Archives of “Technical Analysis” tag

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Loss Size versus Win Size When Trend Following

  
  Education
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Too many seek to have high win to loss ratios. This is a mistake. The key is to “try” to keep your losses small when trend following. You can always have gaps or limit moves but one of the best ways to mitigate big losses is to trade smaller. In a trend following program, win percentage can be among the lowest of all primary strategy types at 35-40%. Compare this with the options selling that has the highest win percentage at 74.25%. Option sellers have buried more traders than I can count. One of the reasons that some ” unique and small number” of consistent trend followers have survived for decades is that they attempted to focus on loss size and have tried to keep them small. One of the main statements of trend followers is Cut your losses and let your profits run. Easier said than done for most. This is where the psychology comes in and must be enforced.

Trend following success is not based on systems or methods…it is based on thought processes. Even with the correct thought processes…it is never easy…and there are always losing periods…

Past performance is not indicative of future performance

5 Market Insights from Paul Tudor Jones

  
Analysis, Education
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Paul Tudor Jones is one of the most emblematic figures in the hedge fund industry. His best percentage returns happened during severe market corrections: 126% after fees in 1987 when U.S. markets lost a quarter of their market cap in one day. 87% in 1990 when the Japanese stock market plunged. 48% during the tech crash of 2000-2001. He returned 5% in 2008. His funds have underperformed in the past 8 years. He charges 2.75% management fee and 27% performance fee, which significantly above the industry average of 2 and 20.

Outside of financial markets. PTJ founded the Robin Hood foundation, which attempts to alleviate problems caused by poverty in NYC.

The biggest conundrum when studying successful money managers is do you pay attention to what they are doing today or do you focus on what they were doing before they became widely popular, were managing a lot less money and had a lot higher returns?

Here PTJ talks about how new powerful trends often start – basically, a big price expansion from a long base.

The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.

PTJ on risk management

If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.

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LUCK VS SKILL

  
Analysis, Education
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Successful technical traders know that their technical analysis does not make them successful.
It does not take much skill to learn how to read a chart.  In fact, there is plenty of programs that can do that for you.  Technical analysis provides an historical record; it does not predict what will happen.  History is not doomed to repeat itself in the markets.  No, the skill comes in managing what happens next.  The skill comes in managing the luck handed to us, good or bad.

Technical analysis is a tool that when used properly and for the right reasons will aid the trader in managing what happens at the right hand side of the chart, most of which is pure luck.  Once in a trade the trader is 100% dependent on the decisions and news events that follow, none of which is in his or her control.

Be Flexible-5 Points to Win in Trading

  
  Education
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Flexibility for the trader  to move with price action is the key to successful trading. You can be rigid with your rules and risk management but you must be flexible when it comes to how the future plays out in price action for any market or stock. It is not those that predict the future that make a lot of money in trading but those that react to what is actually happening that are able to profit from price action.

  1. The ability to change your mind and reverse your trade in the other direction when proven wrong  is a powerful trait.
  2. The ability to admit you are wrong and take your stop loss can save your account.
  3. Put your ego aside and look at what is happening not what you believe should happen.
  4. Trade price action not your opinions.

  5. Always realize the markets are bigger than you are, they are always right.

Volatile vs. Smooth

  
  Education
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“Conventional economic reasoning says that if two stocks have similar expected future cash flows and similar dependence on the market, we prefer the one that is less volatile. But might we not see some advantage to stock in volatile company A, which has survived many crises, over stock in safe, untested company B? Perhaps A’s stresses have allowed evolution of the characteristics that will succeed in the future, whereas B is narrowly positioned for the conditions of the past. In the future, perhaps A’s volatility will allow it to move faster into opportunities and away from dead ends, and to evolve as conditions change.”

– Aaron Brown, Red-Blooded Risk

Why does academia assume lower volatility is better?
How many real world instances have you seen confirming that more volatile = more robust, while smooth = over managed, artificial, and possibly brittle?
What are some of the advantages of embracing volatility — managing it versus shunning it?

M. William Scheier, Pivots, Patterns, and Intraday Swing Trades-Book Review

  
  Education
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You can buy M. William Scheier’s book Pivots, Patterns, and Intraday Swing Trades: Derivatives Analysis with the E-mini and Russell Futures Contracts (Wiley, 2014) for a little north of $50 or, if you have money burning a hole in your pocket, can take his ten-lesson e-mini trading course for about $3,000 or buy his indicator package software (included in the price of the course) for $250. Let’s look at the cheapest alternative.
The book is divided into four parts: time frame concepts, day model patterns, repetitive chart patterns, and confluence and execution.
Scheier’s methodology combines “old school” technical analysis with a “new school” proprietary algorithm for what he calls the Serial Sequent Wave Method. In the book he focuses exclusively on the former. (more…)

1+28 Rules for Trend Following -1 liner

  
  Education
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 1.Price is everything.

2. Ignore the news.

3. Buy a stock when it breaks out of a range.

4. Sell a stock when the trend changes.

5. Buy a stock when it makes a new high.

6. Short a stock when it makes a new low.

7. It’s harder to short stocks than it is to buy stocks.

8. Some stocks trend more than others.

9. Diversify when you can.

10. Ignore the whipsaws.

11. Don’t chase the market.

12. Let your winners run.

13. Cut your losses short.

14. A stock can always go higher and always go lower. (more…)

A Trading Psychology Lesson :Know Who You Are

  
  Education
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A good analyst is someone who can figure out that markets are going from Point A to Point B;

A good trader is someone who can navigate the path from Point A to Point B;
A good investor is someone who can weather the path from Point A to Point B;
Good analysts often are not good traders.
Good traders often are not good investors.
Good investors often are not good traders.
Good traders and investors often need to hire good analysts.
So much of success boils down to knowing who you are and accepting that.Doll-ASR

7 Warning Signs For Trader

  
  Education
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There are warning signs that a trader is going down the road road in a trade or in their trading in general. Traders have to go with the flow of the market, manage risk, and keep their mind open to actual price action. Departing from these principles are dangerous and could result in huge draw downs in capital and even blowing up their accounts. Trading through the filters of fear, greed, or ego are very dangerous.

  1. You stop trading your plan and start “shooting from the hip” you are losing or winning so you believe that you are above your own rules, you start trading your opinions instead of your plan.
  2. You are about to take a trade you are 100% sure of, you have no doubt that it will work out. Trades that feel good to do and feel like can’t lose trades rarely win because everyone is already positioned in those trades.
  3. When you ignore your first stop and start deciding that you should give your trade “more room”, when you allow a loss to grow and rationalize why you should hold it instead of following your plan and stopping out you are in trouble.
  4. Averaging down in a position that is going against you is never a good idea, fighting trends are very dangerous amplifying your losses by increasing your position size can be fatal to your account.
  5. Fighting against the prevailing market trend over an over again can chop your account to pieces. (more…)

Consider Factors That Will Affect Market Participants’ Perceptions Even if You Don’t Believe in It

  
  Education
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  • I have always been a discretionary trader with my analysis based on fundamentals…. Whatever kind of a trader you are, you have to be aware of perceptions in the market place, that can influence the participants’ behavior. If a lot of people are charting and they think that a certain level is a key level for whatever reason – lunar, astrological, who the hell knows – then you have to be aware of it. Because it is going to cause a certain number of market participants to react and you have to be aware of it. You have to understand how that is going to affect your position.
  • You have to be aware of all these technical techniques, such as momentum, because a lot of market participants use them and so they can affect the market.
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