Archive for August, 2008

A Fractal View on Futures Trading Prognostications

By , 21 August, 2008, No Comment

On a given day it possible to read any number of current predictions, analyst recommendations on just where the futures and stock markets are headed. To be sure, you can usually find an analyst predicting an oncoming upward move in the market, and look somewhere else and find another analyst who predicts impending disaster. This is the nature of the financial business, and for most of my life I have had many good chuckles at the ranting and raving of this group of financial gurus.

I think it would be expedient to point out at this point, that market predictions, including the futures markets, are essentially predictions with a binary outcome. The futures market either goes up or the futures market goes down. Since the market rarely stays exactly the same, we will rule out this outcome as spurious. From the onset then, futures market prognosticators have a 50% potential to be right.

Nearly every market establishes some “hot” market gurus, whether it’s Robert Prechter, Granville, Gazarelli….they all have their fifteen minutes of fame and then fall into discredit when they fail to maintain the accurate predictions that catapult them into fame.

And I read many of the analysts every day, more for entertainment than anything else. Why? I think it helps to understand what is going on and the wide variety of interpretations of current financial events. Do I give the analyst any weight in my trading? Absolutely none.

I am a scalper, which means I am only interested in small movements in my futures trading style. I don’t care if the market is moving up or down, or even sideways. All I am interested in is entries into the market that can earn me a potential of at least two points, whether that is a short or long position is irrelevant to me. I am, in essence, a bottom feeder who waits for the crumbs to fall.

That being said, I also am a chaos theory believer. I have observed market predictions over and over fall to the side of the road….whether the predictor is a fundamentalist or technical trader. Quite simply, the market doesn’t listen to what people say…it is a psychological beast that acts, at time, as irrational as any human being you might imagine. You will hear all kinds of predictions today about this being a “dead cat bounce” and other claiming the worst is behind us, and still others predicting dire times…who is right? I have no idea, and neither do the predictors. As I have mentioned, since the outcome of any prediction is binary in nature, about half will be right and about half will be wrong. I find it odd, as much of my college and graduate degree course was in physics that we understand many of the intricacies of the atom, and how quantum mechanics works (which is truly one of the truly bizarre discoveries of our time)….but no one has found a working system in predicting the market, despite the fact that we have poured an inordinate amount of money and time into trying to understand the market.

I realize that my view is an unpopular one, and the screaming idiot who now enjoy tremendous popularity on market predictions (on MSNBC) would call me a heretic, but the overwhelming amount of scientific study, academic study, points to the absolute accuracy of chaos and fractal theory as the only valid trading viewpoint.

Subscribe in a reader

midday futures trading chart 8-20-08

By , 21 August, 2008, No Comment
ESU8 click chart to enlarge
It was a very nice day to trade with most of the moves well defined. I was a little more conservative than usual, and I have no particular explanation why…I suppose it was simply my mindset…as there were many more points to trade into than I actually captured. Nonetheless I ended up +4.5@5 contracts. I stopped about noon.

Subscribe in a reader

A great article for your reading (click on this title)

By , 18 August, 2008, No Comment

While this article does not have much to do with our subject matter, it is very important to us as American taxpayers and I could not resist recommending it for your reading. This is pure insanity. Read it here. Ot should stop and make you think about the terrible mess our Congress and Wall Street have saddled us with. The Fractal Trader is disgusted.

Subscribe in a reader

more on the CCI

By , 17 August, 2008, No Comment

source:stockcharts.com

Introduction

Calculation

There are 4 steps involved in the calculation of the CCI:

  1. Calculate the last period’s Typical Price (TP) = (H+L+C)/3 where H = high, L = low, and C = close.
  2. Calculate the 20-period Simple Moving Average of the Typical Price (SMATP).
  3. Calculate the Mean Deviation. First, calculate the absolute value of the difference between the last period’s SMATP and the typical price for each of the past 20 periods. Add all of these absolute values together and divide by 20 to find the Mean Deviation.
  4. The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation and a Constant (.015) to the following formula:
CCI = ( Typical Price – SMATP ) / ( .015 X Mean Deviation )

(Click here to download an Excel spreadsheet that contains a example of the CCI being calculated.)

Dell Inc. (DELL) CCI example chart from StockCharts.com

For scaling purposes, Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. The CCI fluctuates above and below zero. The percentage of CCI values that fall between +100 and -100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and -100. Conversely, the more periods used to calculate the CCI, the higher the percentage of values between +100 and -100.

Lambert’s trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above -100.

Since Lambert’s original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

  • CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
  • As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
  • Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From overbought levels, a decline below +100 and a trend line break could be considered bearish.

Traders and investors use the CCI to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.

Example

Brooktrout, Inc. (BRKT) CCI example chart from StockCharts.com

The 20-day CCI for Brooktrout provides an example using Lambert’s guidelines. Even though a few signals are good, using crosses above and below +100/-100 resulted in plenty of whipsaws. In January, the stock broke resistance at 20, and proceeded to double in the next few weeks. The CCI moved above and below +100 several times, but the stock remained in a strong uptrend. The CCI did manage to remain above +50 for about 7 weeks (blue oval), but the whipsaws below +100 could have caused an early exit. Whipsaws do not make an indicator bad. However, traders and investors should learn to use the CCI in conjunction with other indicators and chart analysis. In addition, various time frames for the CCI should be tested, and you should test buy and sell points, as well. What works for one stock may not necessarily work for another stock. For Brooktrout, a buy point on a cross above and below +50 may have worked better.

Subscribe in a reader

The CCI and the entry points to trade.

By , 15 August, 2008, No Comment

Entry and exits….today I am going to emphasize the criterion of entering long or short. If you take at the last couple of midday posts you could blow up the chart and see there is a correlation between the CCI and my entry points.

I like to enter most trades when the CCI is crossing the +100 or the -100 marks…obviously is the line is moving down through the +100 or up -100 I consider these prime trade, but the CCI moving up through the +100 or or down through the -100 can be profitable trades. But the CCI is not the only criterion that I use when deciding to enter a trade. I am also very cognizant of where the support and resistance are relative to the price. Obviously, if I had the CCI moving up through the -100 point, but I was approaching a resistance line I would be very hesitant to enter that trade. I always gauge my CCI entry positions in relation to where I am relative to both support and resistance lines. As you can see on the charts, the CCI will often “waver” around the +100 and -100 lines and if you look at the chart, you will probably notice that the price is near a resistance or support line.

So it’s a two stage process for me to decide to enter a trade. I am very interested in where the CCI is relative to the 100′s and then I confirm to enter by looking at the price relative to where the price is relative to support and resistance lines. This may sound a little unscientific, and it is, and it takes a lot of practice to be adept and spotting just what trade will be profitable. I also want to make sure that I am trading with the trend….so that would be a third consideration. So, in actuality, the trade entries are very subjective, and the market action taking place has to be in a certain configuration, or you will end up with a lot of “emotional guess” trades as oppose to well thought out trade entries. Which is not to say that I never trade against the trend, because our fractal philosophy, but definition, dictates that the market is going to change directions in a wave pattern. But knowing just when a significant move is going to occur against the trend is far harder to discern than a trade with the trend….especially if the trade meets the criteria I have just outlined.

For now I would suggest that you start plotting pivot points, support and resistance, and then look at the price relative to the CCI and the 100(both + and -) and practice spotting go trades with the trend.

As you can see on the charts I have posted, I use other indicators, along with the CCI, to further refine my trades. I will, however, reserve explanation until you are accustomed to spotting these long entries.

Remember to locate the CCI and it’s position relative to the hundreds, then correlate that position with where the price is relative to support and resistance lines.

I am aware this sounds painfully simple, but emotional trading can easily take over your strategy and you must fight to avoid participating in emotional trades. Many times I have felt that the market “must” do a certain thing (go up or down) and be disappointed in the result. Usually I have not taken a good close look at what is occurring and trade with my emotions only….the market doesn’t HAVE to do anything.

Subscribe in a reader

here is a chart with pivots points marked

By , 15 August, 2008, No Comment
Pivot Points
Here you can see the pivot points from the formulas in yesterday post. Notice the price action around the pivot points. Once a price penetrates a pivot point, notice how it accelerates through it, and if falters at a pivot point, how it hangs around that point for an extended period of time.
Subscribe in a reader

Pivot Points

By , 14 August, 2008, No Comment

Most of the trading during any given day is done by market makers and specialists. Markets, no matter in what they deal, exist to facilitate trade and prices continually fluctuate between supply and demand to enhance the exchange process.

The market cannot exist in a state of paralysis so traders will constantly adjust bid and ask prices to keep the exchange going. This process is a combination of a traditional auction to seek top prices and a Dutch auction to explore price bottoms.

Prices continually rotate enhancing trading. Therefore, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels.

Prices are moving up and as soon as they hit some imaginary resistance line they turn around and start falling until they hit the level of support.

Pivot Points are those price levels that are most likely to act as levels of support and resistance on any given trading day and you can calculate them with the following formula:

H = Previous Day’s High
L = Previous Day’s Low
C = Previous Day’s Close
Pivot Point PP = (H + L + C)/3
First Area of Resistance = R1 = 2PP – L
First Area of Support = S1 = 2PP – H
Second Area of Resistance = R2 = PP + H – L
Second Area of Support = S2 = PP – H + L

When the prices move through any known pivot points (PP, S1, S2, R1, R2) on increased volume, they are most likely to continue the current trend, and if the prices hit the known pivot point but are unable to move through, then they are most likely to reverse the current trend.

Pivot points are areas to be aware of and respect. They are both dangerous and positions of opportunity.

Knowing those points can help the trader to identify potential entry points and/or stop loss levelsst of the trading during any given day is done by market makers and specialists. Markets, no matter in what they deal, exist to facilitate trade and prices continually fluctuate between supply and demand to enhance the exchange process.

The market cannot exist in a state of paralysis so traders will constantly adjust bid and ask prices to keep the exchange going. This process is a combination of a traditional auction to seek top prices and a Dutch auction to explore price bottoms.

Prices continually rotate enhancing trading. Therefore, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels.

Prices are moving up and as soon as they hit some imaginary resistance line they turn around and start falling until they hit the level of support.

Pivot Points are those price levels that are most likely to act as levels of support and resistance on any given trading day and you can calculate them with the following formula:

H = Previous Day’s High
L = Previous Day’s Low
C = Previous Day’s Close
Pivot Point PP = (H + L + C)/3
First Area of Resistance = R1 = 2PP – L
First Area of Support = S1 = 2PP – H
Second Area of Resistance = R2 = PP + H – L
Second Area of Support = S2 = PP – H + L

When the prices move through any known pivot points (PP, S1, S2, R1, R2) on increased volume, they are most likely to continue the current trend, and if the prices hit the known pivot point but are unable to move through, then they are most likely to reverse the current trend.

Pivot points are areas to be aware of and respect. They are both dangerous and positions of opportunity. Knowing those points can help the trader to identify potential entry points and/or stop loss levels

Subscribe in a reader

midday futures contract report ESU8 8-12-08

By , 12 August, 2008, No Comment
ESU8 8-12-08 click chart to enlarge
Once again, I didn’t trade the pre-opening market and had a Dr.’s appointment at 8:30, so I didn’t get in front of my computer until nearly 9:30. I made several trades early on, and was up 2.5 points until I opted for a TRADE AGAINST THE TREND. Several posts ago, I stated I have a strong disinclination for trading against the trend, and I should have taken some of my own medicine. The trade was disastrous, and I stopped out at 12 ticks. Of course, I could have jumped out of the contract at any time until I reached the stop, but I was absolutely convinced I had found the counter trend trade that would be a real whopper. So, lets see… how many of my rules have I broken?

1. I traded against the trend.
2. As the trade went against me, I rode it into the stops
3. I developed an emotional attachment to my trade.
4. I failed to reduce the number of contracts, as you should do in a counter trend trade.

Yep, I broke all of my rules and I was convinced I was right as I traded…as a matter of fact, I cursed the screen because IT didn’t do what I wanted it to do. And I paid dearly for my inept trading behavior. I am amazed that every now and then I make the same mistakes that I rail against. So, for the day -.5 pts@5 contracts. The Fractal Trader is pissed.

Subscribe in a reader
Page 2 of 4«1234»
Easy AdSense by Unreal