Conviction trade in USDSGD

Base and Rally

USDSGD is one of the pairs that currently sparks my interest. After a decade long decline the exchange rate has based in the years following 2010 and subsequently shot out of that base with a powerful rally, appreciating from below 1.25 to a price of 1.45 at the peak.

But this rally did not continue and the rate has been sold back down to current levels around 1.30.

Liquidity level triggered

So to recap, I see a base, a strong rally and a vicious pullback in USDSGD which has run into an important level defined by the prior low at approximately 1.3150.

For large players, these are the ingredients to build a meaningful long position. Frustrate the long speculators and run their stops placed below the prior lows. Trigger short speculators who might play this as a short breakout trade. Collect all this short volume to stack up longs and reap profits in the coming months.

Outlook for my USDSGD scenario

In the end it’s simple. I am long and looking to stack up if more opportunities present themselves. But as always, I try to cover my butt. Trade small, very small in fact! This is long-term – sit back, relax and rejoice the carry you are collecting! Patience is key. Find a healthy balance between stacking up and taking small profits. Remember, no matter what you do, you will not have done the optimum!

Trade small

This trade, like any other, is uncertain. I might be completely off with my idea. But if that is the case I am confident my disaster recovery mode will get me out without much or any damage at all, because the sell-off in USDSGD has stretched so far already. This game is risky and the Mr. Market knows no mercy. Trade small! Trade small! Trade small! I can’t repeat it too many times. I have seen people puke up their account in no time!

Work the trade

Trade around your positions. Stack up only on great entries. My first profit taking areas are the highs at 1.3280 and 1.3340. That’s where I will trade around my position. Afterwards, I aim higher for 1.37 and above. This is going to be fun 🙂

Disclaimer: Don’t take this as investment advice. This is just my view of the market I am an amateur. Do your own analysis and take responsibility for your trade!

How To Decide Which Trading Strategy Is Right

A common trait among beginning and unsuccessful traders is the fickle abandonment of trading strategies that delivered a string of losses. And I am absolutely guilty for as long as I can remember. The underlying motivation is sound.  You want to improve your results and not trade a system that does not work in the long run. So which trading strategy is right?

All Strategies Suck

It’s inherent to all systems to deliver strings of winners and losers. In that sense all strategies suck. That makes finding something that fits your personality both harder and easier. Why? If they all suck it means you have to decide for yourself how to approach the markets. And there lies the crux. If you have the confidence to decide and persist with your decision chances are you will eventually make that approach profitable. Lesson? Make a choice and stick with it. And I don’t mean to religiously stick with the tactical parameters of your approach and now fine-tune them. But stick to your paradigm of choice.

My Choice

So here’s the deal for myself. I am drawn to a trend following approach to the markets, it is my choice. I like it, I am too dumb to interpret fundamental data better than others. It’s an easy traffic-light-type style indication for the market, up down or sideways. Trend following allows me to trade the markets without any knowledge about fundamentals whatsoever. If sound, I will be trading on the side of the insiders and experts who anticipate the trends. And there is strong empirical evidence that trend following works. For details I refer you to Michael Covel’s book Trend Following on Amazon. Get the book and blow your mind with what’s possible.

The Point

So the point is, how do you decide which approach is right for you? The question to ask yourself is very basic.

Say you are looking at trend following. The central question to answer would be: Do trends exist?

Say you want to trade fundamental macro. Ask yourself if macro data determines market prices?

Likewise with any other approach. If you can put a check mark behind that basic question of validity then for god’s sake stick with that approach and make it work for you. Force it to work for you.

Has The Market Correction Ended? Dow Jones Chart Analysis

The recent stock market correction was one of the biggest and fiercest corrections in the history of American capitalism (point-wise), with its selling climax last Monday. Yet the recovery rally seems equally strong. Tuesday’s and Wednesday’s price already negated half of the sharp decline. What’s next?

Status Quo

I don’t have a crystal ball and neither do I believe anybody else has one. (If you do, please get in touch!) As I mentioned before, the best we can do is find situations in which the probabilities are tilted in our favor. Let’s take a look at what the charts show us and if we can potentially take advantage or protect from further losses.

Dow

It’s clear that the market correction has damaged the trend on faster timeframes. But make no mistake, we have intact bullish trends in the DJIA charts on the weekly and monthly timeframe. The weekly actually presented a beautiful long setup to buy the dip which paid off handsomely. Hence it is not at all clear that the selloff marks the end of the multi-year bull market.

On the other hand I notice the recovery rally does not nearly show the same strength as the previous selloff. We are slowly grinding higher.

Level To Watch

What particularly catches my eye is the 4 hour chart. As painted on the image above, I expect at least a temporary resistance at about the 25460 level.

If you think the selloff has meaning and continued downside then pay attention at that level. I will be taking profits on longs and possibly enter a short if we get there.

Let me know in the comments what you see happening.

Please always remember, I am not a financial professional and give no financial or trading advice. I present my opinion, that’s it. Do your own analysis and take responsibility!

Top 2 Reasons Why Trend Trading Is So Hard For Me

Trading and speculation in the financial markets is an appealing endeavor for many people. And so it is for me. But the percentage of people that find success is rather small. 95% of traders reportedly drop out of the game as losers. One of the most popular trading strategies is trend following. Arguably it is also one of the most successful (to learn more about trend following and how some of the richest traders on this planet milk money read Michael Covel’s excellent book Trend Following (Amazon Link)). So why is trend trading so hard?

What Is Trend Following?

Before answering why trading a trend is so difficult we first have to define what it is. So let us break it apart. The term consists of two words, “trend” and “following”. Let’s look at the first one.

Trend

So to be able to follow a trend we have to know what a trend is. It is one of those terms that intuitively makes sense but taking a closer look the devil is in the details. A trend is a sustained movement of prices in one direction, either up or down. Yes, we can all agree. But when does a trend start and when does it end? As with so many things in trading there is no one definite answer. A trend is pretty much anything that you define to be a trend. You can look at highs and lows, you can use the inclination of moving averages, you can use moving average crossovers, you can utilize trendlines or whatever else is out there. None of these tools is going to give you a satisfactory result in all circumstances. Because honestly the market does not care about your definition of a trend. It will always create moves and price action which will fake you out because your definition of a trend has been violated.

Following

The second term is “following”. The meaning of this is that when you apply a trend following strategy you will always be looking to trade in the direction of a trend that has already been established. The basic tenet of trend following is that a market will continue to move in the direction it is already heading. Well, that is not quite correct. As traders we are not actually assuming or making predictions. All we do is find trade setups that give us a favorable reward to risk ratio. (That is the tenet all trading strategies have in common by the way.) So trend followers find favorable setups in the continuation of trends. As a consequence a trend follower will never be the first to enter a trend manifesting in the markets. A trend follower will never buy the bottom or sell the top. In this sense, trend following is a reactionary strategy.

Entries Are Counterintuitive

So trend following means your strategy will never allow you to buy market bottoms or sell market tops. But what does our brain tell us we have to do to make money in the market? Exactly, it wants us to buy at a low price and sell at a high price. And the lower the price of an instrument falls the higher it can rise later the more money we will make with less risk. Right? Wrong, wrong, wrong. In trading it is all about reward to risk. It does not matter whether we buy low and sell high and make 500 pips or whether we buy high and sell a little higher and make only 100 pips only to watch the market rise another 100 or 200. All we have to consider is the reward/risk ratio (and our winning percentage, see my post about why trading strategies work). The trend following trade which takes 100 pips of “the meat in the middle” with a 33 pip stop-loss is superior to the trade grabbing 500 pips with a risk of 250 pips. As simple as that. But this is against what human nature and our brain want us to do!!! You always think you are late. And you will always look stupid if a trade does not work out, because your brain sees that the trend had started way earlier and you were just late with your entry. You would have made money had you entered the trend earlier. So there you go, this is one of the top reasons why trend trading is tough as hell.

Contradictory Data

The other top reason why trend trading is hard is that for any definition of a trend you will have contradictory data. If you are like me at least. Whenever I trade I do my due diligence and analyse markets top down. I look at monthly charts all the way down to 15 minute charts if need be. The nature of charts is that whichever instrument you look at in 99% of the cases you will find contradictory trends depending on which time frame you look at. Here is an example of cable ($GBPUSD):

What is the trend? My (arbitrary) definition of a trend is the 89 period exponential moving average and looking at these charts the answer to the question is “it depends”. We have a monthly downtrend, a weekly transition from down to up, a strong daily uptrend, same for the 4h, the 1h is choppy sideways and the 15 min has fallen strongly to establish a downtrend. So again, you can let this contradictory information paralyze you or you take a stand, follow your rules and look stupid when your trade goes sour. Why look stupid? Let say I trade the uptrend on the 4h for a trend continuation and get stopped out then my brain will see the 15 min and tell my what an idiot I was to enter long. The 15 min trend was clearly down!!!

Oh yeah, you might decide to wait until all timeframes line up in the same direction. This is of course possible, but unless you want to wait for record breaking markets like the $SPX500 or bitcoin each time you trade you will have to make some compromise with the circumstances.

Trading Countertrend

There you have it, those are my top two reasons why trend following is so damn difficult! And at the same time that explains why trading against the trend, buying a falling market or selling a rising market is so appealing. Because in those cases, all timeframes are aligned to give the same signal. What looks oversold on the monthly and weekly will definitely look oversold on the daily, 4h and 1h. That comforts our brain and lures us into counter trend positions that are often the wrong decision. And it animates us to double down when prices falls even further because what was oversold before us then mega-oversold, right? But a weak market is usually weak for very good reasons and no one knows when the decline will stop. It might go to zero and destroy your capital. The only protection that traders have is to know when their idea is wrong and get out of the trade, at the risk of looking stupid when the market turns right back in its original direction.

Even though the rules we define for ourselves are arbitrary they are the only option we have. If you have no rules you will sooner or later have no money because you take the mother of all losses and get margin called.

I hope this is useful. What are your thoughts on trend following and this article? Please let me know in the comments below.

Understand Why A Trading Strategy Works

Whatever The Input To Your Trading Strategy

There is a very simple fundamental truth to any trading strategy out there. Whether you are a discretionary trader, a fundamental trader, a quant, a mechanical technical trader, or maybe you simply trade your gut feel or let your monkey throw darts. Whatever it is, your strategy is somewhere on the following graph.

The Reward-Risk-Ratio vs. Win Percentage Continuum

The Two Parameters For Any Trading Strategy

Two parameters determine the profitability of your strategy: the win percentage in combination with your reward-to-risk ratio (RRR). The win percentage is the average number of profitable trades out of 100. The RRR is the average size of each winner compared to its initial risk. Say you have a very simple strategy where each of your trades has a predetermined entry, stop loss and profit target price. And your potential profit on each trade is exactly the same amount of pips as your potential loss, so your RRR is 1. What follows is, that you will break even as a trader if you win percentage is 50%. The classical coin flip.

So Which Trading Strategies Work?

In the above chart you will be on the dark blue line with a strategy resembling the classical coin flip of 50% winners and 1:1 RRR.  The dark blue line describes all combinations of win percentage and RRR that break even. Any strategy with a combination of win percentage and RRR which puts you below the dark blue line (in the lighter blue area) and you are losing money. So you absolutely must have a tuple of win percentage and RRR that puts you above the blue line, safely in the promised land of profitability. The further you can move away from the blue area the closer you are to the “holy grail” of trading. It’s that simple!

Chart check ahead of FOMC

Yellen’s last FOMC

Tonight at 8pm CET the Fed will publish their latest interest rate decision and FOMC statement. It’s going to be Janet Yellen’s last official act as head of the Federal Reserve before she is succeeded by President Trump’s pick as the next Fed chairman, Jerome Powell.

Although some experts have voiced opinions of 3-4 hikes in 2018, the consensus does not see any interest rate hike in tonight’s meeting. Thus, the focus will be on the FOMC statement and its wording. As this is Yellen’s last FOMC she will possibly leave office with a more hawkish stance than shown during her term. This pattern was previously observed with Bernanke as well.

Chart Analysis

So here is a break down of some charts that interest me ahead of the release. Let’s start off with the Dollar Index #DXY.

The USD weakness smashed through all trend supports on timeframes shorter than the monthly chart. The question is when the relief rally will start. The north American economies still seem to be in best shape of all and certainly have been the only ones raising interest rate substantially from GFC levels. For the Fed I don’t see an end to the hiking cycle and with inflation picking up in the states the pressure to raise will not subside.

A possible explanation for recent USD weakness is the expectation that other central banks around the globe soon follow suit and enter a prolonged hiking cycle to fend off accelerating inflation. This would lead to bond yield convergence. And to be clear, a bond yield spread for the 10 year between the US and Germany of more than 2 % is unsustainable in my opinion. Said in other words, the US 10y bonds yield is more than four times higher than that of the German 10y! By my logic interest-seeking capital thus flows into the USD.

EURUSD

This leads us to the #EURUSD chart shown below.

As we can see, EURUSD trades at trendline resistance on the monthly chart. It already stalled at this level and I find it a great setup to initiate an extended relief rally. I see downside targets at 1.2160 and around 1.1915.

Commdolls

The two currencies I also find vulnerable against the USD are the Aussie and the Kiwi. They both delivered an extended rally and are ripe for a setback. In the case of the NZD I even consider selling a projected channel completion at ~0.75.

In AUDUSD the channel completes higher as shown in the daily.

AUDNZD

These observations coincide with the #AUDNZD chart analysis. AUDNZD is in a bullish trend on the weekly and until proven wrong I’m biased bullishly. Although last night’s selloff warned me that anything is possible at any time.

So I am positioned for a relief rally in the dollar and hope tonight delivers some volatility in my favor.

Disclaimer

Please note: I am an amateur retail trader and nothing I write is meant to be investment advice. Always do your own analysis and take responsibility for your own investment decisions.

How Order Flow Logic Should Improve My Trading

We all know those dreaded situations. We enter a trade with our best judgement, following the trend etc. etc., we place our stoploss with great care and consideration. And still Mr. Market seemingly knows what we do and think. With uncanny precision price will come to our stop loss, trigger the order and subsequently turn around to fly in the anticipated direction of the trade we had.

So recently I have found the Youtube videos of some people, one of them being Mark Chapman. He does a good job explaining why these “stop hunts” happen and how big institutions need to find pockets of liquidity to fill their massive orders. So what I have been playing with is actually playing those supposed stop clusters as entry signals.

As with any technical strategy you can find lots and lots of examples where this would have worked. Look at this recent uptrend in EURUSD on the 4h chart:

Numerous times we could have prepared for those stop hunt dips and profited by buying with the market makers.

So let’s see how this plays out in real-time trading. In my initial back-test it actually worked out ok on some charts. But also it got me stuck in some positions when the trend turns. I think I can possibly work that out with small position sizing.

Weekly Wrap

$AUDUSD, $NZDUSD

The commdolls continue to flush down the toilet. I mean look at the ozzy accelerating through any childish trendline I can draw!

And I continue to get myself into trouble with these pairs. I see the larger pattern potentially making a bearish extension, but of course I can’t help myself and trade some of the support zones on the way down, building a position that’s flashing red. And red is bad! Arrgh! On a positive note, it looks like the channel completed on Friday is holding. On a sucky note, for the trade I took off of that channel that should have brought some release to the bleeding, I mistyped my order size and forgot two zeros. Whatever, I have seen worse! 🙂

$XAGUSD

Anybody watching that silver? It’s been playing dead since days or even weeks, but on Friday finally pushed out of that triangular compression. Wohoo!!! Not yet super bullish IMO, but let’s see if next week brings some follow-through. I wouldn’t mind seeing it above 18.50 soon. Keep tight stops, this fickle biatch can turn on a dime. If it trades back into the triangle my world view changes back to depression. All about that dollar, so watch $EURUSD / $GBPUSD for hints!

$EURUSD, $GBPUSD

Speaking of majors, euro and cable, I mean…WTF? Euro shoots up vertically, I get kicked out of my $EURUSD short, and now? Come on, show that this was real! Ok, here is some context. Reaaaally fu**ing long-term (weekly):

Channel resistance put the pair under pressure around 1.20 but the downside was muted and pretty much called into question by this week’s impulsive rallye. An run up to 1.25 would make sense to complete two waves up. Which is where I will potentially be a seller again. This bias can change if we see weakness on the lower timeframes. Here is my 4h:

This bullish channel that’s currently supporting price might actually offer very nice RRR for bullish continuation trades. But thats very aggressive. I’m not sure I can handle that. On the flip side, no bearish trades as long as this holds!

Cable is a bit more ambiguous. We are locked in an arm wrestle between bulls and bears on the weekly.

It’s kind of like brexit all over again. The decision of up or down is 50:50 but will have yuuuge consequences. And maybe it is about Brexit. Maybe May may not be in control much longer? There are rumors. And my gut says not matter what happens the pound will thrive. It’s been beaten down for years and other nations’ politicians have jealously observed that the UK accomplished what everybody else dreamed of. A depreciating currency. So a snap-back could happen and it could be big. Ok, thats my gut talking and there is a lot of shit in my gut. Don’t bet on this!

$DJIA

One more thing on my mind, look at this 4h chart of the Dow:

Does this look bullish to you? I think it’s going down baby! Down!! Until it doesn’t and Apple reveals iPhoneXXX for 5k dollars which makes everyone project a trillion $ profits per day and buy Apple stock to the moon. And dragging FANG and Tesla along because because. And Nasdaq rises to the moon, which means the dow at least goes to the sky. You get the point. Careful with stocks!

 

Always remember this is not investment advice, I am just writing for entertainment purposes. Do your own analysis!

The “Technical Evidence” For A Bigger Correction

The number of markets that are currently trading at technical targets/resistance is staggering. Usually these targets act as resistance and suggest a bigger correction. I expect stocks to sell off and a little more volatility in the coming weeks.

$Nikkei was one of the first markets to show a reaction after bumping up against resistance.

Next up is the German $DAX, which crumbles rather slowly but has already given back over 400 points from its all-time high. Price action in the $DAX looks very healthy though. Looking with my bullish lense, there is a chance that the $DAX is simply retesting the breakout point from the large channel (solid blue lines).

Moving on to our US American friends. US stocks have gone almost vertical for such a long time that most traders forgot corrections and sell-offs even exist or are too young to have experienced one. $DJIA has been one of the strongest markets and has overshot a couple of major technical levels before this trendline on the weekly chart. $Nasdaq has been the stallion in the stable but it too is trading at a level at which bears commonly come out of hiding. The $S&P500 shows a perfectly clean long-term channel completion. Similarly the $Russel2000 small cap index has completed a long-term channel.