Archive for April, 2010
Have spent the last few days kicking myself for not getting aboard the latest PIIGS (Portugal Italy Ireland Greece and Spain) drama. Ie the wog countries plus Ireland. The EURUSD pair has had a nasty tendency to reverse midstream between two pivot levels for no explicable reason. Leaving me stuck waiting for it to continue on through when in fact it had hit resistance I couldn’t explain.
Turns out that the problem was the 200 tick moving average on a 5 minute time scale. Amazing the difference a simple line makes. It is the difference between saying that “the price moved from the central pivot toward the first resistance level, sort of hung around the middle for some reason and fell back” and saying “the price moved from the central pivot to the first resistance level but bounced off resistance at the 200 tick moving average.“ One was predicable – even easier in hindsight…, the other not, even with hindsight.
The hint here being if you can’t explain the days action in words without some fuzzy “well it turned around for some reason” statements, then you have missed something. You can never know in advance what will happen, but it helps if you have a picture of what could happen.
I have been going though the process of dumping anything off my charts I am not actually using. Gone are all my standard deviations, ATR, SAR, Bollinger Bands (the latter is still there on the daily view) etc. Pretty well am back to Pivot levels, a couple of moving averages and the Stochastic for a bit of timing, RSI for trend and oversold overbought and MACD for trend strength.
Been trying to avoid analysis paralysis or as some wag put it on a chat forum the problem of “If you torture a chart long enough, it will confess to anything“. But the 200 tick Moving average is a must have. It is a reasonable approximation to a days trade – although 288 ticks at 5 minutes (12 sets of 5 minute bars an hour x 24) would be exact – people use the 200. So in words it is another way of saying the “Average of the last 24 hours trade” which needs to be mentally separated from the Central Pivot which is the average of yesterdays high low and close. Similar but different.
April 30 2010 | Trading | No Comments »
Interesting observation of the GBPUSD pair at midnight London, there seems to be a tendency for reversals to kick in at precisely midnight London time. Whether this is Australian banks kicking in – at the moment midnight London Summer Time is 9:00 am Australian time or simply banks and computer programs globally effectively tidying their books and changing direction back to what they perceive fair value I don’t know. It also hits the EURUSD pair, but it is not as pronounced as the GBPUSD.
Can it be traded? Possibly. It doesn’t not necessarily set the trend for the day, but perhaps worth keeping an eye out for.
April 30 2010 | Trading | No Comments »
Watching the news last night to see Lloyd Blankfein the CEO of Goldman Sachs answer a question regarding Goldman shorting against a CDO product they sold.
His response and here I paraphrase
“When we sell a product by necessity we are taking the opposite position to the counter party in the transaction.”
As a trader this makes sense. When you go long, someone else sold to you. When you go short someone bought from you. The problem, and one that has not sunk into the mind of the market and in Particular Goldman’s customers yet, is that from Goldman’s view they would not sell a product if they thought it had value. In simple terms they only sell crap.
This counter party statement is not true by the way, but it does depend on how Goldman see themselves.
They could equally take a position in which they are essentially market neutral and obtain their revenue by value adding products. This would entail bundling products and services from other suppliers. They make their money from constructing the bundle.
They could share risk and reward where they build a pile of money from a pool of customers, offer a fixed interest rate and take anything over that.
Alternatively they can be market neutral acting as a broker where they take on no risk – other than people not paying their bills and simply provide a service.
But when they view themselves as traders who are competing with everyone, including their customers then we have a situation where the counter party statement is true. If the product had value then they simply would not have sold it.
That effectively means all their products are crap or at least high risk. Their mindset is that of a trader not a service provider. It is the mind set you use where the people you do business with are your competitors, their loss is your gain.
There is a place in the market for this mindset. It is after all what trading is about. You make money from the person who will pay more for your instrument than you paid, and they think they are making money from you who sold too cheaply.
It is an inherently combative competitive position.
Where the issue comes in is what happens when the people you are doing business with are school districts, local councils and other entities who are not your competitors. In fact they are people who if they get damaged in turn weaken your own society.
The question in the end is what is Goldman’s role. Do they value add, do they provide services or are they a direct market participant.
Is it possible for a company to be a direct market participant and act as an impartial service provider at the same time.
If a direct market participant is it possible to both act as a value added service provider that bundles and value adds financial products essentially sharing risk and reward while at the same time acting as a combative market participant whose role is offload risk to counter parties and maximize reward for themselves?
How do customers know which side they are on? How do they know that are competing against a hedge fund or whether the hedge fund is acting for them?
When you buy a CDO how do you know that the person who sold it to you is competing with you rather than acting as your agent.
April 29 2010 | Market Comment | No Comments »
The upside of living in the arse end of no where – the Antipodes to you.
If you have tried trading international markets from Australia you soon come to the conclusion that you really do live in the arse end of nowhere. Australia is like a little row boat caught between two super tankers, One with a US flag, the other Chinese. The motion of our market is dominated by these two juggernauts, When China is steaming the Australian market moves on a wave from from Hong Kong open – the common afternoon rally. When the US is steaming we have on open surge from the US wave followed by a flat market all day. When they move in different directions, things get very choppy, when they move the same way the Australian market rockets – or tumbles.
At the moment Beijing is trying to rain on an over optimistic parade before it catches fire while the US despite there not actually being a visible “Gotta ave” product or industry to support sentiment (Apple the exception) is having the rally to end all rallies. So the US is steaming, China is idled and the Australian market surges before open and is flat all day.
So how to make a living out of this without becoming nocturnal?
Well it works out that the Yanks don’t have it all their own way. The Poms despite rapidly taking on the colour, culture, debt levels, political landscape and international significance of a third world country still dominate currency markets.
The currency markets dwarf global equity markets by about fifty times. Trillions of dollars are traded every day, most of it automatically. Of all that trade the largest component is EURUSD being traded during the London session. Where this actually works from an Australian view point is that London Open is about 5:00 pm Sydney time during winter. The summer daylight saving shift moves that to 7:00 pm as the UK moves an hour one way and we move an hour the other.
To get a mental picture of this think of a huge physical market place with lots of stalls and vendors that at it’s peak is going to have trillions of dollars traded within it over a twelve hour period, winding down when New York closes and everyone heads off to the pub, home then bed.
During Australian trading hours, what is known as the Asian session occurs. This is generally quieter. Prices tend to settle out at some support or resistance level. On some occasions a large move will carry over into the Asian session, but it certainly is not normal. Australian hours correspond to when traders are setting up their stalls and laying out their wares. There is some trade, but most of the market is home snug in bed.
Where it creates opportunity is that it gives Australian (and Asian) traders a chance to get in at an early price before thousands of bleary eyed poms climb out of the tube, grab a bacon butty and a cup of tea to be at their screens at 8:00 am London time at the latest. The sheer volume of trade that comes in at that time tends to push the market rapidly away from whatever level the market has settled to prior to that.
So how to trade this.
The first thing to do is not stare intently at your screen all day, you will burn out and be too tired to make a decision by late afternoon. Don’t ignore it, but don’t waste the mental energy. Get your pivot points drawn up and make a note of how the market is moving. There simply is not normally the volume of trade during the Asian session to push the price through too many support and resistance levels. It will tend to meander between a couple of levels and will settle out where it creates most opportunity.
Remember people are setting up during this period. Unless their is some unusual pressure during this period people aren’t fighting over price. They are trying to position themselves to maximise returns. This means people who want to go long will have their orders placed as low as they can be. People going short will pull back to the highest level they think they can get in at.
Because of the monstrous leverage in currency markets, where it is not unusual for a $1000 to buy you control of $100,000 worth of currency, stop losses are mandatory. The option of riding out a bad entry is just not on the table. To minimise risk traders (and their automated programs) want their stop loss point to be on the side of a support/resistance line where they don’t think it will be hit and their order to be the other where they think it will. What people don’t want is to get the direction right, but for their stops to be hit through normal volatility oscillations. They also want these entry and stop loss points to be as close as possible yet far enough apart to avoid volatility. In simple terms they are finding a balance between their at risk amount and the probability of loss. These are mutually exclusive by the way. The end result is a convergence into a band of say 10 to 20 points either side of a support/resistance level.
Stop Hunting?
In fact this effect looks a little like stop hunting where people intentionally hunt out other participants stop losses. This does happen, but perhaps not as often as alleged. You will often see in the hour or so of trade before London open a sudden pull back to a pivot level. Stop hunting where a participant pushes prices to this level looks the same, but it can equally be an effect where there is a thinning of orders from the region between support levels as the market – computers included – set themselves up for the day. Remember the Poms start trading at 8:00 am at the latest. Many of them are at their desks at 6:00 am. If they are serious about their jobs they allow themselves an hour or so before open to read the news, discuss the days trade and set themselves up.
Also keep in mind the size of the market and the fact there is no central exchange, for a single participant to push currency down to a support level would cost a huge amount and carry huge risks. It has the same effect though. If you are the small guy whose stop is floating around in no mans land and everyone else has pulled back to the trench line, you are going to be hit.
Work out the underlying market direction based upon your daily, hourly etc charts. If the price is in the middle zone around the central pivot the market is unlikely to stay there, it will tend in the direction of the underlying market.
If on the other hand the market is hanging around one of the outer support/resistance levels it is unlikely to move even further way from the mean unless something significant **cough Greek Debt cough** has fundamentally changed the relative value of one currency against the other. In this case it is likely to move back to the mean.
Worth remembering is that currency by definition is a pairs trade. You are going long one and short the other. Unlike stocks that can increase forever, currency doesn’t. Imagine the USD rising against all other currencies forever – it simply can’t happen. Currency always comes back to the mean. The big players, or at least their computers play statistical arbitrage a lot which means precisely that. If the price is in a low probability zone – a long way from the mean, trade will tend to push it back to the mean.
Once you have figured out the market direction, pull back to the nearest support level away from where you think things will move. If you think it will go long, pull down, if short move to the resistance level above the price.
Work out your stop loss and entry distance. The market can bounce anywhere in the convergence zone around the support/resistance line, so work out an entry that allows the market to bounce a bit before the line and also a stop loss distance that allows it to be penetrated by a bit. I am not going to tell you these, dig out some charts and work it out yourself. Avoid round numbers, if I was stop hunting I would be looking for stops 10 pips from the pivot. On the other hand 25 pips is a large amount – that is about the level of an interest rate adjustment.
Place your order and wait. Don’t leave it till the last minute, sometimes London starts moving early, occasionally late, certainly you want to be in place before 3:00 pm Sydney (6:00 am London) time if you can. Once again remember serious traders are at work at 6:00 am, perhaps bleary eyed, but at their desks and unlikely to miss an easy set up.
If you get stopped out go back and see where you went wrong. Trading is a numbers game, losses are normal so look back at all the charts just to see whether your entry would ever have worked and how many times you would have lost with that particular entry compared to the number of times it would have worked. If it was your error – too tight a stop? fix it. If it was just some untoward thing – an interest rate change you missed or some other random move you will just have to wear it. After all you are using money management and you only have a small percentage of your capital at risk, so it won’t hurt – right?
To exit? well that is up to you. You could take a fixed (reasonable) amount, you could use a trailing stop, you could nurse it and exit yourself when it starts to hit resistance or you could move to a free carry position and see where it runs to. You could work out the distance to the next support level and exit there.
April 26 2010 | Trading | No Comments »
A magic formula?
Pivot Points are a thing you will bump into when trading either futures of forex, particularly the latter. They are essentially a collection of price levels determined from the previous days trade that support and resistance can be found at. They were initially used by pit traders who could take the previous days High Low and Close and make a mental note about where something is trading. The calculation details are below, but before getting to that it helps to know what they actually are.
The Central Pivot
The first one is the central pivot that is called either P or P0. I tend to the latter. It is simply the mean of the previous days price. That is to say the average of the high, low and close. The open price isn’t used because it is often messy due to opening auctions.
Thinking about it this one makes sense. In the absence of any other information, if nothing else has changed in the market, it makes sense that today’s price should be the average position of the previous days action. It is where most people will have their orders. If today is worse than yesterday then prices should all be below yesterdays average, if today is better than yesterday then you would expect prices to be above the previous average. Common sense really.
First Support and Resistance
Now lets assume that there is a trend in the market, either up or down. It might be hard to see, but for an up trend we know that yesterday the price has moved from the days low up with a result average at the central pivot. If we assume that this trend will continue then it makes sense to say that we think today’s action will move up from the average position by as much as it moved up towards it the day before. Similarly the first support assumes that it will move down from the pivot by as much as it moved down to the pivot from the previous days high.
Second and Third Levels
The next pair assumes a more aggressive action and that the market will move up or down from the average position by as much as the whole move from high to low the previous day.
The third set is even more aggressive and assumes it will move twice as far from the central pivot as the whole previous days trading range.
Mid Levels
To these pivot and support levels are added the mid levels. These are simply that the average of two successive pivots. So if some people in the market are thinking one support level and others are thinking the next one then it tends to average out half way between them.
The ones that most pivot point sites forget to mention are the bleeding obvious ones. You need to add in the previous days High Low and Close. Thinking about it, these are obvious. Should today be higher than yesterday? If not then the previous days high will tend to constrain things. Should things be up or down from yesterdays close? Etc.
How Valid Are They?
In equity markets there is a lot more information to affect pricing such as company announcements, earning reports etc. So they do work but can be kicked around. Liquidity can also be an issue. These things need a lot of participants.
In futures markets they seem to work well, but can be kicked around by motion of the stocks underlying the index.
In Forex markets they seem to be absolutely rock solid. Forex will move based on interest rate adjustments which usually means a whole, half or quarter of a cent. But apart from this Forex markets don;t have anything else to work on. You can’t calculate the expected value of a currency like you can an index from its underlying components. All you really have to go on is up or down from yesterday.
Another thing worth remembering is that unlike normal reality the markets display a strange reality where if lots of people believe something then it does actually tend to happen. And like Fibonacci levels – which have no first principles market substance whatsoever – but that actually work. Lots of people – meaning banks, hedge funds and other really big players use pivot levels which causes prices to converge to these levels.
Avoid them at your peril. You may get away with being a shag on a rock using some offbeat theory in equity markets where you wholly own the shares and can ride out the mistake. But with Futures and Forex you are using someone else’s money so you either move with the herd or get trampled on.
Calculation.
The central pivot is the average of the previous days price.
P0=(L+H+C)/3
The first resistance and support are;
R1=Po+(Po-L)=2P-L
S1=Po-(H-P0)=2P-H
The second resistance and support are;
R2=P0+(H-L)
S2=P0-(H-L)
And the third resistance and support are;
R3=P0+2*(H-L)
S3=P0-2*(H-L)
To this set you also need to add in the mid levels between each pair. So you have between the central pivot and first support a level at S1m=(P0+S1)/2 and so on to give
S1m=(P0+S1)/2
R1m=(P0+R1)/2
S2m=(S1+S2)/2
R2m=(R1+R2)/2
S3m=(S2+S3)/2
R3m=(R2+R2)/2
And finally when you are drawing lines all over your screen you need to add in a line at the previous days High, the previous days Low and the previous days Close.
The image below is the EUR USD from a few days last week. You can see that highs and lows tend to be dominated by pivot levels. It doesn’t solve the whole problem of working out which levels will apply on any given day. For that you need to have a feel of up or down and a lot or a little and that is a whole different story, but it does give you entry and exit targets.
The solid lines are high, low and close, the thicker dotted lines the main support and resistance levels and the fainter dotted lines the mid levels. The thick blue dotted line the central pivot.
April 26 2010 | Trading | No Comments »
The Equity Traders Day
Does this sound like you?
Your day starts at around 8:00 am. You are in front of the screen a couple of hours before market open catching up on the overnight moves in the US. You have a read of the Bloomberg news, you check out the DJIA, the London metals exchange, browse through a few of the chat forums just to see whether you have missed something in your view of the world. You have had a look through the list of announcements just to see if there has been a monster gold discovery somewhere that you really need to be on board with.
By market open at 10:00 am you are alert and ready to go. You wait half an hour for the morning chaos to settle and you are away for the day. The next 6 hours will be busy even if you don’t trade. Lots to look at, market scans to make, announcements to read.
The move to Futures and Forex
Ok so you have dabbled and figure you know how to read a chart. You have decided that “Penny Dreadfuls” are just that, unless you are either a geologist or have a really good knowledge of the resource industry. For sure the multibaggers come and go, but you never seem to be on them.
Bored with the little ones, you drop the speculative stocks and have a look at real stocks with real value and a real market. Much more liquidity, but to pull out a living it is going to tie up too much capital. You look at margin loans, discover CFD’s and somewhere along the line you discover Index Futures and Forex.
These seem to fit. You are using someone else’s money. With reasonable money management and stop losses you can control your risk exposure. So you open an account and get ready to trade.
So what happens, you are doing everything right. Up nice and early, you have your head around the market and hours go by and the index or currency does nothing. It wobbles around in a 10 pip range for hours. Lunch time comes and you are bored. By 4:00 you are mentally exhausted and haven’t placed a trade.
Next day same thing. In fact this goes on for weeks. In fact you are finding it hard to be alert even a couple of hours. Staring at the screen day after day with nothing happening is almost torture. How do professionals do it?
To make matters worse, when you look back the market seemed to put in a move overnight. What gives here, this is the Australian Index contract or the Australian dollar. Why did it move when the market was closed? The fates must be conspiring against you. The very moment you take your eyes off the screen the contract makes a 100 pip move.
So whats happening here?
Reality check. Lets have a look at what you are doing. You are a trader. You are the guy who goes down to the fruit market and buys a barrow load of fruit that you hope to sell at a profit later in the day. When you are trading Australian hours the whole world is in bed asleep. You are like the fruit seller trundling his barrow of wares out into the main street at midnight and packing off to bed at sunrise.
Those hours might suit you, but they don’t suit the market place.
The truth of the matter is that SPI200 is dominated by RIO and BHP as well as the banks and they trade in the US. The Big Australian index components are most likely to make a move during US hours and when they do the SPI200 moves.
Remember the SPI is a futures contract it trades where the market thinks the underlying index should be. At market open the SPI has already put in the overnight move suggested by Wall street.
So what to do? Trade overnight? From Australia that is a hard ask. To be alert at US open around midnight Australian time means getting out of bed at around 10:00 pm.
Well there is a better way. Forex, but for that you need to see a later post and you need to know what Pivot Points are.
April 26 2010 | Uncategorized | No Comments »
Blogs go through different phases depending on where the people who write them are at any moment in time. As my life has changed recently this blog also is due for a theme change.
Out goes thoughts theories philosophies and the odd recipe that made sense once upon a time and in comes what I am doing at the moment – which is trading.
So yes there are lots of trading blogs – probably because of the amount of time private traders spend in front of a computer with nothing happening.
Trading for the unenlightened is a bit like warfare. Long long days that can drag into weeks of depressing, heavy, tedious boredom accompanied by brief bursts of absolute fear panic and elation where over a couple of hours the decisions you make and the chaos around you can change your whole future forever.
So stand by. I am not sure where it will go and I wish I had started it a couple of months back to capture some of the boredom.
Needless to say the fact I am writing now means that I am optimistic. Have I finally found a crack in the chaos? Wait and see.
April 24 2010 | Trading | No Comments »
