For bull traders, life is easy as I will show again in the next few graphs. Our random walk tells us tells us when to step in, then get out. Two options to get out:
Partially on first price objective and then wait for the stop
In case of time out (the observation period), try to exit on multiples of risks (the dotted lines)
Case in point with SOX. Price objective is recalculated each day, but the flat sections above major troughs are the ones we target. SOX is above the green belt, even making new highs. Just hold for now.
Tesla: you should start raising an eyebrow or two! See that divergence with MACD? Worth securing some profits…
Bitcoin is back up again after the January consolidation. Getting above the green belt was a good buy signal. It has already passed through the first objective (not shown) and it adheres to the second dotted line. Your stop should be bottom of the green belt for longer term, and top of belt for short term trading. Next objectives are 53700$ and 58200$. 50k$ might be a short term psychological blocking point but random walk says not to care!
We talked about the short squeezes, which if coordinated, can lead to strong bull markets. This is usually the case when prices reach an area around the one year high, which is seen as resistance, and so many are shorting to benefit from a price reversal. This works from time to time, but the back testing does not validate it on markets, all stocks, … so be careful!
Coming back to our random market model, it is easier to pick up a trend when it starts, and drive it until it wears out. That is what I am doing with Bitcoin and Etherum. Bitcoin has walked back from its recent top to the random walk path (RWP) and is ready to pick up again. MACD is still largely positive, no reason to exit for now. A partial profit was of course welcome in January.
Etherum is even stronger. The RWP has not even pointed south one day! I don’t know if it will go to 100k$, but 1800$ is surely next target in the short term!
Tezos might be a candidate for near future. MACD is in positive area after a divergence, so just monitor!
There are two crypto-like stocks (in terms of performance). One is of course Tesla and the other one is …. surprise…. Ford!
In spite of never ending pandemic, a looming economic crisis, everything is bull, except maybe dollar and gold. Strange, isn’t it?
Today we will take a quick look at most popular, most used indicator, but I have never understood why traders give it such value! Let me give you some tips to make it interesting. We are going to use Facebook for our study!
On the graph, you can see RSI indicator at the bottom, just below our customized MACD. It looks very noisy especially with default parameter 14, but since it is an oscillator (as opposed to trend indicator that MACD is), you may spot better synchronization with market tops and bottoms. If you can’t see, move your seat away from your screen, a bit more, even more… can see now? Good… The blue lines indicate the overbought and oversold levels, which, as you can see, are not reached very often!
So what’s wrong? The problem lies in RSI formula:
RSI = U / (U + D) where U is average of up moves in last n days, and D average of down moves over same period.
As I have previously demonstrated, market is a random and existence of trends is the proof of its randomness. So where is the link between this formula and random nature of market? The calculation could give similar results whether all the up days are consecutive or not, so with totally different market configurations. So, yes, it may work if you are very short term trader (a few days at most) and work out the divergences, market tops and bottoms, and decide what to do about it.
Could we modify it for more interesting usage? Of course! We can even use it for trend trading. Just replace delta between today’s and yesterday’s close by the delta measurement on your favorite moving average!
Now look at this new indicator. Buy signal is generated when improved RSI (iRSI) crosses above 50. You will notice it goes straight to 100 and stays then there until exit time. Easy, isn’t it?
As usual, use a stop to secure your gains. You may also define overbought and oversold areas at +30 and +70 if you want to stay with the trend as long as possible. False signal do exist of course, and there are 2 on the graph; the moving averages tell you not to go!
Today we are going to study how trends transition to more or less flat markets and how to position ourselves for the best!
I am sure most of you are already familiar with indicators which supposedly indicate when a market is trending, and when you would be better off sleeping and out of the market.
Moving averages are close to be one of best indicator for that purpose. See that graph of Microsoft with Alligator indicator. Note ADX indicator at the bottom does not indicate too much!
The truth is investors are either having the same opinion at the same time and there will be a trend or investors disagree and market ends up being choppy and overall very flat. So any time that you see what could be the end of a trend, switch to drunkard mode and start counting the steps! If you need background information, please refer to this blog post.
Sure enough you could wait for prices to cross Alligator lines and then that colors are in the right order, … then you may have lost 50% or more the big next move! You need think differently. Don’t worry, I will skip the action-reaction lines for today!
First step if course to detect the end of an existing trend (at least 2-3 weeks long), you can use MACD crossing over its signal for this purpose. See this example with AMD:
What the heck am I supposed to do here? We are obviously leaving a short down trend and we don’t know where market is going to go. Nobody does unless you can dig into the brains of all investors at the same time!
Again we assume the most recent bottom is a lamp post, from where our drunk guy is going to walk northwards, maybe in trending manner or in random hesitating steps. But we know about the objective he can reach within the next period of observation. This is the first dotted line above the candles. In this example, it is 8 steps away and we are going to draw lines every 2 steps.
Now we are ready, the 3-months objective is roughly 55$, you need to use a convenient stop to protect and dimension your trade. See this post for instance. Let’s accelerate the time now!
2 weeks later, objective is reached (8 steps), the drunkard makes it even to the 10th step. From there, market reverses, a new long trend does not really pick, so you can do the exercise in opposite direction:
This time the drunkard does not go beyond 4-steps and after 3 months, you need to give up your short play. Then MACD goes again above signal
We reach first objective within 3 weeks, but this time the trend continues reaching 20 steps. You have successfully mixed together trending and random action!
That’s it. It does not need to be complicated. Don’t forget to choose stocks or indexes that have the capability to trend. Until next time, trade safely!
Volatility is still quite high out there, so the chances of big downfall are somewhat limited, … but non zero!
The graph of Nasdaq will show it all:
There is a nice divergence with WAD2.0 indicator and my personal indicator indicates a correction is already taking place, which is true. But before taking a position, you need to ponder about the volatility and objectives.
Volatility is still high, but a down move results in increasing volatility. So the best shorts start from small volatility. As said before, volatility and price objectives are closely linked together. 8940 is probably worst case objective but reaction lines (not shown) tell me it is an improbable scenario (at least not in straight line). I therefore favor more horizontal wandering for some time, … until we get exciting news like end of pandemic, or US election, or ????
Tesla may have gone up pushed by a whale and bulls have bought hysterically the stock. But it was stopped… by a reaction line! Just kidding of course, but it is worth noting that the action-reaction theory works whatever market conditions to predict somehow where market hiccups or changes direction!
Market fundamentalists estimate the real value of Tesla to be around 240$, meaning it was somehow well priced beginning of July before acceleration. Shorting Tesla is an interesting bet but be careful, trend is for now up and very strong, volatility needs to decrease first so it can go up for a downtrend!
No need to say I am very bullish on Tesla in the long term but they need to produce and sell more! Back to basics!
Ferrari on the opposite did not benefit too much from recent rally, a small 50% gain! Because of small volumes and many gaps, I am working on the 3-days graph! Stocks still bumps on random walk lines and Ferrari was also stopped by a reaction line. Ferrari is a totally different business: you order one now for 100k$+ and you will be delivered in 2022! The correction is likely an opportunity to get extra stocks if you can not afford the car itself (even second hand units can be more expensive than the brand new ones!)
I will follow this idea in coming weeks: short Tesla and get more Ferrari stocks with the gains! Careful! Market needs to be re-assessed with each new data and I may totally change my mind. Market is not ready for now.
In 2012, Facebook IPO price was about 40$. Just 3 months later, it was trading at 18$ but if you bought at that time, then you would be enjoying today about 1000% performance just by holding the stock and not caring what might happen on the stock market. That was a bet at the time, that I have not taken!
I personally hate Facebook because it prevents its users from thinking by themselves, promoting subliminally some herd thinking that is supposed to facilitate your life. And people are so gullible they are buying the invisible marketing message.
Imagine I want to buy this electric car from eMoon Motors. I look on Facebook if any of my friends, real or virtual, have bought any and what they think about it. I have found 5, 1 is very angry because his wife dislikes it very much, 3 are complaining and 1 has no opinion. What happens is that people who are not happy are writing it to let out their bad energy, and others that had a little problem are going to confirm, hugely amplifying that scratch on the door made by a dog passing by. People who are happy don’t take the time to comment. What can you deduce then? Well, nothing!
Who has become rich with Facebook? The founders of course, and stock owners. Any users? No! All users have given for free all their data to a monster that is selling this (free!) data to advertisers – wonderful business case, thereby also preventing serious newspapers with real content from getting advertisement, among other consequences. World would probably be better off without Facebook, users already have many alternatives but ignore them out of convenience or laziness. Of course, if your (potential) customers are all using Facebook, you have to use it!.
Facebook stock is a stock real hard to play, because it tends to gap every once in a while, causing automatic trading algorithms to go nauseous. Don’t let that prevent you from making a trade or two when visibility is fine.
The stock follows a random path, too flat most of the time to make substantial gains, but as you can see, the price wanders along the warning lines, like invisible resistances, then suddenly end of last week, a black Friday!
What is happening? Tier-1 corporations propose to boycott FB through November election if Zuckerberg does not take action to control hate speech, that is everywhere on this media! Companies include Unilever, Verizon, Honda, The North Face, Ben & Jerry’s, Patagonia, Mozilla, Birchbox Dashlane, TalkSpace, LendingClub, and Coca-Cola , just to quote a few. See how good I am also at advertising, but I do it very smoothly, not disturbing the casual reader!
What to do now? At very least, as a trader, you should be out and you can come back later. No, stay with me, I am not finished yet! The indicators at the bottom are the Accumulation/Distribution (A/D) and one derivative. The money during last 2 months was still going in, but not so fast (divergence), and now A/D has also crossed its average indicating money is flowing out of FB. The random walk path is still green (going up), so I do not advice a short position in this time frame. The objective for this down move is 186$ but could be stopped before. Don’t think that Zuckerberg is going to sit around seeing the money vanishing , sure we are going to see some Facebook message stating that situation is under control, and he will invite his announcers to a party (not a virtual one) to celebrate this. If it fails, prepare for a plunge to 130$! Have fun!
I am sure you have noticed by now that this blog is totally original and I will not cover the basic indicators, their usage, … There are millions of sites that copy/paste from each other and you won’t learn from them anything but the basics. It is always a good idea to come back to basics, but profitable trading is about having an edge, so none of basic indicators work for very long, when too many traders are using one, market becomes sort of immune to it!
With this blog, I aim to help you kick some ideas down the road and if you wish you can share on this blog. Maybe it does not work for you as expected, but it may inspire others. Just drop me an email (see pinned message) and I will publish your article!
Let me share a story. For very long years, I made a few trades per year and had absolutely no idea how to get in or to get out. so I did some buy and hold based on randomly selected analysis, watching the stocks loose as much as 50% then going back up… And one morning I had an idea: imagine a very tall tree and there is a big coconut hanging from the top branches and a monkey happens to walk by and being thirsty. The easiest part of course is climbing, reaching the top, secure yourself to branches with feet and one hand while extending the other hand to take the fruit. Then suddenly, one branches cracks. You are still hanging from one branch with one hand but you are still safe, sort of! But for how long? The second branch is bending now and you must make a decision: free fall to the ground (not a good idea) or jump down other branches. This is how I started designing my first trailing stop! See? Let me know how you come up with trading strategies, fun to share and comment!
I still have plenty of ideas to share. I will not share publicly the details of my very best strategy because I am using it, but there is no problem sharing older research material that you can choose to improve on your side and share with the club! Just to give you an idea, we will look at in future posts:
Markets can trend and this is due to their random nature. See here.
The randomness can be measured by volatility. The raw volatility (be it 1-day momentum, True Range, …) is the one to be analyzed and understood
You should not try to confirm stubbornly a strategy because cases where your strategy does not work surely exist and might even be the most profitable cases! Market’s got some sense of humor :-))
Now, as title implies, let’s look at S&P500 and where it is going!
As a continuation from previous post, I have left the random walk path and you can see that our drunken man does not seem capable to go more that 2 steps away from the main path.
If you have read my initial posts, you know I like a lot Action/Reaction lines because tops and bottoms are often building on those. Here we are precisely with 2 solid blue lines across the path. Unless S&500 goes through forcefully, we are in for a reversal. I have included Accumulation / Distribution at the bottom, which is a good indicator when you have nothing better, just add a 20-days simple moving average. There is not much energy: look at the slope of price versus indicator! We need some very good news to move up now! So yes, I would wait a few more days to see where we are going and go short if confirmed for an objective at 2400. This is absolutely no advice!!!
After discussing raw volatility, standard deviations, no way we don’t have a discussion about ATR aka the Average True Range. This post will definitely blow you mind, I am going to demonstrate that markets are REALLY following a random walk path, pushing from one side to the other in a precise manner.
For introduction, please read again my previous post about drunkard’s walk.
Let’s consider an observation period of n days. The Highest High (HH) and Lowest Low (LL) may be considered as lamp post from which our drunken guy is walking. We know that on average we should be able to find him at a location situated at square root of n multiplied by average stride length or the Average True Range over n days to use financial wording.
Here is how it looks:
The red line is where Bulls expect price to be, whereas the Bears are waiting for the prices to reach the green lines. These are all average expectations of course, and these objective can be reached any time during the observation period. Please remember that down markets are usually twice faster that up markets.
What if we consider the middle price between these 2 expectations??
Let’s do a bit of maths:
Today’s high (H) is expected at LL + 2 * √n * ATR(n)
Today’s low (L) is expected at HH – + 2 * √n * ATR(n)
So the middle point can be defined as:
MP = .5 * ((H+L)/2 +(HH + LL)/2)
Of course price will not be there, X does NOT mark the spot, but it is a fair expectation about where prices should be, if there were no other information.
Let’s display it on a real chart!
We are going to use n = 36 in this post, you can use anything between 4 and 100, but make sure the square root is an integer for what will be following.
Ouch! It hurts the eyes. But you need to think of it differently. It is not a simple moving average, it is always using the most significant average of the day, between 1 and 36. Anyway you can already see that, when prices are above the path (light blue color),then trend is up. The path leaves a chance to prices to retrace and tends to be closer to them before a reversal.
Let’s not stop there and use a standard average of this path to smooth things out. Now follow my reasoning!
If the random walk theory holds, then the path we have spotted may very well be a lamp post so the actual prices should hover at exactly a number of strides from the lamp post, not 3.7 strides, 4 really! Let’s do it and display some lines at exactly every 2 steps (2 ATR’s) from the middle path.
The red/green line is the smoothed out path. Prices are pushing along the lines, see only a few examples highlighted in red circles here:
One way to see it is to consider the middle path as the median line if you were using an Andrew pitchfork, first lines above and below are the MLH (median line high) and the other lines are warning lines!
Even better, if you are looking for warning lines above a major bottom, each represent a price objective. In the case below, the price identified on first warning line is reached a the top second red circle within .30$! (97.70 vs 97.42!)
Trading strategies are quite straightforward from then on:
From a warning line far below median path, play return to the path
From middle path that is going, play the trend and put a stop on a visible line below the price
If price is ‘in the central pitchfork’, most likely there is no trend!
Now, you will tell, this is an example, sure it does not work with last market conditions? Yes it does!
Here is Nasdaq recent price action, stopped on a warning line!
Or McDonald. Doing quite well!
Final thoughts: Market is moved by demand and offer. Behind these are drivers are humans or robots programmed by humans who can change their mind any time, giving the market a random outlook. This post would be worth many more investigations. Dr Andrew and his pitchfork really had a hint, but without computer, it was definitely more difficult for him. This is maybe the first explanation why Andrew Pitchfork are working and why it is so difficult to identify the right pivots to draw the pitchforks! Anyway, the random walk proves to a very good model, again because we are not trying to fit the data into a specific model or data distribution!