Category Archives: Miscellaneous

The conclusion of the matter

Good evening,

It has been a long journey – this site, trading, and life through the duration of this site. I started this website in 2009, with the aim of finding out my pathway in trading, and also to share my views publicly – which I explain in the “About Site page“. I like to write in general, so writing about technical analysis provides an avenue for introspection: mulling over different techniques, methods, styles; looking back to check the outcome of a prediction (as much as I try not to use this word); and just a virtual journal to record my opinions, observations, thoughts, etc. At this point, if I ask myself whether this website has been a success, the answer is a resounding yes. From my first post to the latest ones, there is a definite improvement in my writing, command of the language, and most importantly, my brand of technical analysis, and trading (though I made sure not to share much about my trading because this is not the point). I set out as a young trader who has been given the technical analysis ropes first, and through my experiences analysing and trading, I have found technical analysis to be my pathway in the financial markets – much like a non-first-generation religious person who was born into a certain religion but reaffirms his beliefs through life experiences. At this point, I feel like I have found my sweet-spot in a map of all the different styles and methods of market analysis. I have read many books and online articles during my younger days, and I have applied different techniques to chart-reading; it has been all, if not mostly, documented in this website. After years of trading and looking at charts, I am confident that I now have a trading philosophy to carry with me from here onwards; bearing in mind that as with many things in life, outside of dead-end work, there is obviously no such thing as a concrete, set-in-stone template of “standard operating procedures” that produces timeless success – especially so in the dynamic world of financial markets.

After years of trying out different techniques and thinking through the rationales and philosophies of them all, I have decided that trend-following is the way to go. Before I delve into trend-following I will explain why I do not pore through financial statements and other information under the wing of fundamental analysis. First, it is not so much that I discredit it; as explained in one of the paragraphs above, I started off with charts, and enough success and reason kept me in the technical analysis camp. Second, there are reasons why I do not feel the need to use fundamental analysis but this is a whole story by itself, and there are pages in this website where I talk about this matter. There are other sources around that explain why there is no need for fundamental analysis. Another school of thought apart from the two traditional sides is trading with statistics and computers. The reason why this school of thought (it actually sounds inappropriate to use this term since there is not much thinking involved in exploiting inefficiencies) does not fall under either technical analysis or fundamental analysis is because it does not have anything to do with making educated guesses about the future. Being a retail trader with very basic infrastructure at home, there is no way I can rely on technology solely to make money from the market. Also, I am a discretionary trader rather than a mechanical one since my IT skills are subpar in the trading world. What all these mean is that I end up with just the chart in front of me and executing trades. Some people may say that gone are the days where you can make money as a recluse at home: “the markets are rigged by the banks,” or “you cannot fight against the big boys.” However, the way I see it, my analysis can always point me to the direction the “big boys” are taking; why does it have to mean that I will always be on the side on the losing minority? And, do the minority always lose?

I am now a proponent of long-time trading. By long I mean more than six months – which is just an arbitrary number, honestly – or basically entering and not having to monitor the market regularly. When I first started trading, I played around with forex simulators, and day-traded very frequently. As time went by, my time-frame kept getting longer to the point I was settled with week-long or month-long positions. Years went by, and I kept getting frustrated with how such a time-frame coincided with market movements in a negative way. Philosophically, I am now a much longer-term trader. The reason behind this is that I think trading on shorter time-frames means more fights with the “big boys”. The short-term movements in the market do not indicate the true direction the market will take in the long-run. For experienced traders, the term I am referring to is whipsaw. So many times you may have been stopped out of a trade only to see the market reverse and go “according to your initial plan”. It has happened too many times to me; hence by results and reasoning, I have decided that long-term is the way to go. Every day, money flows from one hand to another; for every buyer there is a seller. The market moves very quickly, and it is alive. For a small retail trader with only a “home computer” to aid in trading decisions, how can I possibly predict what is going on in the market for one day – even worse, one hour – or a few days, or even a few weeks? How is it possible? I have experienced success before, but looking back, it has been mostly luck. At the essence of it all, the market can either go up or down after you enter – fifty-fifty. You can throw in all the indicators in the world, but the market does not have to listen to them! In the long-run, luck will not sustain – it does not for me, at least. Over time, I realize I need to get over all that noise, all the haziness of short-term plays. In-and-out, in-and-out, dodging bullets, fighting fires, limit hit, stop-loss hit, profit, loss, profit, loss, loss, anger, denial, false hope, even more anger, resignation, anguish. At some point, I have learnt that a good trader should be emotionless. That I have done, but it only becomes frustrating when the losses pile up and eat away into the profits, no matter how detached I am from making decisions emotionally. Slowly, I have begun to realize that longer-term set-ups have been lifting me up out of all the short-term noise in the market. The load of false signals in a trend are so many – so many booby-traps lying in wait for the short-term trader. Of course, this does not mean that long-term trading is so clear-cut and without pitfalls; but from a philosophical point of view, long-term set-ups help the trader to fly under the radar and avoid most of the commotion.

Last but not least, the reason I have settled on a very simple trend-following method is that it makes sense to me. It makes sense to ride on one long wave than to go in-and-out of the haphazard zigzags, and getting burnt occasionally (or usually!). It makes sense that if I am wrong with a long-term play, I am probably dead-wrong (lesser chance of whipsaws). For those who want to know the exact parameters of how I define a “playable” trend, there is none – or not for now, at least. I have tried to objectify in very specific ways on the trends that I consider strong enough to warrant an entry, but after a while, I find that there is no way of telling for sure whether a trend can last. Of course, it is a game of probabilities, and by now, I favour certain conditions and circumstances; however, I think it should not be rocket-science to figure out whether a market is trending or not. At the essence of it all, I identify a trend, then consult my money management strategies to see if the chart is good enough for trading – analysing is one thing, trading the analysis is another – after which, I execute and wait.

There are a few reasons why I decide to write a the-conclusion-of-the-matter post. I have noticed in the last two years or so that my monthly post count has been dropping. Although I can say that my life outside of blogging has become quite packed and cluttered, I have to admit that I am running out of things to say, and I attribute this to attaining a mature understanding of how I should approach trading. There are two ways a company can grow: organically – which comes from within, and inorganically – which comes from the external. Similarly, after years of deep thinking and learning through external sources – and a mixture of both at the same time sometimes – I feel like I have reached some kind of end. Is this just a way of saying I have struck the jackpot recently and so I have nothing more to gain from the financial markets? Or, have I gone bankrupt and given up on trading? The answer is neither of the two. Rather, in a philosophical way, I feel like I have learnt all I am meant to learn, and I am now more sure of my beliefs; but, I will sound very foolish by thinking that I am done with learning, so what I mean is that I am done learning the “foundation stage” – a certain stage where there is so much information and so many different decisions to make, that ultimately results in a base that is tailored to whatever that will be built on it. This may not make sense to some of you as it may seem paradoxical or outright nonsensical contradiction. Nevertheless, I am sure of what I am saying. To use a cliché phrase, this seems to me like an “end of the beginning”.

I realize that my future posts will all seem the same, which makes it quite boring and pointless in some sense. Also, I have decided to devote more time to writing about other topics outside of financial markets. Trading is not the only thing that I do. I have many things that I pursue as passionately as I do with technical analysis, and in some ways, trading and analysing the financial markets has shown me parallels to other fields. If you have been on this site for a long time, you will know how much I like parallels, the analogies that can be drawn, and how certain things that mysteriously agree with each other hold true in the end. I have spent much of my time trading short-term and writing about technical analysis over the last several years; but as you may have observed, my trading time-frame has gone up, my analysis time has gone down, and trading volume has decreased too. By no means are all these a result of dampening morale because of piss-poor trading performance; rather, I perceive it as maturing and growing into the trader that I am supposed to be – finding my style.

NON-TECHNICAL SIDE

I devote this section to the non-technical side of technical analysis and trading. The principles of any field should not, and do not, stand entirely alone and independent of the other areas of life. My experience has taught me that there is more relation between different planes and fields in life than how much people usually think so.

I like the idea of long-term profiting rather than getting rich quick. Greed drives us to want to amass fortunes very quickly, and enjoy life until death after that – who will not want that? But is life always that easy? It may be for a few individuals in the world but not me, at least. I know some of you may wonder how a moral principle has anything to do with technical analysis or trading, but my approach is a very holistic one. When I first started trading, I often had the mentality that “if things went according to plan”, I would double, triple my account in a certain short period of time. The feeling was the same as when I once received an “Ang Bao” (Chinese New Year tradition in Singapore) from a person outside blood circles, and there was a “Toto” ticket inside. Since I never had anything to do with Singapore Pools (only Singapore Exchange Limited!), I thought that I was destined to win the lottery because the opportunity was given to me by chance and it was my first. I told my friends, “I sincerely think I am going to win!” Of course, they gave me the “nevermind-you-will-know-soon-enough” look. Similarly, when I was trading, I would have the same naïve, foolish, and greedy mentality: I often saw in my mind how my account balance would make somersaults upwards, and then all the wishful thoughts of material wealth would start appearing: the car, the house, the holidays, the VIP treatment everywhere, the status, the popularity, etc. Is this not the mentality of most beginner investors and traders? Many years on and I now know the reality – but not as soon as I would have wished for.

“To every thing there is a season…”. Life is full of trends, or more commonly, many people use the phrase “ups and downs”. I have observed that many things in life can be “quantified” in a certain way and to a certain extent such that you can generate a chart; for example, a chart of personal happiness – how happy or sad you are every day. What I realize is that just like the financial markets, there are trends that appear most of the time. The truth about life – and the financial markets in particular – is that things go in a certain direction until something causes it not to. When you apply this principle to the financial markets, it is this motion that presents the opportunity to make a profit. Hence, this is yet another reason why I choose trend-following. The first component of the term is trend; this approach is only possible because of the trends that direct so many things in life. The second component is “following”. Character-wise, I am a non-conformist, I am actually the type who likes to go against the trend. But, in trading, I see the need to follow rather than resist. This theme of following a trend versus going against it is actually one that polarizes different trading styles. On one hand, there are those who believe in doing the opposite of what most are doing. It is well-known that Buffet says to buy when others are selling and sell when others are buying. I have seen people who think they are following the great investor by applying this principle to their own time-frame, which is much shorter than Buffet’s by many years! Needless to say, destruction ensues. The mentality of going against the herd can be very pleasing, especially in the financial markets when a person goes against the prevalent sentiment and ends up winning. I know this because outside of trading, I frequently go against the wave. It makes me feel special and different. It can make a person feel like he is smarter because he probably knows something that everyone does not. Socially, going against the trend just means that it is part of the kind of person you are. When it comes to trading the financial markets, this theme can cause havoc. This theme can be expounded greatly, and it will take a whole other post. For this post, I will only say that it is difficult to fight prevalent sentiment. For a trader to go against the market, he must know something that everyone does not. When a great investor does it, it is not a haphazard move; it is not just going against the trend for the sake of it. However, oftentimes, many amateurs do it because it makes them feel good that they are being different. Therein lies the incorrect application of the contrarian mentality. As for me, I admit that I am not a good economist; I admit that my foresight is not that accurate; I admit that I do not have the ability to gather enough information to conclude against prevalent sentiment. Therefore, I choose to have a trend-following mentality when it comes to trading. It may not be the most profitable strategy to enter a trend when it is confirmed and to exit it after the top has formed, but I know that this is the best way for me with the time and resources that I have as a trader. Many people are myopic to trends in life. In any given trend, there is the “noise” that goes on inside the main trend. The cause of the noise is largely from emotions running wild from day to day. I have observed some relationships among people in my life. When a relationship is going downhill, people do not seem to see the decline. Once in a while, there are encouraging moments that give them hope that things may change for the better (much like the corrections in a trend), and so they hold on. After a period of time largely dominated by negative events compared to positive ones, “explosive events” will erupt, and by then it is too late – the cost of the fall-out is much greater than it can actually be. Elevate yourself and see the forest for the trees.

I realize that as with many things in life, there is no one way to success in trading. I know that most of you have already heard this being preached in different words: “there is no holy grail”, or “all paths lead to Rome”, etc. However, I want to reiterate and beg you to see that there really is no one way to make money out of the financial Markets. There are so many successful traders and investors who each have their own way of extracting profits from the market. Of course, when you take out the exact numbers and rank them all individually, people will hail the number one and discount the rest. I will bring in an analogy from the world of professional sprinting: everyone knows Usain Bolt for what he did at Beijing in 2008: smashing the then world-record and celebrating even before the finish line; and not just that event but for the following years to come. However, do people not know of the other world-class sprinters who occasionally beat Usain Bolt when he does not run his best? How can we disrespect them for being milliseconds behind, or beating Bolt when he does not run a record timing? There are so many examples of how successful people in different fields do not have the same approach, training, style, etc, and why must it be any different when it comes to trading and investing? I think that if there is to be an ultimate lesson I want you to learn from coming to this website, it is that you have to find your style. You may need to imitate others in the beginning of the process, but whatever it may be, the end result is your own style that will make you successful.

My style is trend-following – technical analysis. I hope my beliefs will bring me bountiful profits in the time to come; and I will definitely help those who want to know more about my style. But even as I continue on my path, I know that it is not the only one.

ADMINISTRATIVE

1. While it may seem like this is a farewell post, it is not. More so, I am taking a different direction with this website – this site will no longer be written in a kind of diary or journal style. I intend to make this site a purely educational one – sharing my beliefs for whoever who cares to learn from my style of seeing the financial markets. From time to time, when I feel the burden to write on a certain topic, I will do so. Most likely, the article will be tagged under one of the menus at the top of this website as a “page” (as it is called in WordPress dashboard). So, I think the main difference will be that my articles from now on will  not have a time element to them.

2. Some of you may have noticed that I started work on a technical analysis course, and there is only one section out of a projected ten that is completed and published. I have realized that it will be much easier for newcomers to this website to know the style of technical analysis that I use if there is a course for them to look through. I hope to complete the publication of this course in time to come; it will not be easy and quick to full fruition, but I am sure my “manual” will be out when the time is right.

3. As it has been, my email, technicalanalysistalk@yahoo.com is always available if you wish to contact me.

Definition of technical analysis

First section of my technical analysis course – which is still a work in progress; page URL: https://technicalanalysistalk.wordpress.com/technical-analysis-course/definition-of-technical-analysis/

 

In the broadest of categories, analysis of financial markets – ways of analysing any kind of financial product or market – fall into two categories: fundamental analysis and tecnical analysis. With the advent of the advanced technology, computers, super-computers, systems, etc, there is a third branch that some people will not classify under either fundamanetal analysis or technical analysis. This third, new “offshoot”, though only possible because of technology – hence, a modern field of analysis – is very important because of the volume of trading that feeds off of it: it is the use of algorithms in computer systems based generally on statistics or imperfect market opportunities. For most retail and discretinary traders and investors, only fundamental analysis or technical analysis will be the mode of analysis. There are people who use a blend of the two main philosophies of analysis for trading under the banner of üsing the “best of bth worlds”.

There are many definitions of technical analysis that you can read from books and online material. When I was at the beginning stage of my technical analysis journey, I devoured book after book on technical analysis. The first few pages usually started off defining technical analysis. I leave you to read those books and other online material if you want some kind of “official definition” of technical analysis.

Is it important to know the meaning of technical analysis? Yes, but not in a rote sense. I think the best way is to gain experience in analysing charts – reading between the lines, getting a feel of the market’s pulse through a chart – then stepping back and telling yourself what technical analysis means to you.

What does technical analysis mean to me?

Technical analysis is chart-reading. A chart represents the value of something (a market) as it moves along in time. What, then, impacts the value? Supply and demand of the particular market. Supply and demand is affected by a whole lot of factors that I consolidate as “fundamentals” and emotions. Fundamentals include the following: company financials, news, economic data, economic health – various barometers, forecasts, forecasts comparisons, and many others.

TA

 

In the small chart that I created above, you can see the category called emotions followed by two sub-points: fear and greed. It seems like emotions are insignificant but emotions can be blasted into a huge subject on the psychology of trading. There are books on that realm of trading, and I will not cover much of it here. Briefly, there are two ways of looking at psychology of trading: one, how it affects the market as a whole; two, how it affects traders individually. I believe psychology only affects the market in short-term scenarios.

If you view technical analysis through the same lenses that I do, you will see that my definition of technical analysis is that it is a way of interpreting the fundamentals and traders’ psychology that drive the market. If you are looking for “golden rules” to take away from my course in technical analysis, the first is probably this: “a chart is a way of analysing the fundamentals”.

 


 

 

Technical analysis is like looking at the stars

Quite a number of people I talk to discredit technical analysis on the grounds that it is not academic (in the first place, if you look at the definition of academic, technical analysis fits the bill too), it has absolutely nothing to do with the underlying market, and so on. Basically, people who do not believe in technical analysis think it is something independent of the market and economics – like looking at the stars to see what your future holds; no correlation between the two.

Let me explain what a chart means again – or what it does not mean. A chart is not a graph plotted by a machine that is churning out random numbers; a chart is not something that a bank prints out daily based on whatever data that the bankers feel like using as chart inputs; a chart is not like what completely anti-technical analysis people think of a cow going through one side of a machine and lumps of unrecognisable matter coming out the other side (even then, it came from somewhere).

A chart derives its data from the market. This simple concept is the exact same one as a company’s cash inflow or outflow being the sum total of all monies received minus monies coughed out – and you see it on the financial statement. (We actually see how financial books nowadays suffer the risk of unethical but legal “manipulation”, or even outright illegal doctoring.) No one can manipulate your chart (unless your broker decides to print out a different chart from the exchange’s data, which I have never come across or heard before). Every candle or bar or centimetre of line that prints on a chart stays there forever – embedded in history.

Now that I have established what a chart shows, I shall proceed to what chart data means; where does the underlying data of a chart get meaning from?

“The STI (Straits Times Index – barometer of the Singapore stock market) opens the day with more bidders than sellers – because US markets closed favourably during the previous nightnews of the Fed clearly reaffirming an expansionist policy for the next half a year. Nearing lunch, prices are relatively flat. Germany’s manufacturing data points to strong prospects – promising start to European markets drive the STI even higher before ending 47 points above the previous day’s close.”

What we then get is a bullish-looking, “healthy” green candle on a candlestick chart. This is a simple example of how a chart is a depiction of the market. When we extend this example into more than a day in the life of the market, we get into trends – short-, mid-, and long-term; and much more than that.

A chart is not a depiction of fundamentals? A chart of a small company’s stock price increasing by ten-fold in three years because of securing patents and making good inroads into developing markets is rubbish? The company is a scam? The market – no, the chart is unreliable? At this juncture, some of you may bring in the debate of whether market participants – humans – are perfectly rational creatures or not. We do not always have to pitch tents in the extreme ends of polarizing issues. Briefly, I will say that humans are obviously not totally irrational creatures – would you rather park ten metres away from the shopping centre and pay four dollars or park fifty metres away in a multi-storey carpark with an elevator and pay one dollar fifty cents? Yes, I gave such a safe answer: “not totally irrational”; I will change it: “nearly rational most of the time”.

 


 

 

Conclusion

All in all, I want to promote technical analysis as the way to analyse a market and, subsequently, trade it. The reason is that I value a chart more than how some people do. A chart has meaning – as I have explained above. And because the chart is meaningful, I can develop theories and techniques on analysing the market and use this analysis to trade.

At this point, the sharper ones among you will probably say this: “Yes, a chart is obviously based on real market data. You do not need to go around the world – the universe – to explain that. But trading off a bounce from a trendline still has nothing to do with an uptick in the Baltic Dry Index.”

Resumption

Hello all,

It has been quite a long break that I took from writing on this site. It was an appropriate break to take after writing quite regularly for several years. When I look back at old posts from the past, I realize that my trading style and analysis methods and methodology have changed significantly. As set out in my “About Site” page, the main aim of writing articles here is to improve my analysis. Writing gives me a form of introspection. I am glad to say that I have fulfilled my aim of setting up this blog, and hope to continue doing so. It is always a work-in-progress; when trading becomes a passion, the learning process never stops. The set-up may appear very similar to another in history but there is always the uncertainty of the future. You can try to minimize uncertainty; you can try to make the future more predictable – but when the lines or candlesticks reveal themselves as time goes by, anything can happen.

During my break from writing, I still monitored the markets, and spent idle time thinking about analysis methods, psychology of trading, and the approach I had towards trading the market up until that time. All the thinking – which I see as very deep thinking, diving into the inner recesses of the brain, and akin to meditation – leads me to the conclusion that I should orientate my analysis towards a longer time horizon, and slowly morph my trading strategy into the school of trend-following. I hesitate to write my reasons why I am growing stronger in the belief of trend-following: For one, I did not have exact point-forms in my head during my hiatus, therefore, it will take a longer time to pen it all down; and, I think it will be interesting if I leave it to my future posts for interpretation of why the way of trend-following.

Some may suggest that I may be implementing a heat-of-the-moment change that is irrational. The truth is that I have been slowly gravitating towards trend-following for quite a while. So happens that the hiatus I took last year signifies the change. Reviews of my past trading performances are prompting me to ditch short-term set-ups that I sometimes see as “get in and out, and make a quick buck”. This is not to say that all of the short-term set-ups I showed on this site over the years are redundant. Some of them proved successful, some did not. For what they are worth, they contributed to my trading experience and knowledge, and to my account too. I believe that I will still highlight non-trend-following set-ups but my heart will be with the trends. To put it in a better way, my money is on trend-following.

In some regards, trend-following is not that alien to what I have been preaching on this site. I have always been a firm believer that the trend is your friend, and I think trend-following counts money management as a close partner. However, there are certain changes that I will make when analysing charts and trading the set-ups identified.

With this post, I officially end my hiatus. Here is to wishing everyone a blessed New Year.

Hiatus notice, something more , The Whipsaw Song

Good day all,

I have an announcement to make today. Because of certain reasons, I will be inactive for the next few months. I am unsure of an exact date when I will resume “normal activity” but I should be back by November. I hope to be able to see all of you readers again when I am back to posting articles here. It has been several years since I started this blog. Overtime, readership has gone up, and more importantly, I feel like I have benefited from writing down my analysis and reviewing charts over and over. I feel that it is time that I take a nice, long break from blogging – and trading as well, probably (although, as with some people, my love of the market and trading will not keep me away from following the news; and prices, maybe) – and pursue some of my other interests more actively. I think the word hiatus is appropriate. I have always had long-term plans to do more with this blog. And, perhaps, when I come back from my hiatus I will do so. For now, I am very satisfied with how I have run this blog, and seen my brand of technical analysis – my style – evolve as time went by; assimilating new tools or methods that help me read a chart better, and dropping ineffective weapons in my technical analysis arsenal.

The name of this blog is technicalanalysistalk. Over the last few years, I have built up this unique name, and in future, I may have some plans for it. Of course, this blog is not at all well-known in the community; however, I have time on my side and believe in what I am doing. I strive to grow these three things: my trading account, the name of this site, and me (as a person; my character). Trading and technical analysis have taught me many life lessons, and even changed me as a person. I believe you have arrived at an advanced stage of any pursuit when you realise your character and mentality have changed (positively, of course). In other words, your life has been impacted on a deeper level by your passion. Trading and technical analysis changed and taught me “many parallels” to other aspects of life. It becomes more than just the dollars and cents, the profit and loss, and even the emotional roller coaster that is trading. When you start looking at it from a philosophical point of view, and applying seemingly unrelated lessons in trading to life as a whole, that is when you know you have matured. Your trading equity should have grown as you mature in thought and character.

Successful people in any profession, trade, or pursuit always reveal the so-called secret when asked how they can wake up every day and keep doing what they do. Many times, the answer always rejects money as the driver of the particular passion. It is never about money. When you have the passion in you to do something, you keep doing it. There will always be room for improvement; never a time when you feel as though you do not want to get better. Although I am proud of what I have done on this blog, I know that this is not the limit. I know that my analysis is still a work-in-progress; I know that there are more lessons I can learn from trading and technical analysis.

So, even as I embark on this temporary break from updating this blog, I hope to see you readers of this blog back when I resume posting.

In the meantime, thank you all for your support by coming here to read about my brand of technical analysis. I leave you now with a song called The Whipsaw Song by Ed Seykota. Ed Seykota is a very successful technical analyst. He is classified as a trend-follower, and is one of the best-known proponent of that trading style. He wrote a song that summarises the key elements of a trend-following system.

Once again, I like to remind us that it is not about how many trades you win or lose but how much you win when you win and how much you lose when you lose.

You get a whip and I get a saw, honey

You get a whip and I get a saw, babe

You get a whip and I get a saw

One good trend pays for ‘em all.

Honey, trader, ba-by mine.

What do we do when we catch a trend, honey … etc. We ride that trend right to the end.

What do we do when we show a loss, honey … etc. We give that dag-gone loss a toss.

How do we know when our risk is right, honey … etc. We make a lot of money and we sleep at night.

What do we do when the price breaks through, honey … etc. Our stops are in so there’s nothing to do.

What do we do when a draw down comes, honey What do we do when it gets real big, babe What do we do when it’s even biggerWe stick to the plan and pull the trigger.

What do we do with a hot news flash, honey … etc. We stash that flash right in the trash.

Youtube link here

Lyrics taken from Seykota.com

Stopped in Shanghai, still short on Shanghai?

Evening all,

Equity markets are off to a good start to the new year. The general mood is more positive now, with most investors believing the Europe crisis is slowly dissipating, and the feared fiscal cliff disappearing from the face of financial media – though some will say the timer for these ticking time bombs were reset. Sometimes I do not know what to believe – whether a catalyst for underlying problems will emerge and shatter markets or another leg in the multi-year bull run that markets are in. But if you are a regular reader, you know what my bias is.

Outside of the western world, we have the huge chinese economy, which is still considered “emerging”, that  provides us with a kind of wild card. Along with global indices, the Shanghai Stock Exchange (SSE) experienced a sharp rally in the last few weeks. If you need to visualise how the SSE’s chart looks like prior to the recent rally, think of a white space, and a bold, red arrow (or if you are from China, green) pointing diagonally downwards like the hour hand when a clock reads 4 o’clock. This recent rally in SSE caught me totally off guard. Has the chinese market finally made a bottom?

To put things into perspective, look at the chart below. Ever since the top in 2009, the SSE has been in a long-term downtrend. Volatility is present for sure, but you can make out a clear, long-term trend channel. So, the recent rally looks like a healthy short-term correction.

SSE

For long-term set-ups, the downtrend is more or less intact still. The recent run-up shuld be seen as a good window of opportunity to sell into. I am not buying into the recovery camp but I am sure the SSE will have more room for upside especially if the buying pressure continues into February. For longer-term outlooks, I want to see some sort of consolidation or pattern that signifies a bottoming phase. Only then can I be sure, as a chartist, that a market is turning. For now, I am still bearish on SSE.

If you refer to my past posts on the SSE, you will see that I sounded the bearish bells because of a straightforward breakout towards the downside from a triangle pattern – the triangle was very large. https://technicalanalysistalk.wordpress.com/2011/09/10/sse-broken-down-from-triangle/

I get skeptical of my own analysis when I encounter enormous patterns. Are they really going to work? In my experience, some do, some do not – much the same as “regular”, smaller patterns. Anyways, I traded the SSE accordingly. I will not go into the specifics of my trades in products acting as proxies to the SSE, but I admit that I was stopped out at least once. In retrospect, I did not plan out my trades as well as I should have. Yes, stops were in – I already learn my lesson years ago – but could they have been wider to allow for more volatility that matches the duration of the trade I made (planned time horizon)? This is yet another case where the analysis turns out right but weak money management skills and trading strategy (or an insufficient amount) causes the trader to lose money.

At thas point, I can tell myself not to trade with stops – but I know better than to come to that conclusion. Two loss-making trades in the Shanghai Stock Exchange (CFD instruments) gave me some lessons on stop placement and trade selection. However, something happened to the price action of the SSE that reinforced my faith in money management.

Sometime in the last two months of 2012, I was feeling sore from getting stopped out in some of my trades in the SSE. How do you lose money shorting the SSE in 2012? (More an exclamation than a question). I was itchy for a “long-term, straightforward short in a weak market”. After watching the market for a few days, I set out the trading parameters and got a short in. To my surprise, the SSE got on a launchpad and flew skywards. My stop, which I placed in a position I put much thought in, was hit. The SSE continued to rally to where it is now. This time round, I had no sore feelings. I was better prepared with the short, and knew what kind of trade I was making. As I look at where the SSE is trading now, I can only feel happy that my loss with taken early. I made other CFD trades throughout the same period, and good money management skills meant my profitable trades far exceeded the losses I made on the SSE.

SSE1

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Defence in trading

Hello everyone,

Today, I have a post that is different from what I usually write. Today’s post is more in the category of money management than technical analysis. You can substitute money management for trade management, trading strategies, etc. Basically, it is the part of trading that has not much relation to analysis (whether fundamental or technical) but I believe it is more important than analysis. It may sound silly – as it did when I discussed with friends – but my belief is that money management is more important than the analysis. I have quoted George Soros many times, and I shall do it again, to start off today’s post:

It’s not whether you’re right or wrong that’s important, but how much  money you make when you’re right and how much you lose when you’re  wrong.”

Bottomline of money management

George Soros essentially sums up the principles of money mangement in the quote above. Let us say you have a superior market analysis and your accuracy/success rate is as high as 70%-80%; in other words, you get 7 or 8 market calls right out of 10 (very uncommon, I am sure). That is very impressive. The thing is, if you are taking small profts along the way, and taking huge hits on loss-making trades, you will be burnt in the long-run. And, for those with lower success rates of 40-60% (in general, you get one right, then wrong on the next), you do not have to look at the long-run; in the short-term, you will end up asking yourself if there is any point in punting in the market, or for those doing highly-leveraged trading, you probably blow your account in a few weeks. Conversely – like you have heard many times from trading instructors/coaches at seminars, in online websites, etc – with good money management skills, which basically aims to maximise profits and minimise losses, you will make money in the long-run. You have to accept losses along the way, but your large profits are more than enough to trump the losses. If you are quite experienced, you know everything I have said. It is sounds simple: maximise your profits and minimise your losses. But, how many traders actually trade this way. Money management is not glamorous, money mangement is not sexy, money mangement is not complicated. But money management “makes or breaks”.

In the video below, you will see a short video on money management from Airelon Trading. Please come up with 6 minutes of your time to watch this video. It describes the attitute some have towards money management. When I told a friend how important money management was, he shrugged off saying that at the end of the day, it is about perfecting your analysis to the point you can get closer to being right all the time. Really?

Analysis is not all there is to trading

Success rate takes centre stage in the world of trading. We want to know the success rate of a system. We want to know how many winners/losers a successful trader has. And we certainly ignore those who have bad win rates even if they actually end up making more money than us. If you have superior analysis, good for you. It is definitely not detrimental to have superior analysis. All the more, if you combine good analysis with good money management skills, trading should be a breeze for you. But, for the majority who have to be content with lower success rates, money management can save you.

If there is one thing I have learnt over the years of reading up on the different successful traders/investors in the world, it is that they all have different methodologies of analysis. In the end, we can categorise all the analyses into two broad categories of technical analysis and fundamental analysis (or a third group under statistics for those who use a mechanical, numbers-based, high-tech approach, and consider technical analysis as an inaccurate representation). Also, we can say that this investor is similar to the other investor in certain ways (usually the philosophical side to trading/investing). However, at the end of the day, their methods are different. The way they look at a market is different. Even in the realm of technical analysis there are different styles. Fundamental analysis is also not an entirely united camp; there are different kinds of fundamental analysis: growth investing, value investing, even GAARP – growth at a reasonable price – talk about trying to have the best of both worlds!

What I realise is that there is no one way to trading/investing successfully. And even in many other fields, the cliche sentence that “there is more than one path to success”. The point I am trying to make is that people are constantly seeking for the best system, the best methodology – because of Warren Buffett’s popularity and the deserved respect for him, people all over the world buy books on value investing hoping to be the next oracle-of-“insert your hometown here” – but they are searching in vain. We are all wired differently, and we all have different personalities that will affect how we invest or trade. Also, analysis is not all there is to the game. And definitely not a single way of analysis. Different analyses can still produce results. It is not that all the successful traders or investors rely on a single way of analysis.

Money Management is “universal”

Money management, on the other hand, speaks different languages. You do not need to couple it with technical analysis only. Money management does not require a chart. Money management does not need candlesticks. Money management certainly is not useful only to statistics – based trading. This is the neutrality of money management. It is something that all traders/investors need to be mindful of. You cannot ignore it. You cannot avoid it. And, you should approach it with as much earnestness as analysis.

Defence in sports

Now, I want to draw analogies (or parallelism, as I like to call it, but the dictionary does not support it) to the sports world. I am a very active person and also try to follow the professional sporting world as best as I can. While I am not a sports commentator, I believe I have learnt quite alot from sports that I can apply to other areas of life.

I support the Los Angles Lakers, a team in the NBA (National Basketball Association). I start off with a quote that is famous in the sports arena: offence wins games, defence wins championships.

I remember following the 2007-2008 season closely. In the finals, the LA Lakers played against the Boston Celtics. The Celtics won 4-2 in the end. After that, most fans and respected commentators brought forward a point: the Celtics won because of better defence. Their half-court defence was solid and organised. In the next two years, the Lakers had obviously learnt their lesson, and shored up the defence. They even beat the Celtics in 2009-2010. At the ameteur level, defence is even more important. Basketball is a high-tempo sport. Teams trade baskets and rack up many points within minutes. The only way to win many games and build a strong record is to have good defence. You cannot win with offence in the long-run. It is solid defence that gives you a good foundation to then attack and win.

Next, probably of more interest to most of us in Singapore – I support Manchester United in the EPL. After the Beckham era, the manager, Sir Alex Ferguson, started rebuilding the squad. It generally takes a while to actually replace the “core” of a team. The solid partnership of Rio Ferdinand and Nemanja Vidic came up by the start of the 2007-2008 season. I remember during those days, it was fascinating to see the two foster a very strong partnership behind. And Evra, in technical terms (and my opinion), was one of the best defenders on the flanks. It is no surprise Manchester United won the coveted Champions League that season. Of course, most people will point to the trio of Ronaldo, Rooney, and Tevez as the reason United were dominant for the middle part of that decade. However, people forget that United had a very solid back four. Not to forget, United had one of the best-ever goalkeepers in Edwin Van Der Sar. In that same season, United also conceded the least goals (for themselves) for the decade in the EPL – 22 goals against. Majority of people will only focus on the exciting things. The goals, the flair, the dazzling tricks – all the things that make up a highlight reel. But just like money management, not many see the boring, unexciting, seemingly unimportant aspects of, in this case, football. Defence is key. Just look at the more exciting Arsenal Football Club – known to be the Barcelona of England. Not to poke fun at one of United’s rival, but for all the style in their brand of football, they have not won a major trophy since 2005. Of course, many people will start debates on this and that. But, this is not a sports blog, so I shall not say more.

The reason defence is so important in sports is that good defence means you always have a chance to win. In football, if you are going to let in many goals, your offence has to churn out even more than you let in to win. Why is it that weaker teams always have to set up well defensively if they want to stand a chance to win? Simply because if they defend well, they just have to score one or two and come out as winners. Weak teams do not win because they manage to score 4 or 5 goals after letting in 3 or 4 goals early in a match. Underdogs win games with very narrow and low scorelines. Defence keeps you in the game.

There is more to write on sports, but sometimes we should not go too far with analogies. They simply show slight parallels between two unrelated realms.

How defence applies in trading

For those who do not like the sports analogy I illustrated, I hope that the other parts of this post will give you some food for thought. The reason why I see money management as a kind of defensive mechanism rather than an “offensive” one, even though good money management maximises profits, is that money management keeps you in the game. You can tell yourself that you live another day to trade after making small losses. Contrast to a trader who makes wild losses that can blow out of proportion on a leveraged account. Money management keeps you in the game so that your winners can propel your account to higher heights. Also, like defence in sports, money management is not given the attention it deserves. That is because it is not as exciting as a chartist monitoring the roller coaster he sees on a chart, or a fundamentalist reading between the lines and finding financial gems that no one sees. That is also because money management is simple, and not as complicated and “professional-looking” as analysis.

 

What bull trap?

Evening traders/investors,

I have 2 charts to show you all today. The recent strong, upward move in equities took me by surprise. So, I decided to step back and re-look at the picture painted on charts.

I will start with the STI. First off, take note of the massive head and shoulders pattern I have been having on the STI’s chart. Over the last few months, I leaned on the bearish side since the head and shoulders is traditionally a bearish pattern. Try as I might, the STI recovered from lows at 2700 and blasted past 3000. My stubborn nature is telling me there is still a chance the STI will fall back below 3000, and the upward breakout will then be rendered false. Strictly, I have no choice but to see the recent surge as the STI climbing above critical resistance at the 3000 region. This means that I have to expect further upside. 3100 becomes the nearest upside target, and I think 3150 should not be a problem even.

This is where the confusion comes in. If you refer to my last post on the STI, I uploaded a chart of several indicators. Indicators tell me of “dangerous divergences” between price and indicators; and these indications are the most accurate signals from indicators.

Most sensibly, I have to interpret this as near-term profit-taking before more buying pressure. The key event in the chart below is that STI’s closes for the last trading week have been clearly above 3000.

Next up, I have the S&P 500.

S&P 500 was rangebound at the 1300 region before the onset of the massive sell-off in August last year. Just when fears of a bear market down to 2008/2009 lows were strong, the market, as usual, flew skyward – even past the post-crash highs to hit 1400. Reading the previous sentence, what this gives us is 3 regions of price; and by now we should identify this as an inverted head and shoulders. This time around, I favour the upside since the US stock market is basically on a multi-year bull run. For double-dip preachers, a chart spanning more than 3 years with price going up in, practically, one diagonal line, equates to a multi-year bull run. Just considering this alone, I have no choice but to strongly consider my mid-term bearish view on equities. The sell-off in May was scary; especially so for short-term traders. But, the equally quick rebound cannot be ignored. The bullish sentiment is making a bull out of my 2-month old bear! Last but not least, bulls can rejoice over the upswing in the 200-day MA.

Looking back at my last few posts on longer-term takes, I realise my analysis is sometimes clouded too heavily by sentiment. The good thing is that I am staying nimble, and looking to profit whichever way the market decides to go. The problem with “staying nimble” is that I will be susceptible to wild, volatile, irrational swings and whipsaws (and we know markets are like that). This is the conundrum I have been facing over the last few months when looking at charts. Just when I have formed an opinion on the markets based on technical analysis, out pops up an exact opposite chart event that confuses my case – something like the meaning of paradox.

Maybe, just maybe, I need to refine my chart-reading skills. In every skill-based field, there will be times when the practitioner has overcome a hump in the learning curve and has reached a plateau. For a while, the practitioner tastes success from applying whatever skills acquired recently. But, in due time, the practitoner will feel lost; and this is also probably the time for an upgrade.

Till then, I can only put this post up and look back to see how future events will change the picture of the charts I posted above.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Babypips.com

Good evening everyone,

A friend of mine introduced me to a website some time back: www.babypips.com

It is a website with tools, educational material, a forum, and others geared towards the forex market. I find it quite a resorceful website. I want to bring your attention to a page. It is one of the “in-house” blogger’s article entitled “Cyclopip’s Weekly Winner.”.

http://www.babypips.com/blogs/currency-cross-eyed/introducing-cyclopips-weekly-winner.html

Scroll down to the second half of the page to where a paragraph titled “Why do all of this???” is. I like what the blogger is doing. Basically, a chart is reviewed at the end of the week. Hindsight analysis is done on the chart (which includes fundamental news), and potential set-ups are talked about.

Now, people may say, “Why trick yourself into thinking you would’ve pulled the trigger on that set-up last week and made 80 pips? The truth is, you didn’t do it,and so you didn’t make money! Stop with the hindsight analysis!”

To quite a large extent, I agree that we should not kid ourselves when we miss out on opportunities. A lot of times, traders will say (me included) that they would have bought this or that, or they would have done this or that, but that they did not see the chart / gut feel affected judgement / (insert excuse here).

However, I like how the blogger in the link above says, “In reviewing the past, we can add to our memory trading bank and  exponentially multiply our trading experience. Just take a cue from some of the best athletes in the world. Guys like Kobe  Bryant and Peyton Manning are notorious for spending hours upon hours review  game tape. They do this to find out other players tendencies (in our case,  market tendencies) as well as to learn what they did wrong and how can they can  improve.”

Read more: http://www.babypips.com/blogs/currency-cross-eyed/introducing-cyclopips-weekly-winner.html#ixzz22ZnzKrEx

Having been active in sports, I find it very true and relevant that professional sportsmen watch a lot of tape. It is by reviewing your opponent, and yourself also, that you find out very interesting information that you otherwise missed out on. In fact, having the words “opponent” and “yourself” remind me of Sun Tzu’s principle: “know your enemy and yourself, and you will win a thousand battles”. Very true right?

With that, you may start to see more hindsight analyses here.

Technical traders

Hello everyone,

Today I want to share a link with you all. Click the url below, and take some time to read through the article.

http://etfhq.com/blog/2010/02/17/top-technical-analysts/

Have you ever wondered why you are still looking around for material to improve your technical analysis skills? Have you ever wondered why people still search for the “profitable strategies” in technical analysis? Maybe you already decided some time back that technical analysis suits you, and you will rely on it to make your passive income. I consider myself a young participant of the markets, and – obviously – I have the letters T and A printed on my flag. Certain events have led me to pursue this school of thought. What those events were is not relevant in this post. But, I believe I will be successful in the markets in the long-run by using technical analysis. Sometimes when I am debating with my friends on the infamous topic: technical analysis versus fundamental analysis; or in short, TA vs FA, there will inevitably come a time when someone will shoot the supposedly final bullet: “Warren Buffet is the richest investor in the world, and he is a fundamental person. Period.”

I am sure some of you may have experienced the above scenario. Whether it be a friend, or just yourself debating TA vs FA in your own head, and coming to the same conclusion. After finding out the link above, my heart felt a slight sense of reassurance. Scroll down the webpage in the link, and you will see a Mr James Simons ranking 55th in Forbes’ 100 richest list. Yes, most if not all of us probably have not heard of the names of those people mentioned in the link. But we have certainly heard of names like Warren Buffett, Peter Lynch, George Soros, Jim Rogers, and so on. So once again, the fundamental camp will say, there is no household name to represent you people in the technical analysis camp.

I have just this to say: a billion dollars is a billion dollars, a few hundreds of millions of dollars is a few hundreds of millions of dollars, and a humble ten thousand dollars of side income a month is still a humble ten thousand dollars of side income a month. Yes, the richest technical traders/investors may not come close to Warren Buffett’s wealth. But how many of those using fundamental analysis can say they have a billion dollars? Even though we may not know the number of extremely successful technical traders compared to the number of successful fundamental traders. What we technical traders can be sure of is that there have been some of us who have gone far, who have made alot of money from using technical analysis. While that does not mean sure success for everyone who looks at charts, at least we do know technical analysis is not an untested and untried road. Closer to home, there are people who trade forex/commodities/etc based on technical analysis, and they make a good side income every month. Some also trade for a living, and rely heavily on charts. The reason why we do not hear of all the successful traders out there is simply because not everyone likes to harp about themselves. Some prefer to keep quiet and stay out of the limelight. Some prefer to remain low-key. But that does not mean the technical analysis camp is filled with irrational, star-gazing, coin-flipping traders – as some people like to associate with chartists.

So, the point I am trying to make in this post is that there are those who have made alot of money from using technical analysis in financial markets. Yes, there are many and more who have lost money relying on technical analysis. But, can those in the fundamental camp claim that they have no unsuccessful traders/investors? While it may sound like I want to launch an attack on the fundamental investors, it is not so. More so, I want to defend the technical analysis camp. I want us to know technical analysis is not a new, untested school of thought. The next time someone tells you that Warren Buffett is the most successful investor, and the phrase “technical analysis” does not appear in his dictionary, just know in your heart that there are those who have amassed more than a billion dollars from using technical analysis in the financial markets. While no known technical trader has broke into the top 5 in the richest list, there are those who are millionaires, multi-millionaires, and as we have learnt today, billionaires. Is that not enough money for you?

 

Note: I am not implying that technical analysis directly translates into heaps of profits. But, we should know that there are those who have done it. Without household names, sometimes we think technical analysis is a “young art”, with no known success stories out there.

 

Poll – guess on short-term outlook

Hello everyone,

Forgive me for the inactivity. Stock charts do not look interesting to me at the moment, and I am still waiting for sometime before looking at charts of indices. Things seem to be stabilising for now, and some people are starting to call this the bottom. My analysis leads me to think that I should wait for several more days before calling for direction. For today, I have a poll that I hope all of you will participate in. Tell me what is your take for equities in the near-term from now till about mid-October (1 1/2 months).