Wednesday, February 24, 2010

EURO ZAR 4 hour chart – Part II

In my post (EURO ZAR) chart from 18. February 2010 I posted EURO ZAR chart with falling wedge. This is an update in order for us to take a look where EURZAR is in relation to the wedge.

ZAR lost some ground and is currently trading around 10.52 for EURO and that level is exactly on top line of falling wedge, if not above. There is major high on this chart around 10.57 and if that gets broken it can be very bullish for EURZAR (or ZAR can lose some value against EURO).

Wedge target is around 11.00, which is exactly where previous support turned into resistance was (red line around 11.00).

Be aware out there. Last few years ZAR drop is equated with markets dropping too. Logic behind is that people are moving from emerging markets and moving out of SA.

Trade with trend!

ATR on chart

What we have here are two end of the day Top40 charts with 5-day Average True Range which is expressed in percentage terms.

First chart is Top40 chart from 01. January 2000 while second one is going back to early 2007.

Trading was very easy in 2008 and early 2009. Trend following systems based on 5 minutes and 15 minutes charts made 3000-5000 points per month and if one could catch only 60% of that he would, at least, be 2000 points (or so) up for the month. Unfortunately, trading is not easy anymore due to changes which happened around June 2009.

So, what happened to our market during early days of winter last year?

If we check first chart we can see massive spike in ATR (volatility) as from early 2008 till about June 2009 ATR was way above 2.5% and in some instances it was climbing to levels around 6%.

Second chart tells more, as it is easier to observe what happened: In early 2008 ATR broke above 2.5% and stayed there till 01. April 2008. Then, from 01. April 2008 till 01. August 2008 ATR stayed below 2.5% (red box). After that lower ATR period we had 10 months of extreme volatility during which systems made lots of points. Finally, period with ATR above 2.5 has ended around 01. Jun 2009 and from then on systems are producing significantly decreased number of points. (Systems that used to make 2000 points per month are now producing, on average, 500 points each month.)

Good idea is to find what a norm for various systems is:

If we look back, first chart is showing us that from 01. January 2000 ATR spent much more time bellow 2.5% line than above. Time above 2.5% is plotted (quick spikes) and if one can back test those periods, he would certainly see that systems were performing better during these extreme times than for the rest of the sample. Conclusion is that 5-day ATR bellow 2.5% is the norm for Top40.

What traders can conclude from here?

If you made your budget with 2000 points per month (per contract) I have to disappoint you: Further projection for system should be in the region of 500 points per month and I would advise for review of monthly targets and wishes.

It is advisable to find faster system (shorter time frame; shorter moving averages or faster price break out channels) or much slower systems (longer time frame; longer moving averages or slower price break out channels). Please be careful, in order to avoid creating faster systems that produce more points but from way too much trades. Also, average trade is to be watched and have in mind that even end of the day system can work well in conditions like this.

Increasing trading size (number of contracts) may be viable option, but again be very careful not to be caught undercapitalized by big drawdown, as that will take even more of your capital and probably will cause massive emotional stress.

Keep an eye on ATR and once you see increased reading you may reconsider reverting to systems that worked during time of higher or extreme volatility.

Hope this will help you to make better decisions when looking forward, especially for readers who are trading for living and trying to make their bottom line numbers more appropriate.

Trade with trend!

Saturday, February 20, 2010

Top40 - end of the day recap for week ending on February 19th

Many traders get stuck easily in their daily routine and that helps them to forget about the bigger picture.

So, what is the bigger picture for trading ALSI futures contract?

ALSI futures contract is contract listed on Top40 index on Johannesburg Stock Exchange and it is guided by that exact index. Symbol code for Top40 index is J200 and that is often the reason why we refer to Top40 as J200.

This post will be first in the series, as I will try to publish updated end of the day chart for Top40 index in South Africa. I plan to work on this every weekend and will try to publish it not later than Monday mornings. My hope is that these updates will not serve only traders to make plans for coming week, but serious long term investors as well, as they are looking at their charts only once-twice a week.

Enough talking, it is time to check the chart:

Top40 dropped 2864 points (11.04%) from high of 11. January 2010 to low of 5. February 2010. At that time all major indicators (MACD, RSI and Stochastic – all listed in that order at the top of chart) were making fresh lows for year 2010. Such occurrence did send us warning that Top40 slide was maybe ahead of itself and that one should watch what is going to happen.

From the low, Top40 did rally 1280 points (5.52%) as of the end of the day on Friday. Also, as of Friday there are mixed signals on that chart:
- MACD made bullish cross from very low level;
- RSI is around 50 level
- Stochastic did rally and it is on overbought level.

On last two trading days market opened lower to rally into the close, showing us that bulls still have some power left to push market higher.

Three moving averages on the chart are:
- 200 simple moving average (sma) - indicates long-term trend
- 89 simple moving average (sma) - indicates intermediate trend
- 10 exponential moving (ema) - indicates s short-term trend

I will have them presented with every weekly update, just as a simple tool to identify market direction.
  • long-term (200sma) - UP
  • intermediate (89sma) - FLAT
  • short-term (10ema) - UP
Hope this post and posts of same nature in the future are going to help more traders and investors to make their decisions.

Trade with trend!

Friday, February 19, 2010

Back to Zero

When traded system hits some bad times many traders start to think about abandoning system; they will look for new “holy grail”; or they will stop trading or drop size until system recovers. Over last two to three months I read many worried e-mails in which traders were talking about systems that are not performing anymore and required number of points just to break even.

Getting back to break even level or “Back to Zero” is exactly what I would like to write about today.

Trading and sports (and any other performance discipline) are very closely correlated in terms of skill development. Many hours of learning, back testing, paper trading, keeping journals and statistics - all of that boils down to one trade in a day, month or a year. Same is with professional sportsmen’s training: training day after day and even more training and preparation and hard work, just to run 100 meters race in approximately 10 seconds.

Many years back, country that I’m coming from (Yugoslavia - as of now there are six independent countries, as a result of dissolution of Yugoslavia) had the best female tennis player, who dominated for period of few years. Her name is Monica Seles and she played at the time of Steffi Graf. Her success in tennis arena was recognized because she was number 1 player for many months and because she won Grand Slam tournaments.

What some tennis player from some ex communist country has to do with trading?

It is very simple: Monica Seles, from the beginning of her tennis career was taught not to count points in any of games/sets played. On the contrary, she was taught to play every point like it is the last point in the game, match or her life. This approach might cause some disagreement, but her results proved that those coaching ideas were viable options.

Yes, but what about trading?

If you ask me - “Back to Zero” is something that will hurt anybody’s trading skill. You should execute trades like this is the last trade which will be thousand point winner. (All of this, adhering to your system health analysis, money management, trade management and risk management rules.) You should not look back to locate where we stand on the equity curve and how many points we should make to break even. Bigger picture is what has to be there in front of your eyes.

Equity curves and drawdown have their own space in statistical measurement of system and systems comparison and these statistical measurements are, among other tools, very important. My point is: If you trade thinking about “Back to Zero”, that is probably going to put tremendous pressure on you.

Of course, if one is undercapitalized and must pay his bread and milk from monthly profits, “Back to Zero” becomes massive problem. However, that is the story for next time.

Trade with trend!

Thursday, February 18, 2010

EURO ZAR chart

I wanted to show EURZAR 4 hour chart in order to share what is brewing there.

It is more than obvious that our Rand is getting stronger against EURO as there is visible trend line which started around 20. November 2009. This trend line was tested at least nine times. In addition, there is horizontal resistance in the region of 10.75.

What is not so good (or maybe it is, depending on which side of import/export group you are) is falling wedge that started to form early this year. It is still early to look for upside break up, but falling wedge is reversing pattern and can lead to upside break on this EURZAR chart. Way to measure target is to take widest part of wedge and project it upside from breakout point. There are about 50 points (or 5%) in falling wedge shown on chart.

Falling wedge can be, as well, continuation pattern so watch for that one.

This is what Thomas N. Bulkowski’s, author of Encyclopedia of Chart Patterns, says about it:

“The falling wedge is a very poor performer as far as bullish chart patterns go. The break even failure rate is high and the average rise is low. The only variation that works well is a downward breakout in a bear market.”

Trade with trend!

Wednesday, February 17, 2010

ALSI 30 minutes chart

I wanted to do a quick update showing the key resistance level around 24600 – 50% Fibonacci level for the drop from 11th of January to 5th of February.

ALSI spent first half of the day above that level and now it is back bellow, while trying to break above once again.

Downtrend line was broken early yesterday and two possible up channels/trend lines are developing. One is very steep and is currently around 24500, while another one is around 23900.

If ALSI breaks above 24600 next stop will be just shy of 25000.

Trade with trend!

Friday, February 12, 2010

Learn to trade

Every year many beginners come to market dreaming about being millionaires by the end of first quarter. Many of them, by the end of the same quarter, will stop trading with account being completely wiped, while some will add money to account and continue doing that, just to keep their urges to trade (gamble) intact. Simply, just a few will manage to stay afloat.
What is the best advice that one can give to newcomers to markets and trading?

I would say: LEARN TO TRADE (One setup and try to trade it every time. Of course, this setup must be with positive expectancy or to put it simple – it must make money. )

First and foremost important task for any trader is to learn to trade. If you look at small baby you can learn a lot about trading and for that matter any other sphere of life. Babies first start to crawl and only when they are very confident in crawling they try to get up and, of course, they fall few times and suddenly, they start to manage to stand on their feet and after trying to make step or two they fall again. After few months, which is in baby’s life probably as much as many years are to us, our baby feels confident to walk and only year or two after it started to crawl it starts to run, climb and jump.

So, for all beginners in this game I have something that might sound harsh: You are babies and don’t try to run before you crawl!

How one can learn to trade and what that exactly means?

I find that answer to be a very simple one: Find setup with positive expectancy and trade it every time. This way you will have privilege of having something that makes money and your account will not be jeopardized. Second, you will become very disciplined and discipline for trader who has setup with positive expectancy is everything. If you follow this you will be able to survive much longer than your friend from the beginning of the story and you will probably make some money over longer period of time. Of course, your results will be very different from the results achieved by other trader who trades very same set up and who is doing that for period of more than few years, simply because of trade execution and experience (less points lost due to slippage), but making money is not prime task now.

After you mastered one setup and discipline (So, now you “know” to trade, mini learning process is finished.) than it is time to try to find set up that completely suits your personality. During first two to three years you are going to try to get your way around trading without losing your shirt. After three years of looking you might end up with better systems - systems producing more points from fewer trades, with better T and F formula stats.

What I see very often is that beginner will start trading one system; then he will find on internet system that makes more points and will jump to that one; then his friend is going to tell him about the new guru on the block, so he will go and pay few thousands for this new system with 99% win rate. At the end of three years period our trader will have absolutely nothing behind him. He would trade twenty or thirty systems with not having clue what is going on with each of them. That is recipe for disaster.

Simply, start trading one system, work on your discipline and don’t worry what will happen tomorrow. As I said many times, this is not sprint - it is marathon.

Always have bigger picture in mind.

Trade with trend!

Thursday, February 11, 2010

Average True Range and its effect to various simple systems – PART II

If you revisit my post from 21. January 2010. you may find how five different trend-following swing systems (3 different time-frames) performed during lower market volatility periods, which were defined by 5-day & 10-day ATR.

As we did get some volatility recently (5-day ATR was for total of two days above the mean value – on February 5th and February 8th, 2010) and as several systems I follow have started to perform again closer to their historical averages, I’ve decided to post updated version of the table that was shared in original post.

Trade with trend.

ALSI 30 minutes chart

Here we have ALSI 30min chart from around 19. January 2010.

There is down slopping channel which started around the same time. Top of that channel was tested at least five times, while bottom was tested three times.

Yesterday ALSI tried to break to upside, spending almost 3 hours just bellow trend line and at the end when ALSI failed to do that, it just dropped some 600 points.

What are the possible scenarios from here:

- Bearish one will take us down to bellow 23000 and as I am seeing that MACD just rolled over and is breaking 0 line, this scenario is more likely one.

- Bullish one will take us to test upper trend line with stochastic being low (Don't forget stochastic can stay low or high during prolonged trends.).

Trade with trend!

Wednesday, February 10, 2010

Why trading after 5pm is not that good idea?

Numerous followers of this blog asked me why we don’t take signals after 5:00pm and before 9:30am.

Market movement from 8:30am (ALSI open) to 9:00am (Top40 open) is very slow, with low volume and very often with very small range and, of course, gap. All those are pushed by “tape-readers” or traders who check US and Asian markets and then decided what to do. Probably more often than not they are wrong, trading without any kind of plan, basing their decisions on observations.

From 9:00-9:30am volatility increases with shares being traded and same process is repeated, this time with new observations when it comes to behavior of major indices on JSE. Traders and investors are keen to dump their shares or buy everything available because US last night was in red on green. Again, we have bunch of people making their decision based on emotions/observations, not on solid trading plan. In addition, during winter months in South Africa, European markets open at the same time as JSE, so that brings extra volatility into the mix.

So, I hope this explains why my system is not trading before 9:30am.

However, after 5:00pm all is completely different: US markets are open; volumes are high - so why not trade then?

I would refer you to two charts on the top. Those are equity curves for exactly same system based on end of the day data.

First equity curve represents system when signals are taken from ALSI chart and system is executed on ALSI. Trades are taken at 5:29pm if signals are given.

Second equity curve represents system when signals are taken from J200 chart and system is executed on ALSI. Trades are taken at 5:05pm if signals are given.

Just to remind all - Systems are exactly the same!

You can see vast difference between these equity curves. That is simply because trading ALSI after 5:00-5:05pm brings extra volatility to our market. Cash market is closed, so ALSI does not have to follow anything and big boys are moving contracts, pushing market up or down.

For swing systems this is no go zone and one can simply switch data feed off after 5:00pm if one does not have nerves to watch his positions.

However, I want to add that after 5:00pm conditions are ideal for scalping, because movements are usually very sharp, but that is not part of my trading tools, so I will leave scalping as subject to more proficient traders in that environment.

Trade with trend!

Tuesday, February 9, 2010

J200 and Normal distribution - PART II

I’ve received several questions about previous post (J200 and Normal distribution) from my trading friends on Skype and on one of the forums where I am active (, so I have decided to respond here on blog.

If we assume that we have ideal trend following end-of-the-day (EOD) trading system (100% win rate), then that system is going to mirror market and will produce results that are not normally distributed, as our market is not normally distributed when it comes to difference of daily price changes at market close.

However, as our trading system is not perfect I’ve decided to test distribution of trades for that particular system and for additional eleven trend following trading systems that I trade and/or paper-trade (5min-15min-30min-EOD). For all of them it was more than clear that trade distribution is not normally distributed, with systems successfully relying on market extremes and successfully catching market events during which market reaches extremes several standard deviations from the mean. Of course, this kind of distribution catches some big fat-tail losers too, but as long as these systems continue to catch more positive fat-tail events, they are going to continue to perform. (Please note that these fat-tail events can result from daily returns and/or follow through or can be result of massive one-directional short-term burst in volatility.)

One of the items on my to-do list is to look at normally distributed trend following systems with 60%+ win rate, just in order to have few different machines when compared to these twelve systems I follow, as for all of them win rate is somewhere between 30 & 45%, with average win/average loss ratio being between 2 & 3.

When it comes to mean-reverting strategies and their distribution – I am not actively exploring anything in regards to mean-reversion and I am not willing to comment on this, as I haven’t done homework yet.

Finally, all of this gives me nice platform to come to the point that I wanted to make since I started with original post:

If one’s system has proven (with enough data sample; over many market conditions; with enough out of sample data, etc.) to be able to provide trade entries that over time yield positive results through fat-tails, then trader has to be extremely disciplined in letting profits run, as over time system will lead to positive results. All of this, of course, until system breaks down and that is something that I will be writing more on in the future.

Proper money & risk management are to be employed, as almost always trading great system(s) with too little capital will lead to ruin of one’s trading account.

Trade with trend!


Attached graph shows trade distribution for one of the variations of our 30min system for period: 19.12.2007 – 03.02.2010.