trading systems failTrading systems fail all the time

I’d spent hours, days, weeks, months.

Testing, optimising, fine-tuning.

I’d read books, journals, blogs, studied the market, stared at quote screens and charts till my eyes were red and I could see them repeating in my sleep.

I ate, slept and breathed the markets.

I hated the weekends. Whenever Saturday came all I wanted was for Monday to come round again so that the markets would open.

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Trading in the financial markets is not an easy thing to do but it is something that I decided I would set out to achieve many years ago when just a young man. Besides, finance is a passion of mine and I like nothing better than fiddling with trading systems and scouring various stock charts. Along with music and travel, it’s one of the things that I’m most interested in and it’s been that way since long before I even got a job in the industry.

It’s because of this passion that I decided to put together my own course on stock market trading but this wasn’t an easy decision at first. You see, at first I worried about giving away my knowledge. I worried that if I gave away all my trading systems (and code included) that it would be harmful to me and that people would get all this knowledge for just a tiny cost.

Most courses are not worth a penny

You see, in the past, traders have been extremely secretive about giving away their systems but what I have found is actually the opposite. In fact, I’ve found by giving back to the community I’ve become a much better trader myself. I now have a responsibility to provide students with the right information and that gives me the motivation to learn even more about trading.

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Last week was another good one for US stock markets, in fact US equities had their best August since 2000 and it was the best monthly performance since February. That took the S&P 500 to another record close past the 2,000 level while the Dow Jones Industrial Average and Nasdaq also remained strong.

This week will start off slow with US Labour Day on Monday but things will pick up later in the week with a number of central bank meetings and important events. Events will include interest rate decisions from the Reserve Bank of Australia (Tuesday), Bank of Canada (Wednesday) and Bank of England and European Central Bank (both on Thursday). On Friday, traders will be eagerly anticipating the latest US non-farm payrolls number with analysts currently expecting an increase of 216,000 jobs.

Here are some trade ideas for the upcoming week:

This Week’s Trading Picks

Value 

Packaging Corporation of America $PKG – Long

In the world of the Internet and e-commerce, cardboard packaging solutions are in high demand and Packaging Corp prides itself on being able to cover all bases from packaging ‘watermelons’ to the ‘kitchen sink’.

The stock is attractive to value investors right now after a recent dip and currently trades at 12 times forward earnings with a PEG ratio of 0.70. Current ratio is healthy at 1.50 and the company pays a steady dividend of 2.35%.

There was also news today that the company’s Longview mill has been certified to the highest levels of sustainable forestry certifications. On a conservative DCF estimate the stock gives traders a 40% margin of safety.

this week's trading picks PKG

Forex

GBPUSD: Long

GBPUSD moved between the first support and first resistance nicely on Friday, giving pivot traders some healthy opportunities as the currency moved higher for the first time in 8 weeks.

In fact, the British pound managed to diverge from global trends on Friday as every other major currency, when put against the US dollar, lost ground. This points to more strength ahead for the currency pair and traders should be looking for opportunities to buy this week. A more hawkish view from the BOE could be the most likely catalyst for fresh gains.

this week's trading picks GBPUSD

Small Cap Growth

inTest Corp – $INTT

inTest Corp is a small cap (total market capitalisation of just $50 million) semiconductor that has shown impressive growth so far this year, returning investors over 17% since January. The company pays no dividend and is not without risk, but does look cheap with a PE of 14.69, PEG of 0.98 and current ratio of  6.60. The stock also boasts a high percentage of insider ownership at just over 10%.

this week's trading picks INTT

Trend regression

Cypress Semiconductor Corporation $CY – Long

One of the trading systems detailed in my course (number 20) looks to buy stocks just as they break out into new multi-week trends. This week’s signal is for Cypress Semiconductor Corporation, a semiconductor company with a wide portfolio.

Cypress has a market cap of $1.76 billion and trades at 16 times forward earnings.

this weeks trading picks cypress cy

Short sellers

Choice Hotels International Inc – $CHH

Choice Hotels International franchises more than 6,300 hotels incorporating such reliable brands as Comfort Inn, Comfort Suites and Sleep Inn. That equates to more than 500,000 rooms across the US and 35 other countries.

However, one look at the chart shows how the stock has surged this quarter and the stock is looking lofty at these high prices. The daily RSI reading points to an overbought level of 82 and the PEG ratio has moved past the expensive level of 3 (now 3.08).

Not only does the stock look pricey, there has also been a high level of insider selling recently. According to finviz.com, there has been a 67% negative change in insider ownership over the last 6 months.

this week's trading picks CHH Choice Hotels

Disclosure: I am long PKG.
Additional disclaimer: Please be aware of the usual risks to trading in financial instruments. Please remember the importance of doing your own research and understand the cost to trade including trading commissions and the bid:ask spread.

 


 


As I mentioned in a previous post, I do not classify day trading as an easy route to riches. However, if you were to ask me what my favourite approach would be, I would say pivot points. In this post I will illustrate how to use pivot points in trading stocks and forex.

How to use pivot points in trading

Pivot points can be calculated on most charting packages now but it’s still handy to know the exact formula so you can calculate them yourself, so here it is:

Pivot (P) = (High + Low + Close) / 3
R1 = P + (P − Low)
S1 = P − (High − P)
R2 = P + (High − Low)
S2 = P − (High − Low)
R3 = High + 2 × (P − Low)
S3 = Low − 2 × (High − P)

In essence, I think pivot points work quite well because they are always adapting to recent price action. They are also watched by lots of professional traders and because of that I think it gives them more significance.

Different methods

Traders can use pivot points in different ways. Personally, I find them most useful as profit targets because when a market hits a pivot level it nearly always holds up there for at least a short period of time.

I tend to be bearish on a market so long as the price is below the pivot and bullish so long as the price is above the pivot. I also like to combine pivots with other indicators and to watch the news.

For example, if the market drops through the pivot on some significant piece of news I will often short the market and look to buy it back on one of the support levels. Depending on the momentum of the market, I might take all the position off at the second resistance/support or I might take half the position off. Indeed, I might hold out for the third level if price action is really moving.

Rarely, if volatility is dead, I will take a position off at S1 or R1.

Watching momentum is therefore very important when using pivot points and it’s also a good idea to watch the ATR. That way you can see what is happening to volatility. If volatility and momentum are tapering off it’s a sign to exit your trade more quickly.

In order to illustrate how to use pivot points in trading I thought it would be a good idea to show some examples from last week. These charts are all taken from the same period. You’ll notice from these charts that pivot points do get hit a lot of the time.

EUR/USD

As can be seen in the next chart, pivot points often produce uncanny levels in which to enter or exit a market.

how to use pivot points in trading EURUSD chart

On the 29th July, the pivot, or just below it, would have been an excellent place to sell and the third support (S3) would have been a great place to close the trade, making around 30 pips.

On the 30th, the market declined and bounced off the second support and on the 31st the market stayed around the pivot for most of the day.

On the 1st August, the currency pair pushed through the pivot in the morning and moved right up to the third resistance, giving a trader 40-50 pips if long.

GBP/USD 

During the same period, the pivot also acted as a strong level for GBP USD.

how to use pivot points in trading GBPUSD chart

On July 29th, the market dropped 60 pips from the pivot to the third support and on the 30th the currency moved up to the pivot before falling back to the second support.

On the 31st, GBP USD hit the pivot in the morning then moved down to the first support where it consolidated.

And on the 1st August, the currency touched the pivot in the morning then moved lower throughout the session, closing right on the second support. The second support (S2) was a great place to take profits.

NZD/USD

As you can see from the next chart, a similar story unfolded for the Kiwi US dollar pair.

how to use pivot points in trading NZDUSD chart

On most days, the key pivot levels provided great places to enter buy and sell orders and take profits.

On the 29th, the currency fell through the pivot all the way to the second then third support.

On the 31st, the currency turned back off the first resistance to the pivot and on the 1st August the currency moved between the first support and first resistance.

As can be seen, pivot points can work in volatile as well as trending conditions.

 



Day Trading Futures For A Living

I worked as a futures day trader for a year between 2008-2009. It wasn’t a particularly good time to start in the markets because the volatility from the credit crunch was intense. Having said that, some experienced day traders really benefitted from the increased volatility and made a lot of money.

Nowadays, I do very little day trading. I have the upmost respect for day traders who are able to make it work but it’s a style of trading that just isn’t for me. I have a hard time sitting in front of a screen all day watching price movements which is why I prefer slightly longer time frames.

Day trading is basically very difficult and most of those who try it will fail.

day trading futures for a living. Picture of TT trader

Source: Trading Technologies

What I used to trade

When I first started trading I was given two products to focus on; German Bunds and London’s FTSE. These are popular futures for day traders in Europe as they are highly liquid with tight spreads. On occasion I would also trade the Dow, GBP/USD and STIRs (UK short term interest rates). We had one Bloomberg Terminal in the office and would use E-Signal and Trading Technologies to play the markets. We also had a squawk box, CNBC and 4 screens each.

Can anyone day trade futures?

Of course the simple answer is that not everyone can day trade futures. To be able to trade futures our firm had to have a large margin account with our clearing broker. Upwards of GBP30,000.

Aside from that there are high daily costs with futures trading. To trade at our firm the desk fee was  around GBP100 per day and that was cheap compared to most other brokers.

This was the desk fee and included trading software, data, phone line and connections to the exchange etc. Comparatively, the cost to trade was very small at just GBP$1 per trade per contract (GBP$2 for a round trip).

So for the ordinary retail trader it’s not possible to trade futures. But, it is possible to trade futures products in other forms for example as CFD’s, spread bets, spot products or ETFs.

Day trading futures products for retail traders

By using a spread betting firm or a CFD provider it’s possible to trade the FTSE100, the Dow, German Bunds, Gold or any of the popular futures products.

It’s worth noting that the spreads on these products are higher than they are for futures traders. But on the flip side, the fixed costs are much lower – no $100 a day desk fee, no huge margin requirement and there’s no concern about rolling over different quarter futures contracts.

Tips & tricks for day trading futures for a living

Without doubt, day trading is a difficult thing to do. I don’t recommend day trading for most people but from my experience, the most successful day traders are those who possess the following skills:

Intuition

The best day traders are those who focus on just one or two products. They watch the tape each day (not just the chart) and get to know them inside out. By doing so they are able to trade with a high level of gut feel. That level of intuition can’t be taught, it only comes from studying the product and some traders may never learn it.

Attitude

One of the keys to successfully day trading futures for a living is having the right mentality. Successful day traders take responsibility for their trades and trade with a huge amount of discipline. Most importantly, successful day traders do not self sabotage. They have a high level of self confidence and make sure that they are compensated for the risk that they take on. They don’t gamble and they understand the relationship between risk and reward.

Number of trades

If you’re a futures trader on a desk you can place more trades because the cost per trade is smaller (although that doesn’t mean you should). On the other hand, if you’re trading CFDs, spot products or spread bets, you need to seriously cut down on the number of trades you make a day. Spreads on the major forex pairs and stock markets are low but they are not insignificant. You should try and make only one or two trades a day if you want to consistently make money.

Fundamentals

Another thing successful day traders need is a good appreciation of the fundamentals. To be sure, technical levels are very important for short term traders but fundamentals also need to be understood. Knowing how to react to certain news releases and events is essential. Combing fundamental and technical is the best way.

Technicals

Day traders need the flexibility to go with trends or to trade against the flow. Short term markets are choppier than long term markets and traders need to be able to switch from long and short easily. They can’t get caught up only playing one side of the market and they should cut losses quickly. Pivot points, moving averages and RSI are good indicators for day traders.

A word about bank traders

A lot of people get confused with day trading, primarily because of the way it is portrayed in the media. It’s important to understand that 90% of traders at investment banks like Goldman Sachs and Citigroup are not engaged in real, directional trading. What they actually do is make the market for their clients. They quote prices to their customers and take a couple of points profit from the spread.

Let’s look at an example. Say a customer rings up Goldman Sachs and wants to buy Apple stock. The trader at Goldmans simply buys Apple direct from the exchange for $90.50 and sells it to the customer at $90.60, thus making a risk free $0.10 per share.

Bank traders have direct market access and this model is how most investment banks run their books. They also use order flow and volume to further reduce the risk of their trades going wrong but this is essentially a very low risk business model.

So, this is how Goldman Sachs are able to go weeks at a time without having even one losing day. Real, directional trading can never have such a successful win ratio.


Getting into day trading?

See my favourite intraday trading techniques and check out the resources for brokers, books and systems.

Please consider sharing if you found this article useful!


profit-jesse-livermore-trading-rulesWith many indicators still at extreme levels I am mostly in cash. Meanwhile, $XLE (Energy Sector ETF) has moved into overbought, almost parabolic territory. Might be a good time to go short.

As well, I have been pleased with my position in UK company $MGGT.L which is up 10% since my purchase at the beginning of the month. What will happen to markets this week? Here’s some links for your reading pleasure.

– Is this when the bear growls? CFA Eric Parnell believes the dawn of a new quarter could be the catalyst for a correction.

– Ten facts about current market conditions.

– Nice video of Warren Buffett on How to Read Stocks.

– My new audiobook released on Amazon audible and iTunes.

– Some great advice on this Reddit thread from a penny stock promoter.

That’s all for now. More next week.



Technical traders have hundreds of different indicators and setups at their disposal. Triangle patterns are just one form of technical analysis that traders rely on but they are probably more accurate than most other indicators.

On the whole, there is much debate around technical analysis. There are many in the academic world who claim technical analysis to be nonsense and trading on the basis of MACDs and resistance lines is a road to nowhere.

On the other hand, there are many profitable traders who swear by technical analysis and there are also many trading systems that are completely technical based. I have also read a number of academic papers that suggest technical analysis does work, particularly in the forex market.

My own opinion is that technical analysis is a tool to be used in conjunction with fundamental analysis. Some traders may be able to profit from technical indicators alone, however, I find fundamentals should also be considered first. In this way, fundamentals provide the main trading idea and technicals provide the timing.

In addition, I believe you need to have a solid understanding of trading psychology in order to utilise technical analysis to it’s full potential. In other words, you need to have enough confidence in your ability to follow your technical signals and hold them into profit.

Here are some of the best triangle patterns used by technical analysis traders:

Best triangle patterns for technical analysis

Ascending triangle

The ascending triangle pattern typically occurs in bull markets that have stalled and pulled back. As a security moves higher it forms an uptrend with higher lows. (At this point the security is still far away from it’s recent high and is likely also showing a multiple top.)

An upward trend line forms connecting the higher lows and this converges on a horizontal upper resistance, forming a triangle pattern.

The key point about all triangle patterns is that as they converge on the price, they form an apex and the price has nowhere to go. It can either break out to the upside and likely enter a strong upward trend. Or, it can break down through the upward trend line in a strong bearish move.

The ascending triangle pattern can be seen clearly in the chart for $KIE. As the triangle pattern converges, the price finally breaks out to the upside and enters a strong up trend.

ascending triangle patterns technical analysis

Descending triangle

Unsurprisingly, descending triangles are the exact opposite to ascending ones.

In $RPRX, the descending triangle pattern converges on the support line that has formed as a result of a number of multiple bottoms. As the price nears the apex, it moves higher than the descending down trend line and breaks out to the upside.

This pattern is usually a good indication that a security is bottoming. A similar pattern is occurring in gold right now (June 2014).

descending triangle patterns technical analysis

Wedge up

The wedge up is similar to the ascending triangle but instead of a having a horizontal resistance line, the resistance line moves up with the trend. The wedge up therefore always occurs in an up trend and can be used in two ways.

Firstly the wedge up is used as a channel. When the price move to the bottom of the channel it’s a good time to buy and when it moves to the top it’s time to sell.

Secondly, when the price breaks out of a channel it’s a sign that the pattern has changed and time to trade in the new direction.

wedge up triangle pattern

Wedge down

The wedge down works exactly like the wedge up but in reverse. When the price moves to the top of the channel it’s a time to sell and when it moves to the bottom it’s time to buy. Additionally, if you’re holding a short in the down trend, a break out past the upward trend line signals time to close out the short.

wedge down triangle pattern

Normal wedge

Normal wedges occur during choppy price action where an upward and downward sloping trend line both converge to an apex point. This usually happens when a market is consolidating and is recovering from a volatile phase. Eventually, the two trend lines converge and the market has nowhere to go. It will usually break out to the upside or break down into a new down trend. They can also be used to trade the channel, selling at the top and buying at the bottom.

wedge triangle pattern

 

Want a quick way to find technical triangle patterns? 

Simply head over to the Finviz home page and you can screen stocks for a number of different patterns:

triangle patterns finviz

 

 



Jesse Livermore, aka the Boy Plunger, aka the Great Bear of Wall Street, is one of the great American stock traders. He made (and lost) several million dollar fortunes buying and short selling stocks in the early 20th century and traded through the great Wall Street crashes of 1907 and 1929.

His book ‘Reminiscences of a Stock Operator‘ is one of the all time best trading books and contains many of Jesse’s best trading rules.

Jesse Livermore Trading Rules & Quotes

1. Always sell what shows you a loss and keep what shows you a profit.

profit-jesse-livermore-trading-rules

Buy as a print!

2. Money cannot consistently be made trading every day or every week during the year.

3. A man must believe in himself and his judgement if he expects to make a living in this game. That is why I don’t believe in tips.

tips-jesse-livermore-trading-rules

4. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

5. Prices are never too high to begin buying or too low to begin selling.

prices-jesse-livermore-trading-rules

Available as print. Click to buy

6. Remember, don’t fight the tape!

tape-jesse-livermore-trading-rules

7. Never buy a stock because it has had a big decline from its previous high.

8. Nobody can catch all the fluctuations.

fluctuations-jesse-livermore-trading-rules

Available as print.

9. The human side of every person is the greatest enemy of the average investor or speculator.

10. It is not good to be too curious about all the reasons behind the price movements.

curiosity-market-jesse-livermore-trading-rules

11. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

12. Never sell a stock because it seems high-priced.

never-sell-jesse-livermore-trading-rules

Buy as a print!

13. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

14. No diagnosis, no prognosis. No prognosis, no profit.

prognosis-jesse-livermore-trading-rules

Available as print.

15. Wishful thinking must be banished.

16. Fear keeps you from making as much money as you ought to.

fear-jesse-livermore-trading-rules

17. One should never permit speculative ventures to run into investments.

18. Never average losses.

average-jesse-livermore-trading-rules

19. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

20. I was bearish in a bear market. That was wise. I had sold stocks short. That was proper. I had sold them too soon. That was costly.

bear-market-jesse-livermore-trading-rules

Available as print.

21. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

22. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. It was an utterly foolish play…

cotton-jesse-livermore-trading-rules

23. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

24. Markets are never wrong. Opinions often are.

opinions-jesse-livermore-trading-rules

Buy as a print!

I hope you enjoyed some of these quotes. If you haven’t read Reminiscences of a Stock Operator make sure to pick it up because it’s a great entertaining read too.

By the way, these prints are available to buy! Just click on the one you are interested in. They would look good in any trading office 😉

What’s your favourite Jesse Livermore trading rule?

 



Cheapest stock markets in the world

Sources: telegraph.co.uk, Datastream, Hargreaves Lansdown

How this was created

With US stock markets at all time highs, traders and investors are becoming nervous about the steepening valuation of US equities.

Everybody is talking about volatility and volume right now and both of these conditions suggest that a significant market correction could be near.

The CBOE Volatility Index (VIX) has long been an indicator of fear in the markets right now it continues to trade at some of the lowest levels in it’s history. In fact, the VIX is trading under 11, and has only been this low on a handful of occasions. And as Kerry Prazak points out, the stock market has pulled back significantly nearly every time the VIX drops this low.

But the VIX isn’t the only indicator that suggests a correction is imminent. The Shiller CAPE ratio is also significantly overvalued with a reading of 25.6, 57.6% above it’s median and the third highest in 100 years.

Furthermore, the total market cap to US GDP ratio (a favourite of Warren Buffett) is overvalued at 122%, suggesting future annual returns of just 1.3% on the US stock market.

Market cap vs gdp

Source: Gurufocus.com

With US stocks so expensive right now, the question remains: Where else can traders look for profits? Well there are places in the world that are still cheap.

5 Cheapest stock markets in the world

Russia

It may not be all that surprising that the Russian stock market is one of the cheapest in the world right now. Geopolitical turmoil and conflict in Crimea has seen investors flee equities and the Russian stock market now trades at a PE ratio of 5.30 with a price to book ratio of 0.71 (the lowest of the 34 developed nations analysed).

Despite the volatility, there are signs of peace and notable investors (Jim Rogers included) have expressed renewed optimism in the former Communist state.

Greece

Like Russia, it is no surprise to learn that the Greek stock market is cheap. It is in fact the cheapest of all 34 countries studied with a PE ratio of just 3.40 while the cyclically adjusted PE is 6.08. Contrarian investors with a strong stomach should be able to find some value there.

China

A better place for investors could well be China and with a PE ratio of 6.30, the Chinese market is the third cheapest of all 34 nations, behind only Russia and Greece.

Investors have bailed out of China in recent months as the economy slows down but could be due for a rebound. The Chinese central bank have plenty of tools available to combat the slowdown and that could lead to a good performance from Chinese shares.

Japan

The Japanese Nikkei gained almost 40% in 2013, but the stock market is still cheap when compared to other nations and is 60% below its 1990 all time high.

Japan suffers from an ageing population but the aggressive monetary policy put in place by the Bank of Japan is injecting renewed life into the economy and depreciating the value of the Japanese yen.

With a PE ratio of 13.90 and price to book ratio of 1.32, Japan is cheaper than most other developed markets.

Japanese Nikkei chart

Source: Yahoo Finance

Turkey

Turkey is another stock market that is cheap right now. The Turkish equity market has a PE ratio of 9.90 making it the fourth cheapest behind Greece, Russia and China.

Riots and violence has clearly put investors off the country and the Turkish Lira has also taken a beating.

However, Turkey’s current account deficit of -7.90% is dangerously high and suggests there could be further problems ahead.



The ECB cut rates, unemployment stayed at 6.3% and the VIX dropped below 11 this week, the lowest level since 2007. Although I want to be long, I can’t ignore the drop in volatility and feel a correction is just around the corner. Accordingly, I have moved 90% into cash.

Here are this week’s links:

Why you can’t just buy the VIX

Correction 2014: Are you prepared?

What next for the euro? Interesting insight from Monex

How to take money off trend followers

Buying the most shorted has been rewarding

Keep an eye on the world’s economies with Trading Economics

 

That’s all for now. More next week. 🙂