The intoxicating effect of money.

By , 26 August, 2008, No Comment

As you continue to learn the system I am outlining you will begin to realize that making money, at least in the pure sense, is not so terribly difficult. I have a few basic rules to follow, a little common sense, some chart reading and before long you should be able to make money consistently.

But there is a little problem:

AFTER SEVERAL MONTHS OF MAKING MONEY CONSISTENTLY,

MOST PEOPLE END UP REVERSING COURSE AND LOSE ALL OF

THEIR MONEY.

The fact of the matter is that there is nothing more intoxicating than cold hard cash. Time and time again I have watched successful traders earn money and then fall flat our their faces because they could not manage the psychological aspects of making money and managing risk. Martin Pring has written an excellent book about investment psychology, and goes to great length to explain that most investors are very able to trade effectively. However, the problem with most traders lies in the intoxicating effects of earning money trading.

Typically, investors begin to take on too much risk, or make trades that fall outside the parameters of our discussion here, or tackle markets that our principles do not apply to. What I am trying to say is quite simple, really….the psychological aspect and the control of your own greed is, by far, the most challenging aspect of trading. Over trading, taking on too much risk by trading to many contracts, entering marginal trades, developing emotional attachments to trades…these are all the sign of impending disaster and I cannot stress enough that the psychological aspect in managing your trading life is far more challenging than the technical aspect of trading.

I know, I know…I can hear you all muttering….”that may be true of the other guy, but I am a very disciplined individual and this will never happen to me……”

It will happen to you, and how you learn to deal with the intoxicating effects of your cash earnings from trading will determine how well you succeed in the business. I can teach anyone to make the right trades, but I can’t get most people to make the right trades at the right times. There are no patterns in the markets, there are only spurts of momentum, or directional movement….and no matter how much you are sure that something MUST happen it probably won’t. I think it’s a Murphy’s law thing..or at least it seems to be.

Your ability to act in a completely rational manner and day in and day out execute trades as we outline will determine how successful you will be. I cannot harp on this topic enough…and I will, believe me. Investment psychology is the demise of 7 out of 10 traders. Don’t be one of the seven that fail, be one of the three that succeed.

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Stochastic indicators; A beginning on how to exit a futures trade

By , 26 August, 2008, 1 Comment

I use a portion of the stochastic formula to exit my trades, and for the time being I thought I would introduce you to the concepts and premises of stochastic measurement. There are many variations of the stochastic model and tomorrow we will discuss the manner in which I set the parameters and setting to optimize your exit strategy.

Stochastic is an oscillator that is very popular and has been around for several decades. It is a price oscillator tracking overbought and oversold conditions. It is often used in the red light/ green light trading systems which can cause problems for traders unless they understand how stochastic works, why it was created, and what it was designed specifically to track.

Stochastic was written by George Lane and is a true oscillator which means it was primarily designed to track either overbought or oversold price conditions in a range.

In the stock market, the term “overbought” means that it can be assumed everyone who wanted to buy the stock is now fully vested and there are no more buyers or insufficient buyers to move the stock up.

Oversold is just the opposite, there are insufficient sellers to move the stock down.

The reason oversold and overbought is critical in sideways markets is that the shift from buying to selling can happen rather quickly.

George Lane wrote the indicator Stochastic formula based upon the presumption that as a run moves up (or down) a stock will close nearer to its high as buyers keep rushing in to buy the stock. But as momentum tapers off or buyers become scarce, then a stock will close lower from the high price for the day.

This is a presumptive statement that works in trading range markets. The theory fails during strong rallies and velocity markets because stochastic will move into the overbought area or oversold area signaling an exit just as the stock begins a huge run.

Therefore, Stochastic should not be used during momentum or velocity markets, platform markets, or bottoming markets as it will create a premature exit signal just as the stock is about to run up strongly. Below is a chart showing how stochastic moves to the overbought line during a strong momentum price move. This chart shows a typical platform building pattern followed by the strong velocity move up. This kind of chart pattern occurs during value-oriented markets when institutions are quietly accumulating.

TechniTrader Chart

During a velocity market you should use a different indicator than stochastic. Instead switch to an accumulation indicator and quality indicators as these will help you get into the stock early before the big moves up.

Below you can clearly see how stochastic is showing overbought exit signals even though the stock keeps moving up. This is why stochastic should not be used all the time but only for certain market conditions for which it was created.

TechniTrader Chart

Below is a chart of Stochastic showing the oscillation of the indicator suggesting overbought, or oversold conditions. This is the normal pattern that most trading systems are attempting to find. You can see that this is a very different price action than the previous chart.

TechniTrader Chart

The Stochastic Formula and what it is intended to reveal:

There are 2 lines for the George Lane stochastic formula: %K and %D usually represented in red and black lines on charting software. First, the K line must be calculated.

K=100((C-L)/(H-L))

Where K+ the location of price relative to the current price range

C= the last close price

L=the n-period low price

H=the n-period high price

n=any time period specified

K is smoothed twice with a 3-period SMA which creates the %K line, usually black on charts.

Then %K is smoothed again with a 3-period SMA to create %D line which is usually red on charts. Only the %K and %D lines are used in the chart analysis. So you will only see 2 lines to represent the 3 lines in the formula. Because it uses a fixed time period to period calculation, the lines can jump and move erratically if price fluctuates significantly.

Most stochastic indicators have predefined 80% overbought line and 20% oversold line on the chart. A few charting software programs allow you to move the lines to whatever percentage you wish.

If you are a beginner, simply use the settings of 80% and 20% for a trading range market.

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some random monday morning thoughts

By , 25 August, 2008, No Comment

This central theme of this blog is to share with others the methodology, or at least my methodology, of trading futures contracts. To that end, I endeavor to try to keep on that very topic. However, current economic conditions are so skewed as to make the random comment here and there necessary.

We are a odd group of people, Americans. We will spend ourselves into unheard of debt, allow the government to do the same, and then panic as things begin to disintegrate. We are now in the process of unwinding one of the largest bubbles in our countries history, and the general population seems blissfully unaware of the dire situation we are in.

Of course, the last bubble burst in 2000 with the dot.com implosion. The Nasdaq has yet to reach anywhere near the highs of those times and it has been nearly eight years since that implosion. But really, who cares if Pets.com, or any other ill conceived IPO didn’t make the grade. Our current dilemma does not involve dot.coms or other such peripheral issues. No, we are now talking about the granddaddy of investment, real estate. And the future does not hold a bright and rosy outcome. Not in the short term anyway.

The level of foreclosures and potential foreclosures is at an alarming rate and the Fed and the Department of Treasury have scrambled to salvage several large institutions to prevent a market meltdown. But there are bigger fish in the pond, as it were, and Fannie Mae and Freddie Mac prices have fallen to levels that appear to make them insolvent. There are a variety of reasons for this event, the least of which is horrible overall company management. Without some infusion of capital these institutions are doomed.

The Washington-type talking heads are blithering away with all sorts of potential solutions for our maladies, and some range from just letting the institutions wither, to a complete bailout for the entire system….which would probably run into the trillions, if that of any consequence to you. Our current government is not particularly fiscally responsible, quite the contrary, and finds itself in a precarious position as it relates to MI money supply and inflation or quite possibly stagflation, as it were.

I want to emphasize that as scalping futures traders we do not particularly care about the direction of the market but are happiest when it is moving with definite speed in a fractal pattern, and the large the fractal legs, or generators the better. So cheer up, we are in good shape for likes of us and plan to prosper in the coming times.

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settings on the CCI to trade futures

By , 25 August, 2008, No Comment

The Commodity Channel Index (CCI) doesn’t have a wide array of variables you can manipulate. There is basically a setting, in most programs, as to how many time periods you want the computer to calculate the trading index on.

Generally I use a 14 period setting, although I have used 10 and 16 at different periods of my trading life. I think I have pretty well settled on fourteen. I have back tested a wide variety of potential combinations and found 14 has the best track record, although the difference between fourteen and sixteen is negligible, at best.

So, set your CCI on fourteen plot your pivot points and start looking for great entry points.

Have I told you that most investment companies will late you paper trade for 30 days or more?
I work with Josh Alexander at Infinity Futures and found him and the company most helpful and efficient.

Okay, the Olympics are over, so lets get to work and make some money….and have a wonderful day.

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Some interesting comments from Ben Bernanke

By , 22 August, 2008, No Comment
[T]he financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment. Add to this mix a jump in inflation … and the result has been one of the most challenging economic and policy environments in memory.
-Fed Chairman Bernanke, Aug 22, 2008
As you may have noticed in past blogs, I am not prone to worry much about external factors as they relate to the market and the economy. Past Fed chairman have typically been very very reserved in their assessment of market and economic conditions, even in the worst of times. However, this particular speech, which can be read here in it’s entirety is by far and away the most frank and non homogenized view I’ve ever heard a Fed chair release.
His outlook for the US economy is bleak, at best, and really doesn’t mince words in his assessment of that very fact.
It is quite popular in blogs circles right now to blast Bernanke for some of the measures he has taken, but I take the opposite view. In my opinion, he inherited the current problems that he has been forced to deal with. He was appointed to usher in a whirlwind. Of course, you have probably heard me say that the Feds powers are, in my opinion, more psychological and demonstrative than substantive…and that any major panic-type movement in the markets will leave the Fed simply standing on the sidelines. There is a limit, at best, to the powers the Fed can use to tweak the economy. I believe that they have little ability to stop a tidal wave of economical phenomena. I would concede, though, that the extended period of low rates under Alan Greenspan certainly set the stage for a portion of the mayhem we are currently forced to deal with
That being said, it seems as if we have entered a scenario not dissimilar than “the perfect storm”, which is to say we have a constellation of dissimilar and destructive elements, mostly of our own making, converging to form in a dynamic economic implosion. I do not believe we would enter some sort of “depression” so to speak, but I would predict a drastic change in the near future in the manner Americans will manage their finances, credit and spending….and those that don’t… will find themselves in an abyss of economic disaster or financial ruination.
All right, that being said, how does that after our futures trading activity? The beautiful answer is “not at all”. As observers of the fractal patterns self evident in every market, we can continue to trade those patterns with the same success we always have. As traders, we only seek movement in the market, up or down, and down do not concern ourselves with overall intermediate or long term trends. We are scalpers, and seek only the crumbs that floor on the proverbial market.
Keep smiling, you livelihood is in fine shape and trade wisely…….The Fractal Trader
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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.

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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.

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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.

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