trend Archives - Algorithmic and Mechanical Forex Strategies

The guy that bet on Leicester City every year

September 5, 2016 by Shaun Overton Leave a Comment

Leicester City started the 2015 season with terrible odds of winning the Premier League Championship. Bookmakers only game them odds of 5,000:1 of winning.

To put that in context, you are more likely to die riding a bicycle than you were to win a bet on Leicester City. Or, you can think of betting on Leicester City every year. If you bet on them every single year for 5,000 years, you would expect them to win a grand total of… once.

2014 was hardly an indicator of their pending success. They were nearly relegated to a lower division (i.e., kicked out of the Premier League). And yet, they did win the championship last year.

Leicester City’s Biggest Fan

Meet John Michklethwait. He’s the former editor-in-cheif at The Economist and he’s currently editor-in-chief for Bloomberg. Clearly, he’s a very smart man. And yet, despite the odds and repeated disappointments, John bet on his old love, Leicester City, every single year dating back to the 1980s. That’s roughly 30 years of nonstop losing.

It wasn’t a lot of money each year: just £20. We all have our indulgences. I see the value of having skin in the game. £20 on a season is enough to make one care, but not so much that he’s upset about losing it.

Then something disruptive happened. John moved to the US last year for his position at Bloomberg. The chaos of the move threw him out of sorts, and he accidentally forgot to bet on Leicester City in 2015. He bet on them every single year dating back nearly 30 years. And yet the one year that he forgets to bet, not only did Leicester City win, but the bet paid out 5,000:1.

Let’s step back and calculate the cost of that oversight for Mr. Micklethwait.

£20 * 5,000 = £100,000.

A hundred… thousand… pounds. That kind of winning would put a nice dent in your mortgage, wouldn’t it?

The risk of low probability strategies

Everyone hears anecdotes about successful trend traders. Even winning only 30-40% of the time, they walk away big winners over time.

You live HERE. Math isn’t good enough. You also need to wonder if your strategy can handle real-world problems.

What if they took that even lower? They could move their stop losses closer to the market. They’d reduce the size of the average loser, but the winning percentage might also drop to 10-20%.

Mathematically, this could work out identically. 30% winners that earn 5x the average loser make for a profit factor of 1.5. A strategy with only 10% winners that make 15x the typical loser also have a 1.5 profit factor.

They’re the same. Aren’t they?

Planet Earth isn’t the same as planet Math. In the real world, people get sick and miss trades. Or, they move across the Atlantic and forget to place a £20 bet.

People move. They get sick. Computers break. Things can and will go wrong with trading.

Richard Dennis once commented that the Turtle Traders would often make their annual returns off of one, single trade. A single trade!

When your performance depends on positive outliers, you’re massively vulnerable to accidents. What happens if you’re sick that day? Or your internet goes down? Or your broker locks you out of your account on the worst possible day?

Life happens, brother. A plan that depends on perfection is no plan at all. You need to make yourself robust to failure. Or even better, you’d make yourself antifragile.

Winning percentages

I mentioned that you can do really well winning 30-40% of time. Why then, does my own trading strategy, Dominari, win 68% of the time?

Because I’m exploiting compound, exponential growth. It’s not just how much you win, but the order in which you win it.

Let’s take two examples:

A ranging strategy with a profit factor of 1.3 that wins 68% of the time.
A trending strategy with a profit factor of 1.3 that wins 30% of the time.

Look at the red circles. Trending strategies are prone to extreme outcomes, both positive and negative.

Each strategy risks about 1% on any given trade. And, the average of the range and trend strategies are identical in the long run.

But… and this is an important “but”, the expected worst case scenario with the trending strategy is substantially more likely compared to the range trading strategy. In effect, the average is more average with a ranging strategy than with a trending strategy.

Why is that? Because unusual losing streaks are devastating to trending strategies. Have you ever had a losing streak? It happens to everyone.

By using a strategy with a higher winning percentage, you’re making yourself robust to streaks of losers. And, not to mention, your average length of a winning streak is considerably higher.

Even though you’re getting the same mathematical outcome, you’re making things much easier on your trading psychology when you adopt a strategy with a higher winning percentage.

Dominari & Exponential Growth

You may have thought to yourself, “68%? That’s kind of a strange number to pick.”

You’d be right. The choice of 68% winners was not a coincidence. It is, in fact, the win rate on my Dominari strategy.

Dominari is about more than just buying and selling. Trading is also about managing a portfolio and position sizing. Position sizing is phenomenally important over your trading career.

My backtest results for Dominari show that for every $2,500, the account increased to $17,855.35 after 3 years. That kind of compound growth doesn’t happen by accident. That’s why I’d like to share the good news with you in my webinar this week.

I’m going to show you how to put that exponential awesomeness to work in your trading account. Sound good? Click here to register for the FREE webinar.

Things to Know Before Trading Silver

August 8, 2016 by Lior Alkalay 3 Comments

If you think Silver trading is almost identical to Gold trading, you are wrong. But if you think Silver is utterly different you are wrong, as well. Confused? Don’t be. Trading Silver has a lot of similarities to trading Gold but there are two key dimensions that impact the way Silver behaves in relation to Gold—volatility and the Gold-Silver ratio.

Trading Silver: Volatility

Below is a comparison of Gold and Silver volatility levels. It’s hard not to notice that Silver is substantially more volatile than Gold. The reason for that is because liquidity in Silver futures across the exchanges is substantially lower than Gold futures. This, of course, means that smaller amounts (albeit still in the billions) can move the price of Silver much more than Gold. As a trader you should accordingly adjust your strategy to higher volatility.

In practice, Silver’s higher level of volatility first and foremost has an implication on stop losses. Because higher volatility tends to trigger more stop losses it means more margin of safety is needed when you place your stop loss. In other words,if you are trading silver, you have to place your stop loss a little further to make sure a sudden burst of volatility won’t throw you off the trade only to later hit your market. Of course, this also means you might reconsider certain trades, because if your stop loss is now further from your entry but your limit stays where it is your risk reward ratio is now lower and that could mean your trade is not necessarily worth it.

The second noticeable impact of higher Silver volatility is the manner in which Silver trends behave. Both Gold and Silver have a tendency to move in bursts of momentum but in Silver, the bursts tend to be stronger because of the higher volatility. As can be seen in the example below, both Gold and Silver eventually gains more or less the same percentages. But while Gold’s ascent was more gradual, Silver lagged Gold only to catch up with it later, in a fraction of the time and with a strong burst. This, of course, can be of great value for the Silver trader, especially one who can exploit such opportunities to make a rather quick gain from Silver catching up with Gold.

Gold-Silver Ratio

Perhaps one of the most important ratios in the commodity space. The ratio, as its name implies, measures the price ratio between Gold and Silver. In other words, how much Silver is Gold worth? Why is that ratio useful? Because the ratio between Gold’s price and Silver’s price moves in cycles (see chart below).

When the ratio is at cyclical lows Silver is relatively cheap compared to Gold. In a bullish run it usually means that Silver’s price has more upside and will therefore outperform Gold. The same goes for a bearish trend. When the ratio is at cyclical highs then Silver will underperform Gold, both on the way up and on the way down. Therefore, watching the Gold-Silver price ratio allows you to gauge the potential momentum w

In practice, this means you can expect Silver to outperform Gold when the Gold-Silver ratio is at cyclical highs. A classic example occurred in 2011 when as the Gold-Silver chart was at record lows (see above) which resulted in Silver outperforming Gold on the way up (see below). As the ratio gradually moved into cyclical highs, Silver started to underperform Gold again.

The Bottom Line

Sometimes, Silver just moves too high too fast. When that happens it’s better to bail out before the burst. On the other hand, sometimes Silver lags, so much so that you have to ask is it worth riding on volatility to catch up? The key to trading Silver is understanding its similarities with Gold but exploiting the differences between the two.

43 million real trades reveal the tactic of profitable forex traders

June 20, 2016 by Shaun Overton 4 Comments

Traders that follow one simple rule are 3.118 times more likely to be profitable 12 months later than those that don’t.

The critical feature of profitable traders is their reward to risk ratio. Yes, you’ve probably read that before, but this time it’s backed up with research. FXCM studied 43 million real trades from traders around the world to produce this analysis.

Image credit: DailyFX

Everyone “knows” that 90-95% of traders lose money. The good news is that the real percentage is noticeably lower. 83% of all traders lose money. And, that’s among the worst group. When traders use a reward to risk ratio of 1 or more, 50% of all traders are profitable after 12 months.

Be warned: the phrase “correlation is not causation” very much applies here. I cannot promise you that based on the data that using reward to risk ratios greater than 1 will automatically give you 50-50 odds of being profitable in the long run.

Logic, however, suggests that using good reward to risk ratios is a good idea. The advice to use reward-risk ratios above one appears in every trading book ever written for a good reason.

When traders use a reward to risk ratio of 1 or more, 50% of all traders are profitable after 12 months.

I suspect that it’s not the ratio itself that’s important. Instead, a large ratio discourages the worst mistakes that traders make.

I remember a project when I worked as a broker at FXCM. The systems desk analyzed the trades of the company’s most consistent losing traders. Perhaps taking the opposite signal of the worst traders might lead to profitable trades?

Alas, we found something far more mundane: the worst traders lose because they over-trade.

Trading costs

Think about how trading costs apply to the reward risk ratio. If you earn $2 for every $1 that you lose, it makes scalping an impossible activity

Traders using a 2:1 ratio need to use more patience. Even though FXCM offers low spreads and commissions, a 2:1 reward risk ratio implies further distances to the profit target. Longer pip distances lower the cost of every pip of profit.

Cost examples

FXCM averages a 1.4 pip spread on EURUSD. Let’s see how our reward-risk ratio affects trading costs using the 1.4 pip spread for our 2 examples.

Scalping

Profit target: 10 pips
Spread: 1.4 pips
Spread as a percentage of the profit target: 14%

Intraday Trend Trading

Profit target: 50 pips
Spread: 1.4 pips
Spread as a percentage of the profit target: 2.8%

Your cost as a percentage of profit in these examples are 5x higher when you scalp. That’s not good!

Holding trades with bigger profit targets minimizes the impact of trading costs. Said another way, you get to keep more pips when you win by increasing the distance of your profit target from your entry price.

The advice to use reward-risk ratios above one appears in every trading book ever written for a good reason.

Following a reward risk ratio greater than 1 naturally pushes you towards lower trading costs. Lowering your trading costs logically suggests you have a higher likelihood of long term profitability. If you want to get other critical tips for similar results, then make sure to sign up for the Foundations of Profitable Trading Checklist.

Reward risk ratio explained

The reward risk ratio compares your average profit to your average loss. If your average winning trade is $30 and your average losing trading is $15, then you have a reward risk ratio of 2:1. If your average winning trade is only $8, but your average losing trade is $16, then your reward risk ratio is 0.5:1.

Does the winning percentage matter?

Amazingly, the percentage of winning trades doesn’t seem to matter. The high frequency trading firm Virtu is a great example of this. Virtu wins on 99.999% of trading days even though it only wins on 49% of its trades.

The FXCM data shows that the average trader wins more than 50% of the time. EURUSD trades won 61% of the time, while some pairs were closer to 50%. The percentage of winning trades on all currency pairs is greater than 50%.

Image credit: DailyFX

Despite winning more than 50% of the time, trades with a poor reward risk ratio only had a 17% chance of earning a profit 12 months later.

… you get to keep more pips when you win by increasing the distance of your profit target from your entry price

If you’re currently struggling with your profitability, you’ve probably thought to yourself, “I need to win on more of my trades.” It’s like a business owner saying, “I need more customers.”

Smart business owners know that finding more customers is time consuming and expensive. It’s often much easier to sell more stuff to the customers that you already have.

It works the same way in trading. Instead of worrying about winning more often, you should focus your efforts on squeezing a few extra pips out of your winning trades.

If there’s anything that you should learn from this research, it’s this: the fastest way to improve is to earn more pips on your winning trades. You do not need more winning trades to do better.

Types of strategies with good reward risk ratios

The type of strategy that you select almost automatically dictates your reward risk ratio. Ranging strategies usually have ratios less than 1, which the FXCM data shows have a 17% likelihood of long term profitability. Trending strategies have ratios greater than 1, which have 50% probabilities of long term profitability.

Ranging strategies

If you daytrade EURUSD where the daily range has recently been around 80 pips, then that 80 pip range is the hard ceiling of what you could possibly make in a day. You know from experience that getting the bottom tick or the top tick of the day almost never happens. If you’re lucky, you may enter within 10-20 ticks from the bottom.

Upon entry, you also need to give the trade breathing room. That stop loss probably needs to be something like 25 pips if it’s a tight stop or 40 pips in order to have plenty of breathing room.

The best exits in a ranging market occur in the middle. You don’t know if the market will push back to its ceiling. It has just as much chance as going back to support and it does up to resistance.

The mid point of an 80 pip range is 40 pips, but you’re likely entering 10-20 pips from the true bottom. That only gives you a potential range of profit targets from 20-30 pips.

The most realistic, good ratio is a 30 pip profit target on a 25 pip stop loss, which is 1.2. Most strategies will probably risk 40 pips to make 20, which is a ratio of only 0.67.

Consider what a range trading strategy is. The market is stuck. It’s having a hard time going anywhere. You should only range trade if you have a well researched strategy with a long term edge. Otherwise, the typical trader is 83% likely to walk away with losses after a year.

Trending strategies

Trend trading strategies should last for weeks or months at a time. Looking again at EURUSD on a multi-month time frame, the current long term range is from 1.05 up to 1.16. That’s a range of 900 pips, but it’s not like the market wobbles up and down through that range. Instead, it gets stuck near 108, then briefly pushes down. It comes back to 1.08, then pushes up to 1.12. It might push up again to 1.15, then trade back down to 1.08. It’s hard to guess whether the next move will be up or down.

A 3,498.4 pip move in the EURUSD over a 10 month period.

Better long term plays are to sit on trades and let them pick a direction. The best recent EURUSD example began on May 8, 2014 at 1.39934 and ended March 13, 2015, at 1.04946. That’s a colossal 3,498.4 pip move in just 10 months.

Is there a scenario where you’ll risk almost 4,000 pips on a trade? Of course not. What about 1,000? No! What about 500? No!

The natural risk reward ratio for these types of trends is astronomically high. For a few hundred pips of risk, you can make 10 or more pips for every one risked.

As long as you’re not aggressively trading, trending strategies are far more difficult to mess up. If you can click a button, enter a stop loss and then do nothing for months at a time, then you’re qualified to consider trend trading.

The practical application is of course more difficult than that description, but that’s the idea in a nutshell. If you’re a newbie forex trader and wondering where to start, long term trends are the place where you’re less likely to get hurt.

The problem for newbies, though, is that they’re looking for excitement. It’s not terribly exciting to place on trade and then do nothing for months. It’s one of the paradoxes of the market that less work can often lead to better results.

How to improve your trading

The reward to risk ratio is a critical element for new traders to increase their chances of success, but it’s not the only one. Click here to register for our free Foundations of Profitable Trading Checklist. You’ll learn simple, but useful, tips to improve your trading.

Correction vs Change in Trend

May 3, 2016 by Lior Alkalay 4 Comments

How many times you have seen an FX pair, or any other instrument for that matter, start moving opposite to the trend? Did you wonder was it a mere correction or were you perhaps witnessing a change in trend? Your conclusion will have an acute impact on how you choose your next trade and thus your profit or loss.

Of course, it’s impossible to be 100% certain. But here are three simple methods that could help you decide which could dramatically improve your odds of being right.

Correction zone

The first method to identify a correction or a change in trend is one I like to call the “zone method.” The idea behind it is rather simple.

When a support line has also been a resistance line it’s no longer just support and resistance. Rather, it is a border trimming between two separate zones. One is a zone where the pair is bullish and likely to move higher. The other is a zone where the pair is bearish and likely to move lower.

If that zone hasn’t changed, then it’s a temporary correction. If the zone has changed, then it’s a change in trend. From the EURUSD chart below you can see when the 1.168 was broken back in 2014, the pair moved into a bearish zone. If the EURUSD had rebounded back to the bullish zone, then that would mean the trend had changed to bullish.

The Trend Average

The second method that is useful in gauging a correction or trend change is done by running a moving average. The trick here is to play with the average period until it captures nearly all the trend. You can also switch between an exponential moving average and a simple moving average. Sometimes, an exponential captures the trend better and other times, a simple moving average is all you need. The idea here is to tweak, or fine tune, if you will. In our case, the trend has to be below the average.

Once you have done that, you need to see how the current correction stakes up against the rest. If the latest correction is below the average then it’s a mere correction. If the average is broken, the trend has changed, just as can be seen in the chart below.

Notice that this method is usually effective where the trend is on a rather linear path. It might work on more volatile trends but it will not always be effective.

Failed Record

The last of the simple signals is actually more a matter of probability than a proper signal. And it’s actually the simplest to identify. Simply put it is when a pair fails to break a record and it doesn’t matter if it’s a record high or record low.

Usually, three is the lucky charm. Say the pair fails to break a record on the third attempt, as in the examples below. Then, there’s a higher likelihood that this is more than a mere correction. When a record high or record low is involved, there’s a much higher likelihood that this is not a mere correction but a change in trend.

In Conclusion

As you may expect, there are many more methods to differentiate between a correction and a change in trend. Some are more advanced and complicated. Others, like Fibonacci retracement which often times is used incorrectly, tend to be misleading.

While the methods above are far from perfect, the average trader might find that they are simple and easy to implement. They could, therefore, serve him well as he tries to determine if the pair is in correction mode or an actual change in trend.

How to Profit from Vertical Shorting

April 25, 2016 by Lior Alkalay 4 Comments

It’s not hard to decide if the trend is up or down. But have you ever noticed that sometimes the momentum is so intense the trend almost seems vertical? Kind of like the pair is falling off a cliff or ascending like a rocket?

The pair moves hard in a very short amount of time. I like to call those types of swings “vertical trades”, whether long or short. In this article I intend to focus on my personal favorite, vertical shorting.

Basics of Vertical Shorting

Before delving into the technicalities, it’s always wise to first understand the fundamental mechanics behind a trade. First, what causes the market to move in a vertical short? It is a sudden wave of sellers that overwhelms the buyers so much that nothing can stop them. The pair, rather than moving lower in waves, moves lower almost in a vertical line.

Spotting the Vertical Short

It’s often true that when the market move down in a vertical manner, shorting at the right time is impossible. Very often, something unexpected has happened. That generally is what leads to a sudden wave of selling. Sometimes, it is a set of economic indicators which have surprised the market. Then, a massive short selling wave begins.

On occasion, the piling up of massive short selling is evident just before the burst. And when that happens, it’s the ideal time to ride. Just start shorting and wait for the vertical short to do its thing.

What we can see in the EURUSD chart below is what I consider the ideal pattern for a vertical short. That’s simply because it’s perfectly evident and easy to implement, even for traders without years of experience.

What are the evident signs? At the beginning of the trend, marked with point A, we can see a regular bearish trade. But, as we move to point B, something quite interesting happens. There is a new sub-trend (marked in blue) with a steeper angle. As we can see, the ensuing waves, rather than reaching the red line at the peak, tend to top out much lower.

That is our sign that a vertical trend is coming. Going back to the basics, it can mean only one thing. That is that the volume of short selling is overwhelming the buys. Soon we will have a vertical, falling off a cliff sort of selloff.

When to Start Shorting?

Just like any trend, timing the exact phase in which you should begin shorting is important. With the right timing, you can maximize your profit and minimize your risk. Some might presume that the right time would be the break of the lower trend line. But that’s not always smart. Usually the break of the lower trend line is so abrupt that, by the time the break is confirmed, the market has moved too far off. Then, you might find yourself risking much more to profit much less.

However, if we had started shorting at point C, we could put a rather close stop loss (i.e. risking little) and bank on that vertical short. How would we spot our next point C? My rule of thumb is this: the third time the pair tops out (at our new blue trend line) that’s the confirmation that a vertical short is imminent.

Now, that doesn’t necessarily mean that the pair will fall off a cliff right afterward. However, the pair is likely to continue to slide lower anyhow until the burst. So even if the “spark” comes a bit after we are already banking on profits.

Stop Loss for Dessert

Finally, before we begin shorting, we need to talk about your stop loss. It’s important to put your stop loss above the higher red line and not the blue line. This way, even if the massive short selling we’re counting on doesn’t occur, you won’t be thrown out of the trade. If the pair resumes its old slower trend you could still make a profit, albeit at the much slower pace.

As I like to point out, nothing is guaranteed and many times vertical shorts don’t show clear signs. But if they do, you should know how to take advantage of them.

Ground Rules for Day Trading

January 28, 2016 by Lior Alkalay 19 Comments

Day trading is challenging. Don’t let anyone tell you otherwise. The odds are stacked against you and the risks of loss seemingly lurks at every turn. That’s why it’s important to understand some ground rules about day trading. The rules are there so that you can safely swim with the sharks.

Range is Key for Day Trading

One of the most common mistakes with day trading is failing to identify the daily range. Say you’re planning to take a long on the EUR/USD. However, the pair’s already moved above its average daily range. What might be the result? Your trade could be doomed as the market tends to gravitate into its average range.

When you trade for a few hours most of the signals you count on are a few hours old. This means, essentially, that the signals are naturally soft and fluid. Markets, especially on an intraday interval, tend to gravitate towards its range. Thus fluid signals tend to be much less reliable.

Knowing the range of the interlay trade can lower your risk of loss. Moreover, used in your favor, it could also improve your gains.

How to identify the range?

There are many techniques to identify the true range, including the Moving Standard Deviation or Bollinger Bands. However, those techniques tend to be more effective on swing trading. When day trading, I always recommend starting with what I call the top to bottom approach.

That is a method to identify your support and resistance levels in higher intervals, say, daily. Daily is actually ideal because it’s two levels up, compared to just hourly. Then you apply those levels on an hourly trade. What you get are solid levels you can count on rather than the fluid hourly support levels.

Down to Practice

This is a chart we used to identify the daily range. Now, we drill down into our desired interval. In this chart it’s the hourly interval, where we can get reliable resistance and support levels for either shorts or longs.

Source: esignal

Be in and Out Quickly

You should never stay in a trade longer than you have to; that’s clear and common sense. This method can be more forgiving in longer duration trades, e.g., multi days to several weeks. However, in day trading, when trades are counted by the minute, then every minute counts.

Spend too long at a trade and there can be dire consequences. The market that is already less reliable at such low intervals could turn against you. And the chances this could occur continue to grow the longer your trade is open. Hence, you should always concentrate on minimizing the time your trade is open while maintaining a worthwhile profit.

Down to Practice

How do you implement this rule in real day trading? You make sure your limit per trade is much smaller than the daily range. Why? As you approach the daily resistance/support level, the odds start to turn against you. There is a greater likelihood that the market will turn around before your position has reached its “full potential.”

Trade small and target prices that are well within the daily range. That way, you improve your chance of hitting that “home run” and profiting from your position.

Beware the Trend

Of course, we’re all familiar with the old adage “the trend is your friend.” Well, to that I say if the trend’s a friend then who needs enemies? There’s a rule of thumb for day trading. If there’s a bullish long term trend (i.e. several weeks) and you’re trading a short then beware. The market will have a tendency to unexpectedly surge higher and move against you.

Implementation

Now, some day traders may simply avoid taking shorts in just such a scenario. Yet that doesn’t have to be the case. Instead, you might just take trades with significantly lower leverage. By doing so you balance out the risk associated with trading against the long term trend.

The Beginner’s Guide to Short Selling

December 11, 2015 by Lior Alkalay 10 Comments

Short selling is easy, right? Basically, it’s the same as buying, only going the other way. At least that seems to be the common belief when discussing shorts.

In practice, taking a short position is rather simple. However, it’s also utterly different when it comes to an actual strategy. Because, like it or not, shorts do mirror longs, absolutely and completely. And to be a really good short seller, you must know the difference. You must also know how to optimize your strategy specifically toward it.

Short Selling is Fear-based

When you short sell you gain when the instrument you’re trading moves lower. That’s the exact opposite of when you’re long, or a buyer. And that’s where the similarities between long buying and short selling end. You see, when a trader buys or goes long on something they’re betting the outlook for that instrument will brighten. And the instrument doesn’t matter, whether it’s a stock, or a commodity, or even an index like the S&P500.

As a side note, however, the case in forex is a bit different when there are currencies of the same status. For example, say the pair is comprised of the dollar and yen, which are both safe havens. But when it comes to say EUR/USD, EUR/JPY or GBP/USD, shorts on those pairs are still driven by fear.

But when traders sell? Now, notice the nuance, it’s not short sell, i.e. make money from a falling price, but actually selling. When a trader sells a position he or she is doing it out of fear of losing money. And it doesn’t matter if that selling is taking profit or trimming losses, it’s still driven by fear. When you’re short selling you’re basically trying to profit from the fear.

Fear, however, works differently than optimism. You see, fear tends to come and go quickly. You can liken it to a stampede of investors running from a predator.

That’s not speculation; that’s fact backed by years of data. Take a look at some of the harsh short selling events in the chart below. You can clearly see that gains that took more than 8 months to achieve were wiped out in less than 4 months.

Source: esignal

Why is that important to you as a short seller? Because it reveals the exact nature of shorts; quick and abrupt. As such, the strategies warranted for such movements should be designed accordingly. In other words, built to ride on quick and abrupt momentum for a quick gain and then closed. True, there are abrupt moves higher, as well, and matching momentum struggles. Momentum should be in the DNA of every short selling strategy if it is destined to succeed in the “long run.”

Starter Kit for the Short Seller

In order to be a successful investor you must be ready for a high momentum short time span trade. And of course, it’s all relative to the interval you trade. Here are some basic ideas and tools to help you get a sense of a solid short.

Trend exhaustion: When you have a prolonged bullish trend there comes a point when the trend hits a brick wall. The buyers just stop coming and the pair hits resistance. Soon after, those that already hold positions fear the trend is reversing. They quickly liquidate their position which results in a forceful short from the top.

There are countless methods to identify trend exhaustion but here is a rather simple one.

As you can see in the chart below, in this case a stock called Palo Alto, hit the top point of 200. But only when it fell back to 190 it stated to move rather quickly and abruptly down. What happened next was that the trend line was briefly broken. But there is another even more important element here and that is the MACD below. The histogram bars that preceded the correction when the trend was rising were rather moderate. In comparison, look at those created in the other direction when there was a short.

Source: esignal

That clearly indicates that there is fear around 190 which triggered quick selling. A trend has to have at least two attempts before heading lower. Thus, it’s clear that another attempt will have to be made to break the 190.

Since we already know there is fear around this point we can expect a short. Once we reach the neck, the point where the selling started last time, that’s our entry point for a short. That, of course, will need to be closed quickly afterwards.

Overbought: Another basic strategy to capitalize on fear with a short is when a pair is overbought. Once again, there are numerous paths and methods to trade on this but here is a simple one. Looking at the EUR/USD as our example we will need to look for two things. When the pair closes above the price channel on the one hand and the RSI is at an overbought level on the other, the pair is overbought. That means an abrupt short is about to begin.

Source: esignal

November Performance Review

December 1, 2015 by Shaun Overton 4 Comments

QB Pro return -6.59% for November. My goal of hopping on board the commodity trends was late to the party. Starting October 1, QB Pro traded a mix of AUD, CAD and NZD. That portfolio mix resulted in losses because those currencies have remained range bound from October until today.

Performance of AUD crosses

Performance of CAD crosses

Performance of NZD crosses

Although QB Pro is a mean reversion strategy on the H1 charts, its performance depends massively on long term trends. My biggest challenge on the first of every month is to make sure that my portfolio allocation makes sense for the current environment.

CAD is still near the upper end of where the current trend peaked. I see no fundamental or technical reason why the CAD trend is topped out. Yes, I may need to sit through some minor up and down months; the price might consolidate around 1.30 to 1.33. Then again, it might start zooming upward again. Whenever the trend resumes, I fully expect CAD to continue its trend in the same direction.

CAD is still in a major, long term uptrend. This chart is USDCAD daily

The strongest trend in the market right now is CHF weakness. There are plenty of fundamental reasons to dislike CHF. An interest rate of -0.75% is chief among them. But… that’s also old news. Nothing on CHF fundamental front has changed. I feel like I’m rationalizing, so I’m just going to skip the analysis and go with what the chart says. The USDCHF is trending up and, as of a few days ago, broke through the previous high before the collapse of the EURCHF peg.

CHF is breaking out again

Recent backtests of the QB Pro system on a CHF portfolio look excellent. The backtest below only covers the most recent 3 months.

QB Pro equity curve for CHF since September 1, 2015.

I feel like we’re in a good position portfolio-wise. This is not an empirical observation. It’s more of a feeling. It feels like my likely downside is limited, that if I do lose, it’ll be small. And if I do win, that it’ll look a lot like my earlier winning streak.

If you signed up for the QB Pro system on SeerHub, your portfolio will be automatically updated.

Cup with Handle Chart Pattern

November 23, 2015 by Lior Alkalay 5 Comments

When I first time heard about the Cup with Handle chart pattern I was certain some coffee junkie had coined the name. I expected it to be some quick kind of trade you made first thing in the morning. You know, while you sipped your first cup of Joe. But to my surprise it’s got nothing to do with coffee, or even morning, for that matter.

The Cup with Handle chart pattern is rather popular among swing traders. Now, it does require a lot more patience than many other patterns. But, if you get it right, it’s worth your while.

Cup with Handle: Some Background

Cup with Handle is a chart pattern that, to my knowledge, was developed by William J. O’Neil in the 1980s. The pattern is explained extensively in his book, How to Make Money in Stocks, which I personally recommend.

The cup with handle is essentially a pattern that, as you’ve no doubt guessed, looks a lot like a cup with a handle. The illustration below should help with the visual.

Generally, the cup with handle was designed to identify a buying momentum after hitting a bottom. Sort of an inflection point, for those of you that like math analogies. Once the pair bottoms out, it generates a U-shape pattern. That’s followed by a false attempt to break the high. Then, it falls back slightly to generate the handle shape.

The forming of the handle is your cue to buy. If the cup with handle pattern was identified correctly, it should be followed by a long upward trend. Does that sound confusing? It might be a little but it’s certainly nothing you can’t (pun intended) handle.

How to Trade a Cup with Handle

So how do we identify a real cup with handle? For that, several conditions must be fulfilled.

The first thing is that the bottom should be a U-shape. Don’t kid yourself that a V-shape is good enough. An actual U-shape is very important. That’s because a V-shape signals a very quick rebound which doesn’t usually shake off sellers. Thus, the cup with handle pattern could be a false one. The bottom line is that a long U-shape is critical for the pair to bottom out.

Next you need to watch volumes. One of the most important aspects of nailing the cup with handle is volume. Trading volume should dwindle during the decline and formation of the U-shape bottom. This signals that sellers and speculators are out.

Volume jumps up and then slides once again during the handle formation. When the pair makes that final break, volume should rise and stay high. That is the signal for high momentum.

The Moving Average is also something you should keep an eye on. Understand that there is no magic number as to which moving average to use. For weekly intervals, I prefer to have at least a 20 week moving average to capture the trend.

Overall, the decline precedes the bottom. And the bottom should be clearly under the average, as illustrated. Your buying cue comes after the handle that the pair/stock crosses above the moving average in tandem with rising volumes.

Below you can see what an actual cup with handle looks like. You can also see how we identified the buy signal. And, of course, the most interesting of all, what the upside looks like afterward.

Source: esignal

Things to Remember

Following a cup with handle can be very lucrative. But missing a false signal or failing to wait for the right one can cost you dearly. For example, take a look at the chart below. It’s a classic cup with handle, right? It looks like it… except that volumes didn’t rise in the bounce back nor did they in the breakthrough. Why? Because this was a false signal. The stock later collapsed, drowning those who had a long position with it.

That last example was really very telling as regards this pattern. It tells you should be patient for all the signals to confirm a cup with handle. Otherwise, your trade could end very badly.

Moreover, as you might have noticed, all the patterns we used are in weekly intervals. This is intentional; the cup with handle pattern tends to be the most effective in long term weekly trades.

If you’re trading a CFD of an index and miss the volume data, there’s no need to worry. You can use futures data to obtain volumes. Or you can watch volumes on an ETF that imitates the index, such as the S&P500 and the SPY ETF.

In conclusion, the cup with handle pattern can be highly lucrative. It’s very effective in identifying long term bullish trends. However, you need to be wary of the “false alarms.” Make sure you get an “all clear” before you jump in.

Source: esignal

Effective Trendline Navigation

June 24, 2015 by Richard Krivo Leave a Comment

As with virtually any trading scenario, we must first determine the direction that we need to trade the pair for the greatest likelihood of success.

By looking at the historical 4 hour chart of the GBPUSD below, there are several reasons we know that we want to go long (buy) the pair. Price action is above the 200 Simple Moving Average and is pulling away from it. The pair has been making higher highs (green lines) and higher lows which indicates an uptrend. Also, at the time of this chart, the GBP was the strongest currency and the USD was one of the weaker currencies.

All these point to a buying opportunity.

But, the question remains, when do we enter the trade?

Here’s where we bring in the trendline…

Let’s take a look at the historical 4 hour chart of the GBPUSD pair below…

We can see that price action has come in contact with trendline support at several points – note the blue boxes.

Since price has tested and respected the trendline for at least three “touches”, we know that our trendline is valid.

Our entry strategy to buy this pair using trendline support will be to wait for price to trade down to the trendline and into the “Buy Zone”. If price trades into the Buy Zone and stalls and a candle does not close below trendline support, just as in our blue box examples, we can take a long position on the pair with our stop just below the trendline or just below the lowest wick that penetrates the trendline.

The trader could exit the trade if price reaches resistance, the previous high, or by employing a simple 1:2 Risk Reward Ratio.

Now let’s take a look at a historical 4 hour chart of the USDCHF for an example of selling against Trendline Resistance in a downtrend…

This trading scenario will be virtually the opposite of what we did in the previous buy example.

We want to sell the pair a it has been making lower lows (red lines) and lower highs. Price action is below the 200 SMA and pulling away from it. Also, at the time of this chart, the USD was weak and the CHF was strong.

Again, price action has tested our resistance line at several points (the blue boxes) so we know the trendline to be valid. In this example we would wait for price to trade up to trendline resistance in the “Sell Zone”. As long as a candle does not close above the trendline, we would sell the pair with a stop just above the trendline or just above the highest wick to penetrate the trendline.

The trade could be closed should price reach the previous low or we could use a 1:2 Risk Reward Ratio to exit the trade.

RKrivoFX@gmail.com

@RKrivoFX