CAC40 – rallye de fin d’année?

Suite aux précédents articles, voici les objectifs anticipés pour l’indice de Paris, le CAC40. On va devoir d’abord passer la ligne de réaction orange baissière et donc le seuil des 6000 points. Si tel est le cas, alors les objectifs sont 6300 fin Janvier ou 6400 dès  le 8 Janvier si la tendance est forte.

Le scénario alternatif est évidemment que la ligne de réaction ne soit pas cassée. Auquel on descendrait dans le couloir fait des 2 dernières lignes oranges avec soit 5600 vers  le 8 Janvier. La tendance est haussière en jour comme en 5 jours, c’est le scénario bull que je retiens, je reviserai mon opinion si on revient sur 5830.

Bon trades

How far will the market go?

When you want to know where price is going to go, there are many ways to guess. Among others:

1. Return to average. If price go too far away from average, then they are likely to go back to average

2. Fibonacci retracements and extensions

3. Check analysts price objective

The weakness is the same for all: when? in one swing or after many up and down swings?

With volatility trading, we can answer thoroughly two different ways

1. The drunkard’s walk

The concept  of ‘drunkard’s walk’ was introduced by  William Feller by the following math problem:
If a drunk guy leaves the lamp post he is leaning against, how far would he have gone, on average, after n steps?”

The answer is he would have gone the square root of n multiplied by the average length of his stride:

√n * Average length of stride

Here is how to translate for price objective setting: start from a major price bottom, the first objective that should be reached within n days is the average price change (or Average True Range)

Example: if we look at an ATR over 25 periods (days, weeks), the first objective that can be reached in 25 days is lowest low (the lamp position) plus 5 x ATR25.

Easy, right? If objectif is not reached, then just give up.

When we say first objective, it is because we are considering a random walk, but if a trend is given birth (or the street has a slope for our drunkard), then prices may go much further away and you need to re-estimate the new objectives with each swing low.

2. Action-reaction

The usual way to use action-reaction is enclose price action into channels, so as to get high probability entry points. Also the distance between lines gives the potential objectives in straight lines.

I am removing previous lines for clarity but I am now drawing an other set of lines. Distance between the lines also indicates potential

By having two sets of AR lines on the chart, crossing of lines indicate precisely where prices are going to go. There may be several possible objectives, but many can be discarded (too sloppy change required, or objective in the past)

See here yellow highlighted target reached almost on time (depending on accuracy of lines drawing)

That’s it! Because we are analyzing price and time together (aka volatility), we are reaching high quality trading

Winning streak? It is all in the figures!

Here we go for a technical discussion today. We have all heard that markets are more or less random, as it represents the opinions of millions of investors or traders, and of course, they don’t usually agree with each other, the proof is that there seems to be always some who wants to sell you some stuff when you want to buy it.

So prices may look random but there is a positive bias because prices can not be negative. So normal curve distribution is not applicable. See when Bollinger bands go into negative territory, you know the objective is invalid!

So let’s assume for the exercise that we have a 55% chance that tomorrow price will be higher than today, so 45% risk they are lower. What is longest series of positive consecutive days?

Any idea?

Hint:  we need to use the law of large numbers.

The formula is:

-ln(number of observations)/ln(probability)

So the longest streak of consecutive winning days for 100000 days observed is -ln(10000)/ln(.55) = 19 days and same calculation yields a 14 consecutive loosing days.

Yes, that is what swing trading is about. Anticipate these streaks of consecutive winning or loosing days and play them accordingly.

The same goes with goes with your trading strategy. The probability lays in your own skills to define a winning system. You need to backtest with as much data as possible. A system that is winning 85% of the time can still yield 6 consecutive loosing trade (but also 70 consecutive winning trades ;-))

What happens with robots trading? There are 2 points to consider:

1. Robots have been programmed by human. So they just replicate our trading strategy. So same as above applies

2. Robots can be taught to learn (machine learning, neural networks). After some time they will all more or less reach the same strategy and so they will ‘see’ same thing, so market will become flat and cancel out robot trading efficiency if any.  Some news (real or fake) will be needed to move the market. Robots will learn to cheat and will need support from humans!

So as conclusion, you need a strategy with an edge to catch swings or trends, they are predicted by the random nature of the market. You can protect your strategy by:

1. Not sharing it. Keep it secret.

2. incorporate elements that can’t be automated (e.g. action-reaction lines)

3. Incorporate strong psychological elements. Trend traders for instance do not have more than 30% success rate for their trades. Meaning they may have to endure 32 loosing trades in a row! Without excellent money management and psychological force to endure this, you blow out your portfolio and yourself in no time! But you can also catch the huge moves!

With volatility trading, I can reach 60% success rate on trades, so easier to stand psychologically, up to 85% in very volatile markets.

Until next time, trade safely

The hidden beauty of volatility bands?

You may have wondered why in previous post I talked about action-reaction lines for trading. This is very technical and manual but the principle will be re-used.

Volatilty bands do already exist. There are Bollinger bands (based on standard deviations) or Keltner bands (based on ATR). Is that it?

No someone created also the ‘better Bollinger bands’ (sic). See some code here:

Volatility still is little explored. You know when you are on the right path when it becomes simple.

Look at those bands. If green, go long! (Consider long term trend of course)

This one is even more fun. Formula is deceptively simple. And there seems to be linearity in the market!!! Of course, humans think in straight lines! Just follow them and trading becomes profitable

Apple Weekly

Until next time, trade safely

Can you anticipate market direction?

If there is field relatively unexplored, it is volatility. Because you need to throw away the gaussian curve and look the market in the eyes. Obviously you can what it is doing just now, but do you know where it goes?

Most traders have given up on forecasting, they are merely following the trends. But we are talking human perception and analysis. As many studies have show, human mind decisions can be anticipated with some success and that that should be enough to get an edge.

Let’s start. Here you can see price of gold in € some time ago. Do not worry about multiple lines already displayed. A green arrow indicates there should be some buying opportunity. So?

Let’s go back a little bit and and look at the waves.

Now if you patient engouh, look into Dr Andrew, creator of pitchfork and browse to action-reaction lines. Now the fun begins. Pitchforks and reactions lines by extent capture trend and volatility at the same time. As strange as it seems, volatility can be anticipated. Of course, you know quaterly results date, right? So you expect some move. Acttion-Reaction (AR) lines do anticipate this.

Let’s trace the center line (you need research to be able to find which one is best). Then trace the AR lines.

The space between the lines is volatility in 2-dimensional space: time and price!

According to theory, price should stop on one of the next reactions lines

Fast forward in time!

First line is ignored by market. Then we get  tops on reaction lines. Not just one time but twice!


Trade safely until next time

Why you need to love volatility

You probably have read in many places that volatility is a monster that will eat your portfolio.

Let’s start from zero: volatility over a year is how much price have in whatever direction.

Now look at this one:

Price have risen from 10€ to 20€ in an  almost straight line. So volatility is roughly 100% and you don’t want to be in? No kidding!

Next time we will see how to observe volatility and how it evolves to a trend.

Trade safely

Volatility trading? Hmmm…

All the content on this website will be original. No lessons about Bollinger bands or how Average True Range is calculated.  This first post will reposition volatility trading with respect to other kinds of trading.

For this purpose, let’s travel east to reach China. They have theories like Yin and Yang but the one that interests us more here is the 5 elements theory. According to it, plants, humans, animals are all driven by a cycle including 5 elements: wood, fire, earth, metal and water. There are 2 cycles actually, one for creation and one for destruction. The market being driven by humans, and robots are programmed by humans so are no exceptions, this cycle to market themselves!

A stock has been issued by a company, this is the wood. Then wood generates fire, price is matter of hot arguments we need lots of computer to finalize. The way prices go and up and down each is volatility, it is earth, it is linked to muscles, so the market is shaping up. Then from the volatility appear trends, which is kind of illusion that prices are going in one direction. Once trend appear, volumes change; volumes are like water of the river, they make the market. When price goes up in a trend, then volumes go down as nobody wants to sell before the trend is over. Volumes in turn change the company; if lots of money flows in, then they have capability to invest and this in turn will change the price of the company. Cycle is over!

From a trading perspective, you can position yourself wherever you want:

  •  At stock level, traders carry out fundamental analysis. Their strategy is usually buy & hold and they want to catch dividends for the money you invest in. They don’t usually care too much about the actual price, saying it doesn’t matter. They come up with funny price  objectives by comparing with other companies in same sector and when the stock plummets, they say they keep it for long term!
  • At price level, traders are usually day traders, order book traders, robots… They draw lines which they call support or resistance. They of course totally disagree with one another, given they are not looking at the same chart with same time frame.
  • At volatility level, there is … almost nobody. Nobody is pure volatility trader. People hate volatility (subject of another future article). Bollinger himself agreed his bands are far from perfect. Keltner also paved some way. This area is still not much explored. The point is you need to ‘see’ things in all this random data that is the market. It gets lots of convoluted mathematics to play here. But the rewards are great
  • At trend trading level, one will meet sour guys. Why? Because they are blamed any time the market plummets, as they openly say they play both upside and downsides of the markets. They may have low success rate but when they win, they win big,  and so an overall positive expectancy
  • At volume level, traders have lots of money to manage. So they can call the company’s CEO and advise on the strategy or the volumes might just die, right?

That’s it. There are times when you need to trade price level (sideways markets), other times when trend is a better choice , or dividend playing at some other time. We need to get an edge to enter the market and to exit.

Until next time, trade safely from the right perspective.

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