Wednesday, September 26, 2012
WMB bear trap on weekly
I shorted Oct 19, 52 put, delta –0.1895, for $25. Covered by 20 shares short. Delta roughly neutral.
Cost base: –20 short, 31.97, current price: 33.99. unrealized loss: 40.
Monday, September 24, 2012
Spike ruined my purple vacuum setup
2 mil volume traded during those 15 seconds, at least $70 out of $122 profit stolen.
Friday, September 21, 2012
Thursday, September 20, 2012
Wednesday, September 19, 2012
Tuesday, September 18, 2012
Friday, September 07, 2012
<<Mastering The Currency Market>> Part 3
in our trading careers we will see more of these than reversal
patterns. It is the nature of markets to trend more than they
reverse.
As quickly as markets show repetitive behavior, the pattern
fades away and shows up at a later date with a slightly different
cadence and a longer or shorter distance.
This chart provides a great example of why professional
traders always buy strength and sell weakness. The price corrections
in September gave market participants a clear look at
which markets were weaker than the others, and traders voted
with their money, giving us a very impressive rally in
EURAUD in early October.
One of the most reliable trade signals is the combination trendline
break and stochastic cross.
When we use the trendline and stochastic cross signal, we
don’t need the MACD histogram for confirmation, but we want
it to confirm within the next couple of candles. Arule of thumb
is that if we are considering a trade signal and the MACD histogram
is moving opposite to the signal, we know we are very
likely to be entering a countertrend trade and should be even
more active in monitoring the trade. Preferably, we want at least
the MACD histogram starting to stair-step in favor of the trade.
When a price
move is marked by a nearly parabolic candle like this one, it is
best to stick with signals in the same direction as the momentum
or just not trade. The MACD confirms our decision not to
take the signal as it is below both the zero line and the trigger
line.
the difference between trending
and countertrending markets by pointing out that elongated
candles extending up or down identify trending, or impulsive
price action, whereas shorter candles with smaller bodies
indicate countertrending price action, or reactive trading. This
is an important distinction for a trader because although our
indicators and overlays remain the same, our trading strategy
will differ slightly with the type of market we are in.
Trending markets call for making quick decisions upon entering
a trade but showing more patience once one is in the market,
whereas countertrending markets give the trader more
time in taking a trade but require less time in the trade and
speed in exiting.
A very important difference between a trending market
and a countertrending market is that in a trending market
the higher time frames will dictate price movement and
direction, whereas in a countertrending environment the
lower time frame charts can dictate direction. This means
that in a trending market you do not want to go against the
trend on the next higher time frame. In a countertrending
market you are taking signals on the lower time frames
routinely regardless of the previous direction on the higher
time frames.
In analyzing a market we never skip over a time frame. If we
are trading off a 60-minute chart, we look to our 240-minute chart
for confirmation. We never jump time frames because we would
lose continuity. If we see a signal on the daily chart, we look to
the trend on the weekly chart for confirmation. If we see a signal
or setup on the 15-minute chart, we look to the 60-minute chart
for confirmation. It is paramount to maintain this continuity.
We should
always take direction and identify a trade setup from our
intermediate-term chart, in this case the weekly chart. We can
look to the long-term chart for confirmation or support—though
this is not a prerequisite, particularly if one is day trading—and
use the short-term chart to hasten our entry and exit signals.
Waiting for the weekly chart to confirm does not necessarily
mean waiting till the end of the week. If the behavior
of price on the weekly chart gives us a sell indication on a daily
close, we can take this as higher time frame confirmation.
If we have a favorable
setup on the intermediate-term chart, we can wait to take
a signal on that chart or look to the short-term chart for a signal
in the same direction. If we take a signal on the short-term
chart and the intermediate-term chart doesn’t confirm within
three candles, we need to exit the trade quickly.
For
trading, we define the three time frames as the short-term
trend, which can be as short as two candles if price has closed
beyond the last trendline and as long as 15 candles; the secondary
trend, which can be as long as 15 to 60 candles; and
the primary trend, which can be from 60 candles to hundreds.
Figure 9-11 shows how tightly the stochastic follows the
short-term trendline shifts and how the shifts occur as old
trendlines give out, allowing a new trendline to begin. Agood
rule of thumb for active markets is that once the stochastics
cross and close above the oversold line, the short-term trend
has shifted higher, and once they cross and close below the
oversold line, the short-term trend has shifted lower. As
always, we need to confirm the trend by the pattern of highs,
lows, and closes. Another technical rule of thumb is that once
the MACD crosses and closes above or below zero, the intermediate-
term trend is shifting.
It is also important to understand that once a short-term
trendline is violated, it is likely that the market will migrate to
the intermediate-term trendline, and once the intermediateterm
trend is violated, it becomes more likely that the market
will try to test the long-term trendline.
At this point it is tricky
to determine whether we have a new trend in place or simply a
secondary rally just before a climax. As long as we are below the
long-term trendline, we assume the second case: We are seeing
a secondary rally marked by impulsive price behavior that tends
to fade quickly in the face of the more mature primary trend.
Coordinating time frames also means seeing setups on a
higher time frame and then waiting for a signal in the same
direction on the next lower time frame. An important aspect of
this tactic is to remember that once the signal comes on the
lower time frame, it is important to look back to the higher time
frame to make sure the indications that originally warranted the
signal are still in place.
The point here is that it is wise to keep track of
the primary trend and the secondary trend because by nature
a secondary move will start out strong and fast but fade sooner
than inexperienced traders think, just as the primary trend will
start slower yet stay intact longer and move farther than most
market participants think.
Another word of caution about secondary
moves: Because they start out fast and exhibit impulsive
behavior, they generally will overrun support and
resistance levels such as previous highs and lows, pivots, and
retracement levels quickly, leaving untrained traders to believe
that a new trend is under way.
When we see a trade signal on a chart and look to the next
higher time frame for confirmation, it does not mean that the
trend must be in agreement, but it does mean we should be
seeing indications that support the signal in the lower
time frame. An indication on the higher time frame that
is in agreement with the lower time frame could be considered
a countertrend signal by a leading indicator such as a stochastic trigger line cross, divergence on a momentum
indicator, a trendline violation, or even a one-bar reversal on
the MACD histogram.
The downside of using higher time frame charts to confirm
lower time frame charts comes when we are in a sideways or
countertrending market or when we are seeing trends reversing.
If we always use the higher time frame to confirm, we will
miss the reversals, which by definition occur on the lowest time
frames first. This is why it is so important that traders understand
the importance of both trend trading and countertrend
trading.
Another big problem for many beginning and undercapitalized
traders is that they spent too much time trying to figure
out which direction they think the market will move in on
the lower time frames instead of just taking signals and moving
in whichever direction the market moves.
the only goal a trader should have is to have the discipline to follow her trading plan. Always remember that
trading is not about being right or wrong or even about thinking; it is about executing one’s plan.
One of the biggest personality warning signs for traders
comes from people who are accustomed to getting other people
to change their minds or willing people to do things that
aren’t in their best interests. Salespeople come to mind. If you
are used to being able to manipulate people, you will be in
for a surprise when you trade, because you cannot cajole or
bluff the market. It is said that the worst products have the
best marketers, and nowhere is this truer than in the brokerage
industry. Because of this, brokers tend to have very limited
success as traders. Brokers are not alone on that list,
however. Lawyers also often struggle as traders. Many
advanced education professionals, coming from a field in
which linear logic, not intuition, is practiced, have an uphill
struggle too.
Trading-U.com
Though the market trades around the
clock from Sunday 5 p.m. EST through Friday 5 p.m. EST, it is
common parlance to refer to 5 p.m. EST as the close because it
marks the change from one day to the next on the daily chart.
Being a position trader often means
going through periods in which you have more losers than
winners; this highlights how important it is to get those longrunning
winners. When you do get a winner and learn to let
the trades run, you will find that on average your winners are
much larger than your losers; this accounts for the favorable
risk-reward ratio that position traders enjoy compared with
traders who work the lower time frames.
In a position
trade—or any trade—you should be risking only a small
percentage of your overall risk capital. For professionals this
may be as little as 0.5 to 1 percent. For beginners, who are
often undercapitalized by definition, it should never be over
5 percent and preferably should be closer to 2 percent.
The disadvantage of position
trading is the other side of the risk-reward coin: Your losses
will tend to be larger than they would be if you were trading
a smaller time frame. We recommend always starting out with
just one contract per position trade and keeping your stop far
enough away from price so that you will not be knocked out
prematurely by the larger intraday price swings in markets that
are due to fundamental news releases and other day-to-day
happenings in the world and in financial markets. Your stop
generally should be placed just beyond the last swing high or
low on the chart.
Swing trading involves shorter time frames than the daily
charts; this generally means trading from the 240-, 60-, and
15-minute charts.
The trader determined that he would take buy signals
generated by trendline penetrations and zero line crosses on
the MACD on a closing basis on the 60-minute chart if that
occurred above the weekly pivot point and the MACD was
above the zero line on a closing basis on the 240-minute chart.
Once the trade was initiated, a stop-loss was entered at a price
equal to 2 percent of his account balance or just below the low
of the previous candle he entered on, depending on which
number gave the trade more room.
a combination of a trendline break and an
MACD cross of its trigger line on the 60-minute chart to exit.
Day trading is very much a microcosm of position
trading and swing trading. The only difference is that in day
trading one must be aware of scheduled economic releases and
other world or financial market developments that can affect
price movement over the short term or intermediate term.
In day trading, you always should exit your position 5 to 10
minutes ahead of major scheduled economic releases. We use
www.forexfactory.com for its calendar and anything marked in
red or orange to be a major release. After an important news
release we do not enter trades until the candles on the charts with
the shortest time frame stop showing dojis and start showing
wider candle bodies. Remember that dojis show indecision and
the wider bodies show that trade is being facilitated.
For day trading we recommend using the 15-minute chart
for timing and patterns, the 60-minute chart for direction and
confirmation, and 5-minute or 3-minute charts to help time
entries and exits.
Before the news release in Figure 11-3 we had a sell signal
on the 60-minute chart hours earlier, and on the 15-minute
chart we see that the MACD had dropped below the zero
line and stayed below zero despite the short-lived rally that
followed the 7:30 a.m. CST release. We know that this is bearish
behavior, and it also tells us that the trend on the next lower
time frames is going to be lower also. After slumping lower,
the market tried to rally one more time and ended up forming
a small symmetrical triangle on the 15-minute chart. Symmetrical
triangles, as we know from Chapter 6, tend to be continuation
patterns that are likely to break out in the same direction
in which they were moving when they formed their base. In
this case, the base was created while moving north to south, or
higher to lower, and the market was exhibiting a pattern of
lower highs. However, we still would wait for a close outside
the triangle before initiating a trade.
On our 15-minute
chart we also have a 5-simple moving average set to the close
that we would use to keep us in the trade. As long as candles
closed below the 5-SMA line, which is marked in black, we
would continue to hold our short position.
Always Have the Appropriate Phone Numbers on Hand
You also will find that trading can be stressful because as
humans we are programmed from the beginning to improve
our situation and surroundings and have emotions. This
means we have an innate urge toward progress, and when that
drive is slowed or stopped, we become frustrated. Frustration
creates stress. If we feel that our progress has been stopped or
even reversed, as happens when a trader is experiencing
a position going against him or her, that frustration can turn to
anger and fear. We will always have emotions; the difference
between a professional trader and a beginner is that the professional
is prepared for the emotions and the stress they
create. This preparation starts with writing out a trading plan.
Regardless of the emotional desire to close out the position at
a loss and stop the fear or try to fight the market by increasing
the position, professional traders follow their trading plans
automatically because that is how they have programmed
themselves and because they know it is their only defense.
2 examples, see printout in binder.
What you write in your trading journal is up to you. If there
is one thing that should be mandatory, it is that every time you
make a trade, whether a demo or live, you need to write down
the following:
1. Market traded
2. Direction traded from
3. Date and time
4. Signals used
5. Time frame traded
6. Trend or countertrend
Bibliography
Boroden, Carolyn. Fibonacci Trading. New York: McGraw
Hill, 2008.
Dalton, James, Eric Jones, and Robert Dalton. Mind Over
Markets. Chicago: Probus, 1990.
Falloon, William. Charlie D. New York: Wiley, 1997.
Fischer, Robert. Fibonacci Applications and Strategies for
Traders. New York: Wiley, 1993.
Gann, W.D. How to Make Profits Trading in Commodities.
Pomeroy, WA: Lambert–Gann, 1942.
Goodspeed, Bennett. The Tao-Jones Averages. New York:
Penguin Books, 1984.
Kase, Cynthia. Trading with the Odds. New York: McGraw
Hill, 1995.
Kirkpatrick, Charles, and Julie Dahlquist. Technical Analysis.
Upper Saddle River, NJ: FT Press, 2007.
LeFevre, Edwin. Reminiscences of a Stock Operator. New York:
The Sun Dial Press, Inc., 1938.
Lipton, Bruce. The Biology of Believe. Santa Rosa, CA: Elite
Books, 2005.
Mandelbrot, Benoit, and Richard Hudson. The (Mis)Behavior
of Markets. New York: Basic Books, 2004.
Murphy, John. Technical Analysis of the Futures Markets. New
York: New York Institute of Finance, 1986.
Person, John. A Complete Guide to Technical Trading Tactics.
Hoboken, NJ: Wiley, 2004.
Rhea, Robert. The Dow Theory. New York: Barrons, 1932.
Reprint New York: Fraser, 1993.
Sperandeo, Victor. Trader Vic—Methods of a Wall Street Master.
New York: Wiley, 1993.
Williams, Bill, and Justine Gregory-Williams. Trading Chaos.
2nd ed. Hoboken, NJ: Wiley, 2004.
Tuesday, September 04, 2012
Monday, September 03, 2012
<<Mastering the Currency Market>> Part 2
In drawing trendlines on candlestick charts, we also have the option of drawing them
from the highs and lows of the wicks or from the highs and lows of the bodies.
More often than not a trading range proves to be a price pause before
resumption in the same direction in which the market was
moving before entering the range. This occurs because markets
tend to trend more than they reverse.
We do this by waiting
for an individual candle to close and then updating our trendlines
if necessary before committing to a direction or trade
We always trade from the perspective that we do not know
whether the level will hold. We do not try to guess whether
the level will hold; we stay patient and let the market tell us if
it is respecting the potential support or resistance. Remember
to “lose your opinion, not your money.” Once the candle is
closed, we get a true snapshot of its behavior.
Trendlines are very useful for pointing out direction. Price
doesn’t have to go up to the trendline and give us a textbook
trigger every time. In many cases just having the trendline in
place on the chart will provide a reminder of a market’s current
direction.
In a flat or sideways
environment the market will tend to wrap around its
central pivot, using pivot support 1 (S1) for support and pivot
resistance 1 (R1) for resistance. In an uptrend price often
tends to respect the central pivot or S1 as support and R2 as
resistance, whereas in a downtrend price tends to respect the
central pivot or R1 as resistance and S2 as support.
The chart in Figure 5-24 gives us
a hint that a correction may be coming. On this 240-minute
USDJPY chart we see that the market failed to clear R1 three
times and then fell quickly and sliced through its weekly
central pivot on July 11, which was a clear warning sign. It
struggled to get back above that central pivot the next week,
giving traders a chance to exit longs or initiate shorts, before
falling sharply again. After falling too far too fast without even
pausing at S1, the market made a complete recovery ahead of
the weekend. The next week it started to sell off again early in
the week of July 20, only to retest that weekly central pivot,
which held, before moving ahead to post a higher high.
Figure 5-25 shows an example of a buy signal in the form of
a bullish engulfing candle, right on the weekly central pivot of
this 60-minute USDCHF chart. Not only does the market trading
above the weekly pivot tell us that the market is exhibiting
underlying strength, the bullish trendline tells us that the market’s
current direction is higher. The candle clears the high of
the last dozen or more candles, providing a further indication
that the buy signal could be a generous one.
Figure 5-26 shows a session in which the market opens
above the daily central pivot. We also can see on the far left that
on the previous day the British pound challenged R2, which
indicates a strong market. For the session on May 21 we see the
market trade down to test the central pivot and then give us a
bit of a bounce to tell us it respects the pivot, followed by a
retest with an actual close below it, before a change-of-direction
candle and a close above the central pivot, followed by a
nice rally.
A question you may be asking yourself is, “How do I know
which pivot point to place importance on: the monthly, weekly,
or daily pivot?” The answer is that the time frame you are trading
is the pivot point you are going to be watching. If you are
position trading by using the daily chart for entry and exits,
you are concerned with only the monthly pivots. For trading
between a 60-minute and a 240-minute time frame, you follow
the weekly pivots, and for day trading, you use the daily
pivots. If you are in a trade on a lower time frame and the market
outruns the appropriate pivot points, you can consult the
next higher time frame’s pivots.
pivots are a trend-following tool in that they expand and contract on the
basis of previous market behavior.
Figure 5-33 shows the same day we just examined, but on
the next lower time frame. Here we again see a change-ofdirection
candle, this time on the 60-minute chart. Of course
we don’t know at the time that this intersection of a trendline
and a 0.618 percent retracement will hold, but when we see the
change-of-direction candle put in the double bottom here, just
below 104, we don’t think, we buy.
Although Fibonacci retracements are more of a countertrend
tool in that they measure primarily corrective price behavior,
Fibonacci extensions are a trending tool because they are
Figure 5-36 shows a late summer rally in 2007 in GBPUSD
and then a sharp correction lower by approximately 66 percent
of the up move into mid-September, which provides a retracement
from which to draw an extension higher. In this case the
market pulls up short of the 100 percent extension in early
October and proceeds to move sideways for much of the
month before slipping higher toward the end of the month. The
second close above the 100 percent extension proves to be a
“breakout” above both that level and the isolated high back in
July, and we get a very fast rally, or a climax rally, up to the
1.618 extension level.
there are plenty of
levels for traders to be concerned about on a chart, but the
most important thing to remember is that we don’t respect the
level unless the market does that first.
Technical analysis is, after all, an art and
is based on the assumption that “the charts tell us everything
the market knows about itself.”
In markets we often see an
orderly price move to establish direction, then acceleration
on increasing volume, followed by a dramatic sell-off.
These formations are characteristically larger than flags and
take more time to develop. As in any breakout, we must wait
for the candle to close outside the formation.
We are going to cover reversal patterns next, and it’s important
to remember that these topping or bottoming patterns are
not nearly as common as continuation patterns. A word of caution
is due in addressing reversal patterns, particularly on long term
charts, because they occur less often. There is something in
human nature that makes us feel we need to change things for
the better. Beginning students imagine that they can discern a
change in the market before the rest of us and call a market top
or bottom and maximize their profits along the way. Experienced
traders know better and are more interested in going
along with the market, which means trading through more continuation
patterns than reversal patterns. It is best to understand
this human tendency to change things at the very beginning of
a trading career. The only thing we need to change as traders is
our perceptions of our significance in the face of the market.
A rising wedge is a bearish formation that usually is seen as a
reversal pattern but also can be a continuation pattern. Here we
will focus on reversal patterns. A rising wedge can be seen on
the charts as an up move with a wide shape that gradually
narrows as it rises, giving it a cone shape. It can be tricky to
identify as being bearish because it exhibits the higher lows and
higher highs that are the hallmark of an uptrend. What helps
us identify it as a reversal formation is the decreasing volume
on each successive rally.
Despite what most analysts believe, technical indicators were not designed to predict future price movement as much as to define current price movement. It is believed by most experienced money managers and traders that the simplest formulas often lead to the most successful trading.
Most leading indicators measure
momentum, or the degree of the slope of a current price movement—
i.e., the speed of the trend—and are called momentum
oscillators.
It is thought
by many experienced traders that the most important skill a
trader can have and the one that is the hardest to achieve is the
ability to “let a profit run,” or stay in a position longer and maximize
profits. Two of the main reasons for this are emotions,
generally nervousness, and leading indicators. Trend traders
need to be comfortable with lagging indicators.
In Figure 7-3 we have an 89-period and a 144-period EMA
cross that generates a sell signal on the daily chart. 6 month drawdown
although the zero line cross by the black line is still the most
influential signal because it is a trending signal, we also have
the MACD-trigger line cross, which can be both a trend signal
and a countertrend signal.
MACD Histogram
The rate of change between the two lines (the MACD and the
trigger line) also provides an indication of the strength of a
move.
Traders often ask, “Which divergence should we look for,
that between the MACD cross (the black and gray lines) and
price or that between the MACD histogram and price?” The
answer is either one; however, short-term divergence generally
will show up first on the histogram and can be more significant.
By coupling a shorter time frame EMA that has
smaller deviations with an 18-SMA that has a 2 standard
deviation Bollinger band, we may be tipped off sooner
that a desirable setup is in the making.
Because
a stochastic is so sensitive, it is a good indicator to use for signal
generation that gets you in quickly.
Some traders also use a stochastic in their short-term trading
by taking a close above 70 as a buy signal and a close below
30 as a sell signal. This may seem counterintuitive initially but
can work well in identifying markets that are accelerating.
Another way to use the signal is to wait for a second cross
down from the upper level or a second cross up through the
lower level before entering a position. The stochastic is a sensitive
indicator, and by seeking out markets in which it gives
that second cross for a signal, it is thought that a trader can
help increase the odds of success on a trade.
It is rare to see an RSI reading above 80 or
below 20, but when those numbers come, they are significant.
A reading below 20 generally indicates that a lower low in
price is still to come, and a reading above 80 almost always
means that a higher high in price is to follow.
Just
as we can draw trendlines that act as support and resistance
on the price chart, we can draw trendlines on an RSI chart that
may act as support and resistance.
the
majority of CCI values would fall between 100 and -100. When
the market moves above 100, it is thought to be entering
an uptrend and a buy signal is given, and when the market
moves below the -100 CCI reading, a sell signal is generated.
Similarly, a move up through -100 would be seen as a countertrend
buy signal, whereas a move down though 100 would
be seen as a countertrend sell signal. By not considering price
action between the 100 and -100 levels, the trader avoids much
of the sideways or countertrend price action and seeks out
the times when markets enter into cyclical moves.
Assuming that a quarterly cycle is a good fit
for a currency, we went with a 20 length CCI in this example.
Figure 7-17 shows how a CCI trendline
signal followed by a move above 100 provided timely buy
signals in USDJPY.
The reading on this chart for February 1 is
0.0237, which tells us that the ATR over the previous 14 sessions
was 237 pips. Therefore, we can surmise that if we take
a position in this market and want to place our stop far
enough away from price to avoid being stopped out on a random
intraday price spike, this information will be helpful. We
may decide that a 2 ATR stop would be appropriate—placing
our stop over 474 pips away from our entry—in that it would
give us enough room to stay in the trade and not have to
worry too much about price stopping us out prematurely.
That will help us determine how
much we would need to expect to risk or if we could even
afford to take a position in that market.
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