Two charts

Quick look at two charts:

First chart is Top40 (J200) 15min and is showing head and shoulder with neck line. Same picture can be seen on ALSI 30min chart.

There are some 650-700 points in this formation. Of course, one must wait for break of the neck line to enter trade.

Trade with trend!

EDIT: Neckline broken. Target for ALSI 24800 but don't forget back test

ALSI daily range – PART II

In my post from 26. October 2009 I’ve posted chart with ALSI daily range. Today we will take a look at what the changes are and how daily range compares to gap size (on 5min chart) over last 14 months.

As one can see from first chart, daily range dropped even further and now is seating bellow 500 points, but this can be due to December effect with low volatility. It is interesting to see that from around Jun 2009 daily range is bellow mean value and it was only once above 1 standard deviation. Most of the time daily range spent bellow mean, very close to -1 standard deviation.

Our systems are not working as they should because we have 2-3 days in one direction with 450 points move, instead of 2-3 days in one direction with 800 points move in a day. We need about 300-400 points for system to stop us out and give new signal, so we use already 600-800 points on both sides and all in all we are left with 400 points in the middle of the trend.

On the second chart gap size is plotted in both directions. So, gaps down are plotted bellow 0 line and gaps up are plotted above 0 line. Mean value for gaps is around 0, with relatively symmetrical distribution. Gap size dropped in line with daily range even though there were two or three massive gaps on downside.

Also, I find this interesting as there were few gaps in the range of 700-900 points late in year 2008.

Trade with trend!

Bit more on discipline

Why discipline in following system is so important for system traders?

Often we read that discipline is the most important characteristic of system trader.

Why is so?

I will give specific example from the system that I follow: It is based on 30 min ALSI chart following Dow Theory. If we go through system’s performance log we will see that in period from 13. January - 03. February 2009 system made 3831 points and from 18. November to 4. December it made 2382 points. So, in about 30 trading days out of 240 days in a year system made 6213 points or in 12% of all trading days system made about 32% of yearly profit. Let’s imagine now that one was not in the system during that period of time. Simply, your profit for the year would be much smaller and on top of that all other metrics for the system would be worse, including average winner/average loser, % of winners, T and F formula, etc.

What I learned from more than 6 years of trading is that points in trend following systems are coming in bursts. So, system will make good profits then it will return portion of profits or will tread water for some time. This is where trading becomes difficult and that is when most of the traders fail to follow system.

Frequently occurring pattern is that trader will not trade good patch and after missing good results system trader will start trading bad patch, then after few losing trades he will stop with trading again - right when good patch for the system happens again.

As we speak, our system is going through one bad patch. Since 4. December it lost 1215 points and if one looks from 15. December it lost 249 points. For some it might look like 1215 points is a lot, but that is one good trade.

I believe that discipline is the most important characteristic for system traders on any time frame – in case when trader has system with positive expectancy and sound money management. If you don’t have patience to follow the system through good and bad patches, then your first task is to work on it and to improve discipline in trading one must improve discipline in his life outside of trading. So, next time when your clock rings get up immediately, don’t skip planed gym session, don’t skip STOP sign on the road, etc. Simply, try to improve your discipline in life in order to improve your discipline in trading.

Another problem derived from lack of discipline is that one can close winning positions early, but will leave that one for the next time.

Trade with trend!

ALSI daily range

During last several months, most of the systems that are traded by members of some South African web based trading communities are producing very different results when compared to their historical performance. Systems are based on moving average crossovers or penetrations on different time frames, including 5 and 15 minutes. Idea behind those systems is to catch 2-5 days long directional movements and to score as many points as possible. Somewhere in May number of points won by systems dropped significantly. What can be the reason for that?

Picture on the top clearly shows that daily range (High to Low) on ALSI dropped from around 900pts a year ago to 500pts at present. On the top of that, from mid Jun ALSI had only 6 (SIX) trading days when daily range was above average for the year. Best part of last three trading months daily range was bellow first standard deviation.

This can be one of the reasons why systems are not behaving like they did, but probably not the only one.

Becoming better trader

Many people started with trading or investing on stock exchange for one simple reason - to make money. This reason is valid, but will it help one to survive out there? I don’t think so and there are numerous reasons for that.

First and the most important is that one doesn’t have any experience or knowledge about the game and still wants to play with the pros. Following the same principle - Would you take boxing match against world champion and, on top of that, would you expect to win it? Would you expect to go into surgery and do heart operation and expect to be successful? I guess not. So, why trading is any different?

To become profitable trader one must invest time. First on to do list is to read as many books as one can. That way one will develop very broad knowledge about what is going on. Only after extensive education one will be equipped to make his conclusions on what is to be liked, if anything at all. Following step is to read as many book as possible on specific field of interest.

However, if one after all the reading realizes that one doesn’t like anything related to trading, then do something else.

Finally, after one finds niche and market that one wants to trade, that is when one more educational effort is to be undertaken as one has to find out as much as one can about it. After all of that, paper trading for few months in real market and day-to-day conditions is to be taken seriously, simulating trading as much as possible. Please note: It will never be the same with money on the table, but please try it.

So, let’s refresh - We want to trade to make money.

From day one money was not made, while a lot was spent on books and courses, while precious time was spent too. That is correct way, as at the beginning one should forget about making money. One should focus on becoming better trader; one should focus on following his system 100% of the time, while finding better ways of trade execution. Making money is result of all actions previously stated – it is not a cause! Simply, if one focuses on efforts to make money, one is placing the cart before the horse. One must focus his attention on improving his trading. To make money one must forget about making money.

Of course, one shouldn’t get stuck in his head. It is very beneficial not to get caught up daydreaming about all the different things one could do when first 1000 points winner is made. Grand plans and spreadsheets considering development are not to be created. Those activities may seem intelligent, but they don't actually help one become better trader and all they do is keeping one stuck.

Although, the road to making money may seem long, the process of getting there is actually quite simple: One should do whatever it takes to make a daily habit of improving his knowledge, even if baby steps are being made at first.

Again, this is marathon, not the sprint.

Trade with trend!

J200, End of the day chart

Let’s take a look at daily charts - J200 or Top 40:

First one is from February 2009 till Friday, September 4th, 2009. It is easy to notice that there is strong and obvious trend upwards from low that was made on March 3rd, 2009. Two black lines are parallel, making channel that was tested twice at the bottom and twice at the top. Also, we can see as well that there are some negative divergences that were developed before recent drop which was 7 days long with 6 red days and 1 green day. In the mean-time some hidden divergences developed on Stochastic and RSI. (Hidden divergences are when indicator makes lower low and price makes lower high.) Both of them are shown with green lines, with one that was on August 17th, 2009 and another that was very recent. These hidden divergences usually point towards another upswing on Top40 in weeks to come.

The other chart shows bigger picture for Top40. Starting from mid 2005, we see strong move up; then strong move down which is followed with trend that started in March 2009. This chart is telling us why market is so reluctant to go higher: There is a massive resistance around 22700-23000 (thick red line) which was tested 11-12 times from bottom and top (from December 2006) and it is coming into play again.

Looking as first chart, it is clear that area around mentioned line was tested so many times in last few days.

Of course, the most important is to see if that trend line gets broken. If it does, market will go up strongly and get to 24500-25000 area fast. However, if market decides not to go over resistance, then we will have big pull back that can take us all the way down to 21000.

In both cases, J200 will resume its direction shortly.

Trade with trend!

Long term success

From a very young age, we are ingrained with a powerful short-term reward system. We are incentivized to eat on day one with the reward of satisfying our hunger. Such immediate gratification teaches us to always eat when we are hungry. As we began with our education, we were rewarded to learn with grades in mind. And grades, we soon realized, yielded the reward of approval (and love, I suspect) from parents, teachers, and peers. We would study non-stop for days to take an exam, with the assurance that we will receive a grade within a week. As we entered the job-market, a day's work was rewarded with a monthly salary. In many cases, an immediate commission was rewarded for each sale - or aggregated into a bonus at the end of the year.

So, how all of this reflects on trading?

Very small percentage of people makes it in trading and my personal opinion is that most of the people who were bumped out of this game have placed short term rewards in front of the long term goals. Most of the people will take small profits instead of letting them go, just to be satisfied with their short term reward. They will keep losers for much longer then they should because they will not be rewarded if they close them early, so they chose to hope that positions will probably swing back to positive territory. This approach is absolutely wrong as in trading one must keep winners as long as he/she can and cut losers very fast. Only by doing this one has a chance to make it in this game. Problem is that there are just a few people who understand this and that is the reason why we have so many losers in trading game. But, I guess, this doesn’t apply only to trading – it applies to everything around us. Only few people make it in big league, starting alone simply because they were not satisfied with their salaries at the end of every month. So, they took bigger risks and started their own companies.

Trader who is just starting with trading should encounter many setbacks during which he/she must always keep long term goals in his/hers head. Short term reward will be so tempting (at the beginning) to take profit and to break system rules when you are in good trade. That’s when your mind must work towards achieving long term goals by following/respecting trading system, money management and trading discipline as long lasting success will simply wait at the far end of this endeavour.

Trade with trend!