Sunday, 23 October 2011

Trend Following and Price Choppiness

Choppiness of Price Action

There are times it suffices to enter trades into the direction of price flow to make money (by taking profit or trailing the stop) regardless of indicators or patterns the price may paint. That's the rule of trendiness - at whatever point you enter, it's more probable the price will do what it's been doing than to reverse. At times like this, any trend following method will work: break-out systems, continuation systems, any kind of moving average crossover or swing systems. It looks hilariously easy - enter and take profit, in the rare case the price reverses, take a small loss. But what looks more hilarious is how traders get quickly used to these conditions, build expert advisors based on them, create rules and invincible methods which are soon about to die, as the price action adopts a choppy character.

Over the past few decades, price trendiness in the markets has been steadily decreasing, while the choppiness of the price has increased. The main reason for this is that the markets are more liquid; world's financial sector is at its peak, markets have now global character. There are more brokers and traders than before, more time frames are traded - all this is underpinned by the computerisation of the trade. Think about quantity: two voices can be clear and their sound dynamics very powerful. Two hundred voices produce more noise and sound dynamics are flatter. However they try, they will never adopt tunes as one voice.

What is choppiness? It's not volatility; it has nothing to do with ATR readings. It's not the direction of the market; market may go down, go up or sideways, while price may be linear or choppy regardless. Choppiness is the ability of the price to overlap itself. Interestingly and significantly, now when the trend is rarer, most common and popular indicators evolve around trends and swings : RSI, Stochastic, Macd, Zigzag. All brokers make them available. Now when understanding the price choppiness becomes the key to beat the price action, adequate indicators are as rare as a success without breaking the law and committing crime. Probably the best use for today's technical analysis was before it became popular, which was a few decades ago.

Choppy Markets Trading

My favourite indicator to measure the choppiness of the price is Choppiness Index developed by E. W. Dreiss. It's downloadable from the web and easy to install on platforms which support custom indicators. Although indicators are useful, everything they indicate is already in the price. Also, using Choppiness Index one becomes familiar enough to realise what it measures and to quickly involuntarily calculate it without looking at the indicator window. Anybody can roughly measure the degree of price overlapping just by looking at the price readings, the result may be more precise than any indicator. The key is to be aware and to pay attention.

MA crossovers are very popular swing methods which won't work in choppy markets. Some will give very nasty signals, some will keep losses in check, some may give moderate results. The key is to stop using those methods in choppy conditions. Don't count on a change, wait for the change to come. The choppiness of price vary throughout different time frames. Hourly and daily charts are still easy to play trend following. 15m are difficult at times, especially in currencies. 1m charts became impossible to trade positively without a filter, as the market oscillate between choppy waves or ranges and fine 'one line' trends with a few counter waves. This is probably why many small time frame traders moved to larger formats as their results worsened.

The chart above shows trading 1m DJ ma crossover (5ema and 20ema) using Choppiness Index as a filter. The crossover is not valid when CI 14 is above 44 and flat, valid when CI 14 approaches 44 from above or is below - pointing down. Also the crossover becomes valid when CI gets 'friendly' shortly (1-2 candles) after the crossover : I believe one could trade 1m DJ by entering into the direction of price every time CI 14 hits 44 from above.

Saturday, 3 September 2011

Trading Rules 2

Rules to follow combine market laws and trading preferred actions into guidelines which help a trader not to lose the correct trajectory in difficult conditions. Or to get back into the trading routine after things have gone wrong. Trading is not a science, office duties or production line. It's more like a sport, where good overall condition is needed, concentration, ability to cope with stress, loss, misfortune or vicious fate.
Rules grow, get modified and are created on the way, because trading ability is a set of skills which requires constant practice, endless learning and attention. This is why many of my trading rules of 2010 have become so obvious and so incorporated into my methods and beliefs that they are no longer guidelines. Like in one's life, you must first set a rule not to put your hand into the fire, not to trust strangers or to brake before the obstacle. Then it becomes an unaware pattern which you don't need to describe or read up every morning.
Your current trading rules must be with you every day because they are somehow new concepts, contrary to your old beliefs or habits. They are your present steps and advice, helping you with current tasks. So you may even record them on a dictaphone and listen to them over and over while trading.
There are so many types of traders that there are human characters. Although you may find similarities in the way we operate, our goals and ways of realising plans are so different. Also a trader won't set a new rule before he perceives a new pattern, a market or his behaviour charecteristic which he wasn't aware of before.
Here come my rules of 2011
  • Don't let the mainstream media influence your judgement, inspire greed or fear in you
  • Inner voices and guarding angel hints are worth as much as a coin toss
  • Method development capabilities are a part of traders arsenal
  • Time is a healer
  • Other traders have problems I don't have and never will
  • Overconfidence is as bad as lack of confidence
  • Reverse the tendency of avoiding easy markets and jumping into most difficult ones
  • Respect yourself for the things you're doing and problems you've overcome
  • Market is a force which you cannot rule, you may only subordinate yourself
  • 'Dividend' investing is a great thing
  • Give it time, patience will make time your asset
  • Time is your friend and ally; markets have no choice - they must move in time
  • Market is like an ocean, if you can swim, you will always catch something
  • Rest and days away are a good thing
  • Precious metals and energies : production cost goes up with price and demand
  • Always have predefined stop loss and exit strategy
  • Never catch the low, it simply doesn't pay
  • To go with the main wave adding to positions is something I must learn in 2011
  • Exterminate counter main wave trades and 'its too late to go with the flow' talk
  • Don't add size and frequency when losing; stop or slow down instead
  • Don't force the market to pay for your own mistakes
  • Follow your plan, don't gamble
  • Trader must be consistent, not intelligent
  • You're not there to show the market who you are, to make it play by your rules
  • 20ft mega signal, universal for all time frames
  • Shaft range, evolving around the main market profile line
  • Don't lose concentration because of over trading or sloppiness
  • You make progress every day
  • Obstacles : there are many ways to overcome them all
  • Don't criticize yourself for what you do, game you're at is most difficult
  • See the price action as it is, not as you believe it is
  • Respect the market, be submissive and take what it gives
  • Aggressiveness means lack of respect, hyperactivity and frustration
  • Market is not a person who acts against you, it is a soulless and brainless force
  • Nobody knows where the markets goes

Friday, 26 August 2011

Aware Desautomatisation of Unaware Automated Processes

You walk, but you don't realise the way you move. You raise your voice (unconsciously), which you notice after somebody else tells you. You wake up and without thinking much, you get into the groove of daily routine, which happened without you - one would say instead of living, you "are lived by you."
Or you are alert, self-aware, concentrated on a certain aspect of your person i.e. "am I a fair person?", "am I likable?," "am I respected as I should?", going through circles of thoughts which, fully automated for the sake of their function, are a spontaneous response to larger automatic modes of your operation as a human. Firstly, you've been programmed to maintain a certain level of human quality, especially its face value which lies in the judgement of others. Secondly, your status must have been under pressure, from internal or external factors, otherwise your wouldn't care. Thirdly, you're an analyst and a thinker: this trait was given to you without your knowledge, merit or decision. Thus, being "alert, self-aware, concentrated on an aspect" is paradoxically contrary to self-awareness, concentration as a complete control and management of your behaviour, flow of thoughts, modes you're in.
I acknowledge that I am a self-moving being, controlling maybe 30% of all my processes of speech, emotion, muscle tension and thought flows, when I try to focus on my person, controlling maybe 5% of them, when I am in a "cruising mode".

Is the automatisation, unawareness of processes, unawareness of their automated structure a flaw in the human or animal nature? Not at all! It's the law that underpins our existence. Buddha, a human who once had enjoyed piece of mind and emotions, state of being blessed by lack of care, created a religion, claiming he found the state of being closest to God. Nirvana is a state where all automated thought, followed by emotion and a body reaction has come to a stop. All you can feel is freedom and pure joy of existing. Buddha was only human and his intelligence managed to describe the state and conditions around to get in or lose it. What he didn't get is that the description of the case, as well as the means of meditation to get into nirvana are not a tool set for a sustainable nirvana or most importantly a better life. It's like listening to a music which generates instant pleasure inside you; it comes and goes quickly without a meaningful trace. Moreover, I argue, it may have a negative effect on a human, as its interference into your automatic life's functions may distort them and lead to an unwanted exposure. Meditation, drugs or anything which generates a 'feel good' by suppressing or breaking your modus operandi can lead to seclusion, madness or self-destruction. It may sound crazy to hear that nirvana is bad thing. Please note, it's not particularly bad in itself, but the way of getting into heaven can eventually lead to hell.
Automatisation it's an attribute that is good in itself! It helps us to maintain the level of high activity without the effort of performing analysis every time you move your finger. Thanks to unaware automatism, you can preserve behaviours and beliefs. By allowing the scripts to run in the background, you can focus your attention on current tasks which require instant analysis. For example : is this pool small enough to jump over? Is this umbrella suitable for today's wind? You don't analyse why you meet that girl. To be honest, you don't have to, you've been conditioned to like this type, to meet her this way, to speak to her that way. You are lived by yourself and shouldn't destroy the process.

Contention point of this essay, however, is to help an individual to carry an aware desautomatisation of unaware processes in order to perform aware actions. Why? Because we live in a civilisation which produces people like ducks, stuffing into them 'useful' garbage through all channels: education, ubiquitous propaganda, things you consume and job you're required to do. 2000 years ago, there was Roman civilisation, people were produced like ducks, set to carry in them certain truths, to comply with a type of beauty, to abide to 'eternal' rules. There is nothing left now, except useless ruins and wasted lives of believers.
If you don't fully understand yourself, if you are doing things you don't like, if you're not the person you mean to be, if your body and emotions play tricks to you, you should strive to stop the automatism of your acts. You can eliminate wrong habits, stress, personality flaws and even improve the health of your body. You can implant qualities you want : detachment from reality, energy, particular perception of things or sens of humour.

Aware reconstruction through desautomatisation can be performed in three simple steps:
Slow down now, whatever you do. By stretching the matter, you will perceive each particle of the process: thought which generates emotion, emotion which generates belief, beliefs setting the mode. You will notice areas of you focus (why them?), the hurry (what is the cause?), your immediate goal (does your frustration mean to do harm, to teach them lesson, to show your vulnerability or to simply that you give up?). You're getting into questioning your operations which will lead to a negation : you're not stupid, therefore your deeper self will quickly understand that what you were doing reflexively was wrong.
Step two : Negation will lead to a stop. Your mechanical body movement will stop. Muscle tension will ease, eyes will open looking for information, you'll feel amazed and surprisingly empty. Your mind will try to perform a kind of testing, i.e. stupid idea, flush of argument to see how your background appliances respond. There will be no response! Your body may try to move on its own a bit. A kick in the air, shake of head, you may swoop to the ground and look eyes wide open. This state may cause a short spell of euphoria, as it would feel like on a different planet! Your beliefs were wrong, there is no fear, no need of being down on you. All you were 20 minutes ago doesn't matter anymore.
Step three : start an aware action. Decide the way. Why not differently? After completion, your next step was to yield. What is your preferred action now? To walk past? To skip guilt thing because it's not the point? To act as if you were there before? You're a creature which learns new things quickly and automatisation of new behavioural findings is your nature. Do things you decide to do. Next time, even when you wake up semi-conscious, your background will ask you to decide which set of functions to authorise. Do you start the day by going through all your misfortunes, or you follow the decision not to engage in activity which causes misfortune 90% of the time? Do you go for a ride on a rainy day? (because 20 years ago you decided that weather is not an issue for a man who will survive the harshest). Or you wait for 2 hours for the sun to come out, as you decided yesterday? (because it's practical and there's nothing wrong to it). Do you wear a fake smile? (because otherwise all say you look miserable). Or you cut off stupid remarks and search where lies the reason why you are unhappy? (Maybe the reason is just those stupid remarks? Are you the only person around to tolerate this and those assholes need to give vent onto anybody? Or are you the only person around to easily get offended, while the words you speak are no sweets whatsoever?).
There is no step four, which should be about the preservation of decision upon using desautomatisation of unaware automated processes to help you achieve your goal. Consistent programme seems to have no sens and surely would turn one into a nervous control freak! Once an action is performed, habit will follow. Fight back once. Overcome fear once. Once and consciously. Next time your old involuntary reaction will be there at hand along with the new pattern, asking you to choose. Your new processes will stay with you, will always remain deep in your mind.

Thursday, 7 July 2011

Oanda - Thievery Broker

Here came the day I stopped using Oanda forever. As a trader, you try to trust your broker, even when suspicious things happen. You try to play down critics of your own platform, you believe it's not that bad (hoping vainly your broker treats you better than other customers?). Then comes the moment it's OVER.
A long AUD/NZD trade hits stop loss at 5am, after a flash spike down to 1.2823. It happens, you think :

Out of curiosity though, you check the price at your other forex accounts. Then you check price data from the web. Amazingly, the lowest level you see everywhere else is : 1.2877

So you e-mail Oanda front desk:

Today, on one of my sub-accounts a long AUD/NZD position has hit stop loss level at 1.2831. The problem is the lowest level this pair traded today on my 2 other forex brokers accounts was 1.2877, check for yourself : Open AUD/NZD chart to see where was the price today. As your platform is the only to display this level of price I must say this was a system error to my detriment. Even if your spread was 35 points during news release - taken from your spread on Oanda website for Aud/Nzd for 5th of July - there is no way it could have reached my stop loss at 1.2831. Your spread, when the price was at 1.2877, must have been 90 points to reach my stop loss level!

After long 24 hours wait here comes the reply :

We have investigated your trade in question (ticket xxyy) as requested and found no error on the trade. Please note that OANDA is a Market Maker and our prices are determined by the rates we receive from our liquidity providers and our rates are not necessarily same or similar to the rates from other brokers. When your trade was closed by the stop loss, due to the news announcement released in Australia, our spreads on the AUD pairs were widened momentarily. Your long position was closed by the stop loss when the bid price on the market fell to 1.28312. At that moment, the ask price was 1.28382 making a spread of only 7 pips. During the period, the lowest price the bid went to was 1.28200.

This is incredible! There was no big 35 spread when the stop loss was hit, just the price was 50 pips off the market when it happened! Oanda - 1.2820, the market/other brokers - 1.2877.

Please note that OANDA does not trade against the clients nor benefit when they lose money on trades. OANDA hedges its exposure for trades made by clients by making corresponding trades with third-party banks. As a result, if you lose money on your OANDA trade, OANDA loses a corresponding amount to its third-party bank.

Oanda hedges its exposure, LOL. This is why during the busiest hours for AUD/NZD (Australasian session) on the most liquid market on earth - forex - there is 50pip difference from the spot market price! If your MM broker can be legally 50 pips off the market as their 'liquidity providers' dictate, this means it can do to your automatic exit and entry orders whatever they wish!

I am in the process of ending my relationship with Oanda. I've also promised them to write a review, so they lose more than they stole from me. Protect you money, there are many honest brokers around, even MM. Try a new platform and move on!

Tuesday, 14 June 2011

Derivatives trader am I

Profit days every day, stellar PnL ratio, one or two losses a month, great methods, growing size and confidence, where is the limit - you may wonder. Here comes the answer - there's no limit! Give me a single reason why this should stop, never lost my mind or control. Things can only grow.

Market is like an ocean, when you can swim, you won't drown and always catch something. Mind big waves and whales - you are smarter and more nimble than they. If you open the platform with kids joy knowing this day will be another great fun day - welcome to the land of trading.

GBP/USD in June. Entry, partial TP, exit TP, reentry, first partial profit, second PP, stop loss break even first trade, reentry. First partial profit, second partial profit, third partial profit. Now watch out, correction on the stock and commodities markets is about to finish which means - weakness of USD.

EUR/GBP in June. Euro has slightly better fundamentals than the pound but this moment - end of range was a signal to trade short. Entry, first PP, second PP, then shaken out because of early stop loss move to BE. Happens, but shouldn't really, I am too experienced for this.

CAD/CHF in June. CAD is fundamentally inferior to the Swiss franc, but after extreme strength must come some weakness, while CAD was weaker than it should fundamentally, so a great set up. Daily chart trading - buy and sell, buy and sell.
I have had some great trades in commodities - natgas and cocoa, but the platform charts don't show entry/exit points so won't attach any picture. Commodities are easier to trade than currencies, are more profitable and in a great bull market, so plenty of joy for traders.

Exchange paper for something that will not lose value. Land, copper nails, second hand Olympus OM manual lens or shiny metals. Bear in mind that there are many things which value evaporates faster than fiat money's - DVD's, brand new electronic goods, food and cars.

Sunday, 6 March 2011

'Many ways of looking at the rule'

Lessons Learned from Ben Bernanke's Policy Rule Discussion at the Senate

At yesterday's hearing before the Senate Banking Committee, Fed Chairman Ben Bernanke talked about monetary policy rules in response to a series of questions by Senator Pat Toomey. First, the Chairman stated that the Taylor Rule calls for interest rates “way below zero” and that this justifies methods such as quantitative easing. This is puzzling because I have reported for months that the Taylor Rule (see 1993 paper) does not call for an interest rate below zero. Second, when Senator Toomey then asked if Taylor believed the Taylor Rule called for rates below zero, Chairman Bernanke didn’t answer directly, but instead claimed that in 1999 I preferred a different rule to the one I published in 1993; he then said that the 1999 rule gives a much different rate. Senator Toomey then pressed on and specifically said the Taylor Rule called for rates higher than we have now, at which point Chairman Bernanke changed tack and argued that there were other policy rules that call for below-zero interest rates.

John B. Taylor March 1, 2011
Full article here

Well, Mr Ben Shalom Bernanke, there are many ways of looking at your performance, but the general rule is that you don't argue with a Jewish fiancial terrorist, posing as an expert of the matter.
While the inflation floods the world, Mr Ben wants to practice some 'many' ways of looking at the rule. I.e. a hammer dropped doesn't fall, but grows in size, when you place your eyes between the drop point and the centre of the earth.

Thursday, 3 February 2011

Do You Hear Me? "Never" Again

To those who would bet against the euro, watch out for your money because we are fully determined to defend the euro.

Mrs (German Chancellor Angela) Merkel and I will never -- do you hear me, never -- let the euro fall.

French President Nicolas Sarkozy
on 27th Jan 2011

Da, Da, Mr Sarkozy, you better watch out for your money because you and Angela don't have enough to defend the euro. By the way, I thought that a weaker euro helps EU exports? Let me think...are you afraid of wide protests because of rising prices on the horizon instead?