[Beginner series] Trading with a pitchfork – Part 2

In part 1, you have learned how to identify key market turning points, which we have called Swing Point, shortened to SP. Swing points follow peaks and troughs in alternative way. Then we looked at short term and medium term SP’s. The last one are the ones we are interested in for drawing pitchforks.

Of course, the first question is why drawing pitchforks? Pitchfork is an interesting tool in the sense that is allows to identify trend in easy and blunt manner, no discussion is needed; then it gives buy and sell signal; it also measures the volatility! In short a dream tool, this is my Christmas gift to readers, but mastering will require some practice!

We are going to play with Exxon Mobil today. On the following graph, I have indicated the medium term swing points. Again take time to practice a bit here, because then it becomes (relatively) more difficult.

We are going now to number the SP’s, starting from the right of the graph, and in backward direction from 4:

Tough, isn’t it? Then your charting software should have a pitchfork tool. Select it and select the swing pints 1, 2 and 3. You should get something like that:

I am not going to explain the geometry used to draw the pitchfork, there are plenty of sites that do this. Let’s zoom instead on price action:

The green light is the median line, the red ones are the MLH (acronyms defined by doctor Andrew), are parallel to median line. After SP3, you notice that prices seem to adhere to the upper MLH, that is a sign of strength! At point 4, you can easily observe that price have not touched the median line, there is a gap between SP4 and median line, this is an other sign of strength and, according to A. Andrew, the minimum price objective for this situation is the price at SP3! The pitchfork is down trending and price have already exited the pitchfork even before SP4: this is the buy signal! We are all set up. We need to verify one last thing, the pitchfork made on SP’s 2, 3 and 4 should be trending up! Let’s draw:

Everything is perfect. We will look in future post the rules and how to find out where prices might be going, but let’s use for now the minimum price objective, so you need to place an order with stop at SP4 and objective at SP3, meeting your gain / risk sensitivity.

How did the trade go?

The min objective was reached only a few days later, then price has gone up since, landing currently a cool 33% at the time of writing!

This was your first pitchfork trade. Next time, we will look at the major rules to use pitchforks in safe and efficient manner.

Until next time, trade safely!

The boring market report – November 10th 2020

In last report, I was bearish for the short term, all indicators pointing in same direction: south! Now there were the US elections, and then yesterday the possibility of the existence of an efficient vaccine. Please note that Joe Biden is not formally elected and the vaccine testing is not formally finished! But anyway, markets have decided to turn back north after 2 steps to the south. This happens from time to time, stops are there to save us from disastrous situations.

Let’s look at Semi-conductor index first. The divergence on MACD should have driven the index towards the South. However volumes (see previous post) did not increase on that scenario, so it was a dead end.

Where are we going next? I need to show the steps in the opposite direction!

The first objective has been reached already and attempt to go beyond has failed yesterday. Short term traders may short this situation but the long term is up so you may want to stay on board for now, going to 3000. 5G should push in this direction!

Same situation for other word indexes, no additional comments.

Bitcoin has reached and gone beyond initial objective, hope you are part of the trip! (See other comments on previous post)

That’s it for today. Until next time, trade safely!

The light secret volatility of volumes

I have talked many times how the volume of information (fake or real) continuously unloaded onto media (social or not) is actually misleading (or trying to) your trading activity, just as using those brackets in the text! Trading the mathematical way just helps you with information overload.

You may have noticed I have not talked the actual volume data so far, one reason being that it is not freely available for all the supports we want to trade with. I am going to show you how to simulate this information, and how to more easily analyze volume information.

Let’s play with CGC – Canopy Growth Corp, a company involved in Cannabis business (just to attract search engines!). Volume is usually display in form of histogram at the bottom of your graph, with up days in green color and down days in red color.

There seems to be some outstanding spikes here and there, these are usually linked to specific events, could be quarterly results, and dividends payments, or law changes, or market important information. These can be some good entry points in a trend, especially if you missed the beginning.

Before we jump to more detailed analysis, if you consider Bitcoin or even some sector index, you may not get this information easily, or you may need to pay for it. So it would be good to simulate it, even if we would be missing the actual scale information, i.e. the real volume information.

I have already mentioned in WAD2.0 post that Williams Accumulation Distribution can be calculated without volume information

1. Calculate True High (TRH) and True Low (TRL)
TRH = Current bar high or precious bar close, whatever is higher
TRL = Current bar low or previous close, whatever is lower

2. Calculate current bar Accumulation/Distribution:
if Current close is above previous close then
AD = Current Close – TRL
if current close is below previous close
AD = Current close -TRH
if current close = previous close then
AD = 0

The absolute value of AD is the simulated volume. Let’s look at it:

You can see the spikes in volumes are located at the same place, more or less. So now we can use this calculation to get volumes sort of information for Bitcoin or Gold or whatever… Good, one problem fixed! On top of that, I can even make it smoother with synthetic bars as explained in same post mentioned above!

Now you would like to know if volume is really going up or down in more accurate way, maybe something you can even automate. As a reminder, this is linked to your observation period, you will to consider parameters that make sense to you. The solution is straightforward, let’s apply the good old MACD to volume.

Whaouh, we can see things now! Note I used the 10-days synthetic volume here to smooth things out and a MACD with 40-80-9 parameters. Volume does not tell you the trend but you know a trend is starting or getting stronger if volume is going up! On the right side, you see the recent rally is helped by strong volume increase, just get in the market and then use stop or objective or whatever strategy to get out. Volume will indeed go down when the trend cools down, and then volumes will go up again but it might trend continuation or trend reversal (see first arrow!)

Now look at this Bitcoin chart:

See? Each rally is preceded by a signal cross over MACD. Confirmation by the moving averages. Easy, isn’t it?

That’s it! Until next time, trade safely!

Undistorting investing reality at the speed of light!

I am sure you are wondering what I am going to talk about with such a post title! But let me start by asking a question: Can you tell me what is speed of light with good accuracy? I will be back after this break:

Whatever answer you give me (ideally should be: 299792458 meters per second), what I did is just awake part of your brain that deals with math, physics, … or intelligence to summarize. It is very important for next question:

Why do you invest your money for?

  1. To save planet from crazy climate evolution
  2. To help companies being more socially responsible
  3. To make as much money as possible
  4. To help out spot aliens if case they come to vicinity of earth

See you can not lie any more to me or to yourself, the only possible answer is number 3. Your brain orders you to take that answer.

Now think about you last meeting with your banker (didn’t I write bankster?). You were surely told how we need to build a safer and green planet, how it is difficult to have profitable investments…

Had your banker started by asking you my initial question, the meeting would have much more complicated for him, you would most likely have told him “give me 10%, I know you can do it!”

Can he really do it? Not in straightforward manner but short answer is yes. The theory is simple. All the countries will need pay for the money they have printed for the pandemics, and the way they will do it is by applying deep negative rates to accounts, maybe down to -5% or -6%. Whaouh! <Add more interjections here!> It will go slowly for acceptance by people but it will happen. But wait, here we are discussing treasury bonds! When interest rates go down, the price of bonds goes up. When the rate is down by 1%, bonds prices go up by 6% or more!

See that one graph below (US treasuries bonds futures). While your bankster now charges you negative rate, he invested your money in treasury bond, yielding a cool 29% over the last 2 years, 9% for 2020 YTD. Ouch, that hurts!

Now go and see your banker, ask him to put treasury bonds in your portfolio (of course, consider there is some risk level involved here), keep as little cash as needed if you get negative rates. Enjoy the face that your banker will make! Especially if rates go down, deep down, very deep down, …

The same goes for trading. You are told to use indicators with preset parameters recommended usually by the guy who created it. I have explained many times the fraud that the Gaussian distribution is, it actually causes distortions of reality. Indicators are the same: they let you see the reality through a specific prism, and if they are not based on sound mathematical principles, they will mislead your investment decisions. The popular MACD falls into such category (I will let you look at the formula), though it might be efficient when used in specific market conditions but also with right parameters. See Ferrari below, MACD with default parameters is flat for most of the growth this year:

As mentioned many times, an investing or trading action must be linked to an ‘observation’ period. You want to earn x% over the next y months. The parameters should be set in such a way that you can follow your trade easily : entry point, target price, exit time. Say I want to capture most of the up trend over several months, I change the default parameters to 48 and 80. Look at MACD now, close to perfect!

It does not take too much intelligence to uncover a trading strategy that works. Just wake up your brain by wondering what is the speed of light!

That’s it! Until next time, trade safely!

The boring market report – September 23rd 2020

Don’t worry, we are not there yet, only one big drop on Monday when everybody sold what they have, as the little tiny virus does not seem to want to vanish.

From the long term perspective, always good to look at kagi graph:

A 3-Buddhas top pattern is now obvious, and prices have gone to the ‘yin’ side. As you can see by the average in dotted line, the trend is still very bullish on Nasdaq….

Let’s take a closer look at with candlestick chart:

The first objective is reached!!! So Nasdaq kindly bumps back to north direction. Does not mean it will not go through the floor in next couple of days, that is when you want to go short, but as usual, in intelligent manner, not risking you pants and shirts!

That’s it for today. Busy with other stuff. Until next time, trade safely!

Secret new indicator makes trading easier!

When it comes to teasing potential subscribers for a newsletter, whether free or not, authors always mention a secret new indicator which detects the 10-baggers, stocks that can multiply by 10 in next few months. How disappointing when you find out it is about crossing the 1-year high! Such indicator indeed just does not exist, because stocks prices are moving because people are buying aggressively and not the opposite. We can predict with some accuracy where market has chance to make tops and bottoms in the near future based on volatility but exponential growth predictions can not be relied upon! Be cautious!

Brought to you by Cozy Dragon Trading Research Labs is a single new indicator that provides a sense of direction and timing never seen so far. It does not have any name so let’s call it Secret Indicator (SI). Let’s take a look at it!

Overlaid on price is our random walk path and just below the SI. If you are looking from the buy arrows, SI goes up keeps going up until the very day of trend reversal. Zero crossings of SI or its histogram can be used to trigger the buy action. There are a few finer rules to make the analysis fully reliable.

Please compare with RSI or STC indicators just below, causing many buy and sells orders because of whipsaws….

We can not disclose the formula behind this indicator. But we will use it in background for our market analysis!

That’s it for this back-from-vacations message. Until next time, trade safely.

S&P500 Market analysis June 30th 2020

S&P500 is still hesitating where to go, bears are now predicting a new market crash because of a stupid virus that can not be kept under control in the US and bulls are thinking that Fed is standing, ready to do whatever is needed to sustain the markets….

I introduced the Ferrari trading tool in previous post. As you can see, we reached also the red zone. Either you jumped out at that time or… your stop is taking care of securing your profits, especially should the trend continue, you are ready to drive it along!

With a stop positioned at 2956, you can switch off your screen and enjoy the sunshine!

Talk to you later!

Facebook will make you rich. Or not…

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!

That’s it. Until next time, trade safely!

Would you mind buying yourself a Ferrari?

Even if you are not interested in car business, there is a good chance that you have seen at least once a Ferrari drive by, and because of its specific engine noise and design, you wished to be able to drive it even for a few minutes. I had the chance to drive one for 20 minutes once, it was an incredible experience!

Anyway, let’s go to today’s topic, and see if there is any Ferrari like tool for trading, and to add for the fun, we will look at Ferrari graph! Think about their business: when you order a Ferrari, you will not be delivered before end of 2021 and you need to pay … now! Those interested in fundamentals should be looking on this stock! And so should you… and get a little piece of Ferrari!

Before we continue, remember that a Ferrari works fine in nice long roads, but it will be a painful drive if the road is bumpy with dangerous bends every quarter of mile!

DEMA – Double Exponential Moving Average – is for those traders interested in taking the fast lane. I colored it green when going northward, and red when going southward. As you can see, we have a good indication of the trend!

For those interested, the formula of DEMA is as follows. It is in short an EMA that is corrected for delay. So you can and MUST use long averages, don’t use 10-days DEMA, it doesn’t make sense!

DEMA = 2 x EMA – EMA(EMA)

Using DEMA as a stop is not best idea you may have since prices may jump above and below the hood, so you need to add a bumper, sorry a stop! Here you go:

Last but not least, you do not want to enter too far away from DEMA. Remember my random walk path? DEMA is not the same of course, but let’s check if price are not going too far away from this path! For those who know, it is a Keltner channel with DEMA as central average!

Wonderful! Prices are not going more than 8 ATR’s away from DEMA! I colored the zone between 6 and 8 ATR’s away from DEMA (don’t enter in red zone!) now the landscape is plain visible, provides a good idea of the direction, the stop prevents you from falling in ditches.

As previously said, do not use this Ferrari on small country roads, your portfolio will end up in a ravine sooner or later!

That’s it. Until next time, trade safely!

Have you been fooled by the bell curve?

I know you like some food for the mind for the week-end, this post is sure to make you think even it is simple mathematics! Of course, it will be fun to read too!

I have talked previously about how not use the Bollinger bands and I am going to kick even more on this concept.

As soon as you start talking about standard deviation (or sigma), you are assuming a bell curve, that is 62% of measurements (price) should be within one standard deviation of the average price. Let’s check that immediately, let’s display a Bollinger band with 1 sigma on Apple graph:

Apple Daily

Now look in each blue blox. There is almost ZERO price inside the band! The guy who sold the Gaussian curve to finance was the best salesman EVER!

Though attributed to Gauss, the bell curve was created by Abraham de Moivre in 18th century and then promoted furiously by an Adolphe Quételet in 19th century. Johann Carl Friedrich Gauss, one of best ever mathematician, published a book about normal distribution for astronomical data, and since then, we are talking the Gaussian or bell-shaped curve.

Gauss never studied the stock market random data! And standard deviation is only a ‘trick’ to locate 62% of the data around the average.

As shown on Apple graph, stock data is not consistent with normal distribution. Now what? When you have spotted a problem in trading, you got an edge!

You may remember from your years in high school the basic average deviation, sometimes called mean absolute deviation (MAD). In other words, it is the raw deviation measurement. Quoting Wikipedia:

MAD has been proposed to be used in place of standard deviation since it corresponds better to real life.[3] Because the MAD is a simpler measure of variability than the standard deviation, it can be useful in school teaching.[4][5]

School teaching? Hmmm… Most important part is first sentence: it corresponds better to real life! More on the difference between MAD and Gaussian distribution by fabulous Nassim Taleb here.

Stock price is not an industrial process measurement, it reflects the opinion of all people about the studied stock. If you are a car manufacturer and making 4.50m long cars, your production should make cars, say between 4.49 and 4.52, because otherwise the doors will not close properly is car is 4.78m long and you will need re-manufacturing with all associated costs! That is not the case for stock price, you are allowed to be excessively bullish or bearish!

Let’s give this theory a try. I am removing the Bollinger bands and adding a simple moving average, 34-days for the example, but you may change it.

Steven Nison, in his book introduced the Disparity indicator, created by Japanese traders, which is defined by:

Disparity = close – average over n days of close

It is very close to what we are looking for! We only need to add an average to get the Moving Averaged Disparity (MAD also just to add confusion!)

Apple Daily

The blue line is disparity and the MAD line is shown green when pointing up, red when pointing down.

As you can see, trading is almost straightforward. Buy when prices are over the 34-day average and disparity crosses over MAD (or when price cross over average and disparity is above MAD). Then get out when prices drop below average! Easy, isn’t it? You also get some nice divergence at the top, disparity has crossed below MAD end of January, far before the correction started!

From this introduction, there are plenty of ways you can improve this very basic but nonetheless very efficient indicator!

Here is a non commented graph of Nasdaq for you to play with:

That’s it! Until next time, trade safely!