Resistance is Resistance Until…

Resistance is resistance until it isn’t (the fact it is also futile is neither here nor there).

I lost count of the number of times I used to bottle it when I saw price heading back towards resistance and the PnL figure turning from green to  red. Making a cup of tea is a much better idea than closing for a small profit or loss.

Yes I have had added a ‘charts’ category, but I’m not promising anything. Click to zoom, times are GMT (the original timezone and the best!) …

A green bar isn't a reason to close, it may be a reason to make tea.

 

Update: My 3 readers saw this post, sold the resistance again and moved the market lower. Thank you

Thanks for selling to prove my point.

The Best Welly Seller in The West

My name is Walter and I sell wellies. Whilst I quickly eat some lunch (a curled up sandwich I bought  from the petrol station where I have just spent £60 filling the van up with fuel) I’ll tell you about my day.

This morning I had a couple of hours drive to a company that would have been a great new customer for me. I gave a good sales pitch, I’m a good welly seller, but I failed to get an order.  It was out of my control really, a competitor sells wellies exactly the colour they want.

However, once I’ve finished this awful sandwich, I’ve got 3 meetings squeezed into the afternoon and I’m confident that I’ll sell some wellies.  It’s my own company that I started a couple of years ago and it is doing well, my accountant agrees.

Why am I telling stories from the wonderful world of welly wholesaling? Lets imagine for a moment that Walter sold wellies but with the mindset of a trader…

I worked all morning and all I managed to do was lose £60. I am useless at this, why am I always wrong?!

I am so angry about that £60 that I’m just going to sit here, get mad and not even turn up for the first two, potentially lucrative, meetings of the afternoon.

I’ll have recovered in time for the last meeting, but to be honest I haven’t got the energy for it.  They have placed big  orders before but I’d be happy to just make back enough money to cover my petrol for the day.

Trading seems to develop a different mentality to other businesses. So if you lose £60 on the only set-up you see all morning you could try thinking of it as £60 of business overheads  instead and then just get on with the afternoon. Of course it’s not that easy, but then neither is selling wellies out the back of a white van.

The P Word

I was watching a poker tournament on TV the other evening when one player knew that he had to fold.  Everything about the situation (the pot odds, the fact he was out of position etc) meant that the correct decision was to fold.  But rather than just immediately muck his cards, his face was contorted by anguish for at least 30 seconds, the camera zoomed in to catch every nuance of his apparent pain.

One commentator asked “Is he just acting here, to make it look like a difficult lay-down or is he really crazy enough to call?”. The second commentator answered “No, he knows he has to fold but he is just waiting for his emotions to catch up with his analysis“. Then he folded.

Press in the event of leaked NFP Numbers

What a brilliant piece of insight! So my request to the trading-platform designers is for a ‘pause button’, how much easier it would be to trade if we could take time-out to get our heads-straight before having to actually press a button that logic says needs to be pressed.

I know that isn’t possible, the market moves on without us, and often at startling speed, but  I can dream (or use orders).

The Last Resort

I promised something practical (not philosophical) but the idea-gauge is reading ‘empty’.  I’m just going to have to post a chart. I’ll pick EUR/USD for its universal appeal, I know nobody outside this little island cares about December FTSE.

If you can’t decipher my charts/method/madness then the summary is (for a fixed risk per trade ‘R’, not its real name),

-R, 4.5R, 0R, 1.5R, -R, -R, +3.3R = ~6.3R

Yes, I got lucky with ISM. Yes, I failed to exploit it fully.  Yes, that is a break-even trade even though I campaign passionately against them. Those are just three reasons why I won’t be doing this again, but I was desperate for content.

 

My Mantra (2 of 2)

So after much thought I came up with my mantra, “Trade Like Blaise“, but should now explain it a bit.

Blaise Pascal was a French scientist and philosopher born in 1623.  He is perhaps best known for Pascal’s Wager in which he argues that  even though the existence of God cannot be proved, a person should wager as though God exists, because the potential benefits exceed the potential downside.

Pascal used decision theory to build a matrix that summed the ‘pros and cons’ of living as if God exists (for example if you believe in God and he does exist then you will live for eternity in Heaven) or living as if he doesn’t for the two scenarios that God actually does exist or he does not. Summing all the possibilities, he concluded that on balance it is better to live your life as if a supreme creator does exist, even though it is unprovable.

What has this got to do with trading? Well, my belief is that no matter what the prophets on Bloomberg tell you is going to happen, they don’t know and you don’t know either.  The statement ‘major support will hold’  is analogous to Pascal’s unprovable God.

So I construct a matrix (I do this notionally, not for real, that would just be too weird!) and chose the option that provides the best outcome on balance, that provides the  positive expectancy.  I don’t know if a key support level will break or not but I live my trading life, plan my entries and exits, in a way that maximizes expectancy without knowing what will actually happen.

That should now complete my alienation of the ’show us some charts’ crowd. I promise to be more ‘practical and applied next week’.

 

My Mantra (1 of 2)

A few weeks ago Swamiguru published his trading mantra.  Ever since then I have been thinking long and  hard about doing the same (daytime TV in the UK isn’t as diverting as it used to be).  So here it is,

Trade like Blaise.

I need to explain it? Really? I suppose I should then, and that will be my next post.

 

You need a buy-stop just above 1.6400.

I’ve Let You Down

I had planned a post based around the equity curve simulator that I take every opportunity to plug. I do this  because I feel it is really important that people understand the extent to which the variance in their trading account is nothing but cruel, unfeeling, performance-independent chance.

I had only recently noticed, or at least properly appreciated, that the equity doesn’t converge as the number of trades increases. Contrast this to the way that the percentage of heads will tend to 50% as the number of tosses of a coin increases, as the standard deviation=square-root(N*0.5*0.5) where N is the number of tosses.

This non-convergence suggests that we can all trade until the cows come home but the amount of money in our bank will never absolutely reflect how good or bad we are at a trading.  I tried to do something really clever with the maths at this point to reach an important and paradigm-shifting conclusion.  However,I failed, so I am left with only half an argument, half a brain and half a post. I’ve let you down, sorry.

Even then, the money in the bank doesn't accurately reflect how good we are at trading.

Something For The Weekend

Lets end the week with a positive thought.

I can’t guarantee this is true, I have no interest in sports betting, but was recently told that on betting exchanges you can sometimes get odds of better than evens on the toss of a coin. People bet on the outcome of the toss  at the start of a cricket match and believe that because one team’s captain is a ‘good tosser’ <insert own joke here> (has a strong record of winning the toss) then they are more likely to do so again.

Why is this a positive thought? Because while there are people who are prepared to be that irrational with money then there is hope for all of us who apply a bit of logic to this irrational world.

And of course this also allows me to link to a video of possibly the best few seconds of cricket ever,

Head & Shoulders & Economists & Journalists

If you google “head and shoulders pattern” then it returns 543,000 pages, only a few of which are about the shampoo.  One of the sites on the first page of results describes it as a “powerful reversal pattern“, but is it?

You have to dig very deep to find any kind of quantitative answer to that. This strikes me as strange, there is no shortage of data on which to test the idea(!) and no difficulty formalising the pattern as an algorithm.  Why is it so difficult to find an analysis of the value of this pattern (and indeed many patterns and indicators)? The cynic might answer “because it doesn’t sell books“.

But I did dig deeper and found this study, Head and Shoulders: Not Just a Flaky Pattern (you can download the pdf of the paper), by Carol Osler.   I’d really be pushing your attention span, and mine, to critique or adequately summarise this paper, you can however read a journalist’s slightly uncharitable interpretation here.

Head & Shoulders

My point is not about this paper in particular but rather the general observation that quantitative evaluation of technical analysis is noticeable only by its absence, or at the very least its scarcity.  It only takes a cheap PC and a free download of OpenOffice Calc to be able to do a rough and ready back-test  for yourself.

During a heated debate on a trading forum about the value of pin bars I did exactly that. I analysed OHLC data for 8 years of hourly EUR/USD data and found they had no (actually slightly worse than ‘no’!) predictive value.  The problem of course is that crunching numbers in this way doesn’t allow for these signals to be placed in context, that limitation doesn’t however entirely negate the result. What was most telling was when people disproved  my analysis by showing me an example when a pin bar had bagged them 70 pips(!).

So my hope is that we become more prepared to shine the light of analysis on our cherished beliefs, and equally prepared to ditch any that don’t stand up to the scrutiny.

I have provided a number of links in the text above where I feel some terms may need further explanation.  I know the vocal minority are smart enough not to need them, please  don’t feel patronised.

The steadily growing traffic for this blog (thanks to those that kindly link here) is only a sign that new people are visiting, they may be visiting and hating it, if so I’d like to know. The silent majority are encouraged to comment, as of course are the vocal minority, even Solfest.

Seeing Red

I often write and talk about taking the emotion out of trading. Now though those clever people at Philips have created a device that will warn home traders, by changing colour to red,  if your emotional state is not compatible with making trading decisions. 

"An emotion mirroring system for online traders", not a funky watch and fruit-bowl.

It seems utterly crazy to me but then I said the same about the iPod. You can read all about it here and form your own opinion. I turn a shade of green whenever I see 9 pips of slippage but I’m not even sure that is relevant.