Progress Made – Performance Stats Returning

Made some significant understanding breakthroughs that resolved the problems I was having with the amount of extra volatility spikes in price movement. It was a work in progress starting with the last week of June going into July, but during that time some major discoveries were made in how to interpret the “nuance” in market moves that filled the gaps in my trading plan.

Now at the end of the month and many trades later, my adjustments have been confirmed and the results have been some of the best trading I’ve done in years, and likely the best continuous precision trading ever.

The biggest obstacle to trading success, at least in my case, is the brain, and getting it to just understand and interpret market price action without the pollution of personal bias. This is far more difficult than it sounds because we have a lifetime of learning and experience that our brain seeks to engage in times of doubt and uncertainty. This leads to the brain “backseat driving” our decision making process which makes it that much harder to just focus solely on market behavior alone to achieve correct solutions. So the challenge most traders face is developing a system that will neutralize our external/internal biases and bring the focus back to pure market activity.

My July results will speak for themselves but before that, I will be updating my monthly/quarterly performance from the last update I made, which was January.

The months of Feb – June were “less than spectacular” with negative returns, which is bruising to the ego, but necessary to be fully transparent with returns for this year. As any trader/investor will tell you, it’s far easier to post the positive returns than it is the negative ones. =)

 

 

October Extreme Market Volatility AKA “Super Roller Coaster”

This comes a bit later than I had planned, but it’s still worth blogging about…

The week of October 13 – 17 was quite the wild one in market extremes. We’re talking about moves that were more than double or three times the normal move, happening throughout the trading day.

Here’s a chart of that week:

ES_Week_10_13_14

The typical daily range has been about 12 – 15 points  , so these major moves really stood out. This type of extreme market resembled the go go days back when day trading was all the rage and everyone and their cousin were attempting it.

Each $ES futures contract is worth $50 per point move- so the market was either a gold mine or brutal depending on whether on was on the right or wrong side of a market move.

 

 

 

 

The Key Reason Day Trading is Mastered by so Few

Many people are drawn to the allure of making easy profits via day trading, but for the majority of folks who venture into it, sustained success is elusive. Rather than being easy, most find it difficult if not impossible to accurately buy and sell to make a profit, much less a living.

The golden rule of trading or investing is to buy low, and sell high- a pretty straight forward and simple idea, that in reality can be much more complicated to execute. Many trading books offer the guidelines of how to read chart patterns or mathematically analyze the market to determine the best times to buy or sell. There are even software programs that supposedly do the “thinking” for you and give you buy/sell signals.

Despite all this additional help, the classic “buy low/sell high” maxim is still deemed to be highly elusive to the vast majority of folks that result in such commonly accepted statistics as 80% of all day traders have more losses than gains. How can this be with all the extra information out there showing folks when to buy and sell?

The answer is – the market isn’t a fixed entity that has absolute movement independent of all its participants. Rather, it moves according to what all the participants do, meaning the actions of people trading the market also collectively affects the market.

This means a trader or investor is really trading with or against all the other participants in the market. For a market to rise, buyers have to be more aggressive than sellers. When the market falls, selling dominates over buying.

Therefore, to make money in a rising market means you need to get in early at the lows, and sell near the highs- a seemingly simple enough task, but the problem is everyone has the same idea. So for example, let’s say the market is projecting a move that looks like it will move down three points, then up ten points.

The potential market move is seen by many, so will the market react as expected? Likely not, and here’s why:

1) The “low” is determined to be three points down, but there are market participants who may decide to buy early to be sure they get a position, so may they buy at 2 points down instead. If you have enough people buying early, the market won’t go down three points.  So those who were waiting to buy at a drop of three points will likely not get a position.

2) Once the market turns and rises, some folks may not want to wait for it to rise 10 points because they want to be sure they can lock in a guaranteed profit, so they sell early. If enough folks so this, the market may not rise as high as anticipated and those who wait too long might see the market reverse on them for a loss.

So it becomes clear that investors/traders are really trading against the behavior of others in a auction like environment. The feelings of greed and fear can also push the market into extended ranges as well.

So “buying low” equates to getting in ahead of other buyers, after the major selling has subsided. “Selling high” means getting the jump of selling before others after the bulk of the buying is done.

This means a good trader/investor is buying while many others are still thinking about selling and selling while they are still in buy mode. In other words, you have to train yourself to think differently than the “herd”  thoughts of folks buying/selling

Making your thought process independent from the majority is a key requirement for successful trading. It’s also important to be able see see upcoming moves without needing to see much confirming market action. Every confirming action means more people will see the same projected move as you. Ideally, you want to be one of the early buyers ahead of the pack and the same goes with selling.

 

Trading Update: 4/14 – 4/25

The word of the week is….patience.

Last week on Thursday, I made some additional revelations which helped me to fine tune my system to enable capturing extended moves while reducing risk. Once I had analyzed the charts and made the updates, I logged back into the trading software to view the market real time- only to find out the market was closed for the night and Friday as well for the Good Friday holiday.

The week starts and I’m looking forward to trying out the changes made to my system, but the market doesn’t cooperate by remaining flat with little movement. Tuesday and Wednesday is more of the same with little to no market movement. This was the week Apple, Amazon, FaceBook, and other big name stocks were announcing their earnings  for the past quarter, so likely the market was subdued in anticipation.

Thursday was better with movement, but my charts were messed up with all the “flatline” data from the prior three days. Friday was a good day with Thursday’s action making it possible for clearly charting opportunities.

Unfortunately just one day to check out my new methods didn’t provide a lot of time to get familiar with them and I wound up missing the best moves of the day, as in seeing what I “should” have done after the moves were already playing out. The good news is I was able to spot the moves rather quickly, albeit after the fact. Typically I have to spend time after the market closes going through the days market moves to see what I missed, so this is a nice change, and shows me what I need to focus on.

I wasn’t able to capitalize on my new strategy this week, but only due to my missing the set ups, which will certainly improve with further use and observation. Updates this week will lend to make my charting clearer to make the right set ups stand out more.

Looking forward to next week’s market action.

 

Working the Grind – Market Chart Analysis Ad Nauseam

Valentines Day was just another Friday, which was just another day of market chart trading analysis.

I’ve been spending heavy hours day after day focused on market price fluctuations…

The general process is:

1) Researching and analyzing chart data.

2) Using my research results into the design of my trading system for predicting future movement.

3) Testing my methods in live trading for direct evaluation.

4) Check trading system for how accurately trading model matched actual market movement.

5) Determine what trading model changes are needed for improvements.

Then it’s back to step one of researching/analyzing chart data, as well as going through all the other steps in a repeat loop until the desired results are obtained.

It can be quite time consuming and tedious, which is the heart of manual system building. Doing this with focus over time creates a feedback system with your mind and trains your brain to problem solve in this particular area.

I’m happy to report that this process has been paying out dividends in market understanding – finding key pieces of the puzzle of market behavior that repeats over time, and more importantly, determining how these puzzle pieces fit together. It’s taken quite a bit longer than I anticipated in developing this deeper understanding, but that’s related to the nature of the market being filled with so many elements that need to be considered.

One of my first big revelations was that economic news reports and headlines have negligible use in determining future market activity. The news can be horrible and the market can continue to climb higher and higher. Conversely, the news can be good and the market will remain flat. It’s been my experience that the market drives the news, and not the other way around. What I mean by that is the news media looks at market activity, and then tries to link that action to some corporate or economic event. Knowing this makes it easier to maintain focus on market behavior rather than all the talking heads spouting varied opinions of where the market is headed.

Trading analysis can be a grind, but the progress gained, though not as fast as desired, makes it all worthwhile.