You should also have in mind that when Forex pairs are in a trend state all technical indicators will be at extreme levels and stay there for quite some time. This strategy is good in range bound markets and is not good at all when you a tendency is in place.
Over 150 million people watched the super bowl last night and we can only guess how many people had wagers on everything from the final score of the game to whether or not Alicia Keys was lip synching during the national anthem.
Superbowl Sunday is a fabulous time to be an odds maker as they will make money no matter who wins. But what if they booked bets on the market? Even with the benefit of hindsight, it may be not be such a great proposition.
Think about it, if back in June of 2012, when the S&P 500 was down at 1266, and the bookies had to take action on where the market would be now, knowing that the debt ceiling debacle hasn’t been decided, unemployment was a 7.9% in January 2013, and consumer confidence was at a multi-year low, would they pick 1,513?
Heck no! Las Vegas hasn’t grown to be the behemoth destination because the odds makers are right; it’s because that they get the “vig” no matter what the outcome. Unlike the so called “stock market forecasters” who are already predicting a banner year because of the January performance. Supposedly if stocks surge in the month of January, it increases the odds that the market will be up at the end of the year. This phenomenon is termed the January Barometer by Stock Trader's Almanac, and sports a pretty impressive accuracy rate of almost 90%.
But here’s a little lesson in statistics. If you compare stock market performance to a thousand random events, such as temperature, traffic, or even Super Bowl outcomes, you are likely to find one series of events that has a 99.9% probability of past correlation. Unfortunately, these correlations end up having zero predictive power.
As silly as it seems that we would grasp at predictive straws like the Super Bowl outcome predicting the stock market, or use one month of returns to predict the rest of the year, it pales to the insanity that is the current market situations.
Trade well and follow the trend, not the perma-bull OR perma-bear "experts."
Best Trades to you,
Founder & President- Trading Advantage
Secret Trading Tip #14
If you know your way around a price chart (Tip#5) then you are ready to learn a little more about technical analysis. This kind of analysis is defined as an attempt to try to forecast price movements based on patterns observed in price changes on charts, or other changes that are not rooted in fundamental observations.
For technical analysts the key to observing the market lies in signals and patterns
Technical analysts (or technicians as they are sometimes called) are looking for all kinds of things in the rates of price changes, the patterns that price changes might be making, shifts in volume and open interest, and more! They are trying to find anything that could be used to show a potential trading opportunity - something that could help them forecast possible future movements. It is important to add a disclaimer here – Past performance is not necessarily indicative of future results. There is no way that finding a pattern or indicator in a chart will be a guarantee of what will happen in the market. They are all subject to the same personal bias and are just as fallible as any other forecasting method.
Why would anyone use technical indicators?
Technical analysis is a means of trying to decipher the market trend or a possible reversal of that trend. Like any other kind of analysis, it is meant to be used in tandem with other observations, ideas, and fundamentals to give a bigger picture when planning possible trades. Even the most basic patterns in technical analysis can be used for trade entry and exit points. Here are some examples:
An uptrend may be present when there are a run of trading periods with higher high prices and higher low prices. Identify an uptrend, and you might get an idea for a long trade. A downtrend could be characterized by a period with lower highs and lower lows. At that time, you might want to find a place to play a short trade. If the market is seeing pretty equal highs and lows, it could be stuck in a sideways trend or channel. Even those have trading opportunities since the high spots could be identified as overhead resistance, where prices will go and then stop and retreat as selling enters the market. The low prices could be showing you key areas of support when the prices get to a point where buying occurs and the market doesn't seem to go any lower.
Past performance is not necessarily indicative of future results. Chart courtesy of Gecko Software.
Support and resistance offer interesting entry or exit opportunities. It would be a much more improbable trade if you decided to go long (buy a contract) right as the market was hitting an area of potential resistance. Likewise, it might be riskier to enter a sell order just as the market is getting to an area previously known as support. This isn't to say that your trade wouldn't work, it is just good to know these spots and understand what is behind them – it'll make designing your trade a little more effective. Perhaps you would want to play these areas in case support or resistance is forecast to be broken based on your fundamental analysis or a piece of news due out in the market; or, perhaps other technical signals are telling you that the trend is about to be broken. Here are some other basic signals technicians might look for:
Head and shoulders patterns are formed when the market prices make a peak (first shoulder) and then decline, subsequently rise above the former peak (the head) and decline again, and finally make another peak (shoulder) not higher than the head and decline once more. This pattern is seen as a possible trend reversal. It is a bearish pattern in an uptrend.
Inverse or reverse head and shoulders are also possible, marked by spikes downwards and then recovery resulting in the reverse should-head-shoulder pattern described above. This is seen as a bullish pattern if it occurs in a downtrend.
Triangles, pennants and flags are also key patterns technicians keep an eye on. They can be bullish or bearish depending on the prevailing trend and the way they are formed. Flags and pennants are seen as signals of a continuation where the market sees a kind of consolidation of action before making a move in another leg of the trend. Volume also comes into play with flags and pennants, usually lower or weakening volume.
Find patterns, find a trade
If you can back up your trading bias with actual technical observations or patterns that might indicate the market is trending or about to see a reversal, then you have a trading opportunity! Rather than boldly (and blindly) placing buy or sell orders and hoping the market moves in your favor, taking the time to learn and understand how the market behaves can make or break your trade design. Other people are looking at the same information and furthering your education can never really be a bad thing!
Secret Trading Tip #8
Avoiding Mental Sabotage
I have heard that 95% or more of all traders ultimately fail.
Have you ever wondered why?
Most traders will tell you it was the system or method they were using. They'll also tell you they had a few bad trades they couldn't recover from. Or their dog chewed through the telephone cord just as their computer crashed, and they couldn't get out of a losing trade.
Everyone has a different reason, but when you hear enough of them, a pattern begins to develop. I believe most traders fail because they sabotage themselves.
The markets work differently from other investing opportunities. There is probably more freedom in the trading business than any other industry in the world.
You can do what you want, whenever you want to do it. You can trade 1 contract or 100. Buy the market or sell it; it's up to you. The only thing that holds you back is running out of capital.
Most people are not accustomed to that much freedom.
If you can't control the market, the only thing you can control is yourself.
Trading is also very different than the things we do on a daily basis. In everyday life we exercise some control over our environment. If a room is too dark we turn the light on. If we want to go somewhere, we jump in the car and turn the key.
In trading you can't control what the market does.
No matter how much you want the market to go in a certain direction, there is nothing you can do to force that to happen. You can't turn a key or flip a switch. Hoping, pleading, screaming... nothing will make the market do what you want it to.
Embrace the uncertainty - plan for the best and worst cases
One of the most important things you can do to avoid the mental sabotage is to understand the lack of control you have over the market, and plan for every trade. Now I don’t mean a trading plan like buy a contract and then close the position when the market trades higher. I mean a real plan. That includes specific entry points based on certain market movements or conditions. It means exit strategies for when things go right and for things go really wrong. It means placing limits and stops and keeping your emotions in check. If you have a roadmap for your day, you are less likely to fall into that trap of mental sabotage.
Remember: if you can't control the market, the only thing you can control is yourself.
Successful traders all understand and embrace this concept. Unsuccessful traders continue to try to make the market conform to their wishes.
"Just a short note to say thank you. These past few weeks have been a real eye opener for me and thanks to you I'm making more money trading the S&P's than ever. I've been trading the S&P's for over 5 years and never have I had as much fun and without the stress. Using just the "One Time Framing Technique" and the 80 Percent Rule, I have made over 5,400.00 dollars in the past four weeks. Just today your 80 Percent Rule netted me 2,150.00 dollars. Not only am I glad I didn't return your course, now you couldn't begin to pry it from my hands. Many, many thanks for everything."
William P. San Ramon, CA
"It's not brain surgery, you just follow the techniques and you can make money. Larry's Program really works."
Fred C. Amityville NY (Testimonial from The Secrets of Floor Traders Course.)
Secret Trading Tip #20
Understanding Candlestick Patterns – Harami
I've already covered some of the better known patterns like doji (Tip #18) and engulfing (Tip#19) – now it's time to add harami to your candlestick chart pattern arsenal. Let's take a look at what this technical signal looks like, and what opportunities might be presenting themselves when you see it.
Harami patterns can be bearish or bullish
Harami, like engulfing patterns, are a two candlestick formation. They are actually often confused with engulfing patterns because they both involve candles where one real body is bigger than the other. The difference is that in harami, the preceding (or first) candle in the pattern is the longer one of the pair; it encompasses the whole body of the second candlestick.
If you see this two candlestick pattern, it could be a sign of a reversal
In a candlestick chart, bullish harami are formed when a long filled (or red) candlestick appears during an established downtrend and is followed by a smaller hollow (or green) candlestick. The reason this is a bullish signal is based on the idea that the first candle forms during a session with potentially high volume and bearish sentiment. The following day, there is a gap higher to open, a smaller trading range, and prices were supported above the previous day's close. This is seen as a potential indication that things are about to turn – a bullish reversal.
A bearish harami is made up of a long hollow (or green) candlestick occurring during an established uptrend which is then followed by a smaller filled (or red) candlestick. Similar principles apply to this signal as they did to the bullish version – the first day makes way for a smaller range led by a gap lower and selling pressure that kept prices from rising.
It is worth noting that some candlestick chartists suggest harami can include candlesticks of any color combination – filled + filled, filled + hollow, and hollow + hollow. The whole point for them is for a larger candlestick to be flanked by a smaller one. The reversal signal is just potentially stronger when the second candle is a different color. The two different candle sizes are just seen as an abrupt and sustained bit of trading contrary to the prevailing trend.
Harami are telling you that there has been a sudden trading shift
This candlestick pattern tends to crop up when there has been an apparent loss of trading momentum. The kanji definition of harami is embryo – I take this to mean that the second candlestick is just the early start of a new trading direction, contrary to the existing one. Like most candlestick patterns, it may be wise to look for confirmation of a reversal once you spot harami.
With the markets closed for the President’s day, American took time off and paused to honor this iconic office. While many of us have grown disenchanted with the current state of affairs, our presidents have a rich and storied history.
From national icons to Carl Ichan, the only real market news on Friday was this battle with William Ackman over Herbalife, cause there’s nothing like a couple of Wall Street tycoons getting in a financial pissing match.
We learned late Thursday in a filing with the SEC, that Icahn has taken a 13 percent stake in Herbalife (HLF), a supplement company that Pershing Square Capital Management, Ackman’s company has a huge short position. Ackman has repeatedly called the company a “massive pyramid scheme.” HLF jumped more than 20 percent before the opening bell on Friday, but sold off near the close and finished only marginally higher at 38.74.
Icahn's investment came three weeks after a feud between the two men boiled over on live television, with each phoning in to CNBC and insulting each other. Classy! The two were just dredging up old wounds as their feud began a decade ago over a real estate company deal that ended up in court. Icahn was forced to pay $4.5 billion to Ackman's Gotham Partners, and he has never forgotten about it. Poor, poor billionaires.
Whether or not Ichan really thanks HLF is a good investment, one can only speculate. He did say the regulatory filing that he plans to have “discussions” with Herbalife management about business and strategic alternatives to enhance shareholder value, including the possibility of going private (READ.....Please go find some business model other than the multi-level marketing kookiness you’re passing off as a legitimate enterprise because I really hate this Ackman guy and want him blown out of the water).
Ackman, who is still heavily short HLF stuck to his guns on Friday.
"After 18 months of due diligence, we have concluded that it is a certainty that Herbalife is a pyramid scheme," he said. "Our goal was to shine a spotlight on Herbalife. To the extent that Mr. Icahn is helping achieve this objective, we welcome his involvement."
All of this is amusing for a slow market news cycle, but as for the historical relevance of their squabble, it will rank right up there with the folks still debating who was the better president, Millard Fillmore, the 13th or Franklin Pierce, the 14th?
Secret Trading Tip #29
Advanced Technicals – Moving Averages
In Tip #14, I talked about some of the basics for technical analysis. Trends and simple chart patterns are just the tip of the iceberg for technical analysis tools. There are many advanced tools that technicians use to try to find signals in the market price. One of the terms you might hear quite often is moving average.
The moving average for a market plots the result of a calculation that averages the prices in a certain time frame. Fans of the indicator say that it “smoothes out” the data, giving a clearer picture of potential trends.
The word “moving” refers to the way that new data is added while older points are dropped.
A simple moving average would take the closing prices from a set number of days – let's say 20 days – add them all together, and then divide by 20. The result can be plotted on the chart. The number of days is usually up to personal preference. The more days used to calculate the average, the smoother the line will be. Here is an example of a 5 day versus a 30 day moving average:
Past Performance is not necessarily indicative of future results. Chart courtesy of Gecko Software.
See how the two compare? The 30 day has far fewer dramatic movements in it. The choice of line usually depends on the strategy that you are looking to use with the moving averages.
Some moving averages use a formula to give recent data more influence on the final numbers. One of these is the exponential moving average, which some computer programs might use if you select this indicator. The following chart shows the difference between a simple moving average (in red) and an exponential moving average (green) where both are calculated for 10-day. See how the EMA looks like it responds to the changes in price faster than the SMA?
One of the most common uses of Moving Averages is in confirming trends.
Moving averages use data or prices that are in the past, so they are not really good for predicting trends. The slopes higher or lower in the moving average line can be used to help a technician looking to confirm a possible trend. Take a look at the chart of the 5 day moving average. A trader looking to hold a long position would probably not be comfortable doing so if the current prices were above a downward sloping moving average line. On the flip side of that, a short position would not be on the top of a trend-traders list if the market price was above the line.
Some technical analysts use larger or bigger MAs to try to identify support or resistance. If the market price bounces off the line for a 100 or 200 day moving average, it is a possible spot for support or resistance. Trading opportunities might come into play if the prices crossover that line. Other strategies using MAs come into play when the lines for two different time periods cross each other. In this way the technical analyst will be watching for signs or confirmations of a reversal.
Moving Averages can be used alone or as a complementary tool to other analysis.
Like most technical analysis tools, the moving average for a market can be used in tandem with other analysis. It is a lagging indicator, since it uses price data from the past, so there is reason to keep it handy for confirming trends, rather than trying to apply it in a predictive manner. Keep in mind that different time periods might be more appropriate for specific trading intentions. If you are day trading, it probably wouldn't be the best use of your chart reading time to use a 50 day MA. You might feel better with something that is an aggregate of minutes or hours. Do your research and practice, and you might find that this simple technical indicator suits your style.
Day trading is fast, and risky, and not for everyone.
The quick pull-the-trigger style trading that is synonymous with day trading is not for everyone. There are great disadvantages and heavy risks. I think the big trick is to find and stick to a trading plan. Having a pre-determined approach to the market – a place to get in and a place to get out for profit OR for loss – should help you keep your head on straight. Trading with a plan instead of raw emotions is what separates the cocky cowboy image most people might have from the actual serious day trading reality.
Which came first - the chicken or the egg in the new world of Barnyard Economics???
If the first two months of 2013 market’s action could be compared to the farm, the crop would be poor and the animals unproductive, but the farmer would be enjoying a banner yea...except on Mondays. Because alas, for the eight Monday in a row, the S&P 500 closed lower. The farmer (and the markets) might opt for a three day weekend in the future.
Whether or not these patterns and statistics have become self-fulfilling prophecies is hard to ascertain. We do know that the market opened all gangbusters Monday with everyone from the cows to the pigs buying stocks. By mid-morning, things got dicey as we heard Chicken Little’s cry, not the sky is falling, but the sequester is coming. With no resolution in Washington and March 1st fast approaching, federal spending will be reduced by $85 billion in the final seven months of this year and by $1.2 trillion over the next nine years.
Another culprit seemed to be Italy, as we learned there may be a barnyard government. Initial results from Sunday's election showed the center-left party of Pier Luigi Bersani leading in both chambers of parliament, but later in the day Italian state TV station RAI said none of the four main groups running in the Italian parliamentary election is likely to win a majority in the Senate. A coalition or party must win at least 158 of the 315 Senate seats to gain a majority in the upper house, which a government would need to pass legislation. Italian stock market proceeded to drop 4% from pre-poll headlines and Europe's VIX pushed back above 21.5%. In addition, the Euro fell out of bed versus dollar dropping down to 1.3141.
Whether or not the barn doors have swung open and the macroeconomic fundamentals will upset the cozy liquidity production machine, we shall soon see.
Thanks a lot Sir...Larry Levin to capture our attention on this important point. I never thought about Buyers or Sellers factor while it is an important part of forex strategies.
Secret Trading Tip #3
A Little Lesson in Lingo
The world of trading has many parts that seem a little foreign to new traders. There are plenty of catch phrases, symbols, and other banter that can be intimidating or even confusing at first. One of the biggest sources of confusion includes the shorthand that you see for many markets. Understanding what you are reading is important, and learning the basic lingo can come in handy.
Everything has a specified time and place
All futures contracts (be it for commodities or financial instruments) have very specific parts, quantities, and dates associated with them – and that’s before you even worry about the price! Not all contracts are created equal. The value of the S&P 500 contract is five times the value of the e-mini S&P 500 contract. Those are two symbols you wouldn’t want to confuse! If there are markets you want to trade, visit the exchange’s website and learn about the key parts for each contract. These will include:
The contract size
The futures months for the contract
The format for the price quote
The smallest amount by which the price of the contract can move (whole points or fractions of a point, also known as minimum tick)
Any daily trading limits for price movements
Trading symbols for the contract
- And much more!
Gimme an H! Gimme a U!
Memorizing all of this might seem like a bit of overkill, but in modern electronic markets making a mistake can happen in seconds and cost an unlimited amount of loss and confusion. Just remember that “fat finger” trade and the trouble it caused!
Let’s take a look at a contract I trade, the e-mini S&P 500. This futures market trades electronically (hence the “e”) on the CME Group’s Globex platform. On their website, I can go to Contract Specifications and learn that:
The symbol for this market is ES. I can use this code to find price quotes on many tickers.
The contract size is $50 x the e-mini S&P 500 futures price. I can use this value to calculate the dollar risk/gain per point in the market. Basically, if each point is worth $50, a 3 point movement would be $150. If I want to calculate the total dollar value of a single contract, I just have to multiply the current price by $50. If the market is trading at 1,280.00 that means it is worth 1280 x $50 = $64,000.
The minimum price fluctuation is 0.25. That means that if I am making an offer or trying to quote a price, I know that there are quarter point increments so I can’t offer a price like 1265.30 in this market. It would have to be 1265.25 or 1265.50.
The contract details also list the trading times so I know when a session begins and ends, and also the trading contract months. This market has contracts for March, June, September and December (the quarterly cycle) – these months will be written with their own symbols as well – H, M, U, Z. The full list of monthly symbols is:
Each contract will expire at some point, and that date is relative to the contract month.
If you can understand the lingo, you can avoid costly mistakes
Some of this might seem like a no-brainer; after all, a lot of trading programs will give you the info with a single keystroke so you don’t have to memorize all of it. The reason I think it is still relevant to know this is because taking the time to learn and understand how the markets work and what the lingo means can save you potential trouble. What happens if you are long ESU11 and you try to close the position by selling ESZ11? Can’t do it – you would know that the ES U11 is the e-mini S&P 500 for September (U) 2011 and the ES Z11 is the e-mini S&P 500 for December (Z) 2011.