The Market Maven Alert
Tuesday 17th March 2009
Hi,
I hope the skies are blue wherever you are. Spring is in the air and the stock market has stopped making record lows every day (for now).
According to the weather man, we're set for 5 straight days of sunshine. Will the stock market follow suit in similar positive fashion? Here's hoping.
It's around this time of year that weather services make predictions about the 'long glorious summer' we're going to have. As we all know, these predictions invariably turn out to be wishful thinking. Michael Fish's failure to predict the Hurricane is probably the most famous!
Forecasters seem to have a particular blind spot when it comes to bank holidays! I've still not forgiven the BBC weather man for my wet weekend camping in Wales a few years back.
Making long term weather predictions seems to be an imprecise science, just like making long term predictions on the stock market. Very few people called the current crisis correctly. Boris Johnson's comments about the snow being worse than anyone could have expected are a bit like Gordon Brown's line that no-one could have predicted the current financial crisis. Unfortunately, Boris couldn't also blame America for the snow.
Old wives tales are still ever popular when it comes to predicting the weather.
Red sky at night, shepherds delight etc.
When cows lie down, it means rain is coming (Or was it the other way round?)
I also seem to remember one to do with seaweed when I was a youngster.
I've no idea how accurate these old wives tales are, but you can certainly say that the trading world isn't immune from popular beliefs like this.
Sell in May and go away is a famous one.
The four year presidential cycle is another.
There is actually some evidence to back these popular aphorisms up.
I'm going to ruffle some feathers here when I say this, but....
I believe that there are more old wives tales and folk stories in trading than there are with the weather.
I do chuckle when I go to trading shows and investment seminars and the speaker is going through a load of chart patterns like a flag pattern, a double top or something called a cup with a handle.
They usually go through a stylized example which of course demonstrates perfectly that the pattern works, when in actual fact its very hard to make money trading patterns alone. There's tons of books, ebooks and course out there extolling the virtues of various chart patterns without ever offering a shred of evidence that they work.
It seems people hold these patterns as beliefs, just as a dotty great aunt of mine believed that her cat having a mad 5 minutes meant a storm was on the way.
Maybe my dotty great aunt was on to something, who knows. The point is that human beings can rationalise things post hoc so that their predictions still hold true.
When it comes to trading, I much prefer to prove things for myself and where possible use quantitative research from people such as Thomas Bulkowski.
Bulkowski has written a number of books on chart patterns such as the Encyclopedia of chart patterns and Trading Classic Chart Patterns.
These books go through all the weird and wonderful chart patterns from flags and pennants to the rather biblical 'Adam and Eve double top'.
The great thing about Bulkowski is that he has done a ton of research into the effectiveness of the various patterns.
On his website http://thepatternsite.com, you can find details on every possible chart pattern under the sun, with their performance ranked for you.
All the chart patterns are ranked here: http://thepatternsite.com/rank.html
The top performing patterns are:
1. The Flag pattern (high and tight): http://thepatternsite.com/htf.html
2. Complex head and shoulder tops: http://thepatternsite.com/chst.html
3. Island long, break downs: http://thepatternsite.com/longisland.html
The Top performing Candlestick patterns are here: http://thepatternsite.com/CandlePerformers.html
It should be noted that the best performing patterns are often the most rare, which means the results are based on fewer iterations.
The website provides only a snippet of what's available in his book. If you are interested in trading charting/candlestick patterns, its well worth spending some time going through his website and checking out his excellent books.
There's also some pattern recognition software available absolutely free: http://thepatternsite.com/patternz.html
His research isn't perfect, but it's better than following an old wives tale!
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System Watch
I'm currently in the midst of the latest edition of What Really Profits. I'm reviewing http://www.tradingfx.com, Ninja Trader (software that allows you to create your own forex systems), The Oil Biz, MyTrades (The Financial Trading Jargon Buster) and running through a very famous trading strategy.
There's a whole bunch of other systems catching my attention at the moment. Here's a quick run down:
A few black box type systems:
http://www.fxprofitmountain.com
http://www.hectortrader.com/courseindex.php
http://www.trendstuffer.com
http://www.tigermaxsystem.com
http://www.verticalsolutions.com/strategies.html
Tom Hougaard comes recommended by a few traders. He's just set up a live trading room. You can register for free here: http://www.tradertom.com/whichwaytoday.htm
Market Raider: Testing this at the moment.
Foolproof Evening Trader: Getting Good feedback on this from readers who are using the system.
FX53's CA2 text alert service: The protext service has been closed, but the CA2 strategy is still live.
Nick Kruger's S&P 500 evening trader service: beta testers are coming to the end of the test period. I'll report back soon in more detail.
The 80/30 eur/ gbp system: A simple little system that has divided opinion. It has a high strike rate, but the risk reward ratio put a few people off this.
If you've any feedback on any of these or want me to look into something, just get in touch
My Trades
As discussed last week I moved my stop on my S&P 500 futures short to 720 and promptly got stopped out. We're much higher than this now, so I'm pleased I did it, though at the time I did grumble. Coulda woulda shoulda stopped and reversed long, but I'm quite pleased with the way the trend went overall.
I had an incredibly lucky week with my forex trades last week. It was weird in fact. I had one trade last longer than usual, but I had to go out for the evening. I closed it early rather than ruin my evening by checking my phone every minute. As it turned out, I got out near the peak of the move. Another trade I closed early for break even because I was running too many programs and my machine was freezing up. Had I remained in the trade as I should have done, I would have taken a chunky loss.
It's funny how your brain plays tricks on you. I caught myself rationalising that I was a super trader to close those trades so early, when in actual fact it was pure luck which no doubt will balance out and I'll miss a big move sometime soon.
This week's hot trading buttons
This week's highlights include the release of the last MPC meeting minutes on Wednesday morning, and the FOMC statement in the evening. There is also a raft of inflation data with US PPI today, and CPI on Thursday. Fed chairman Ben Bernanke, finishes off the trading week with a speech on Friday afternoon.
Trading Wisdom
"If the market was that easy and straight forward it certainly would make the investing game much easier, but Mr. Market is not a logical beast. He doesn't think or act logically. He is a very smart guy who knows all the arguments, bulls and bearish, but he is an emotional beast who will find ways to keep us frustrated, especially if we insist on expecting the market to do the rational thing." James De Porre
Regards,
Dave Evans
Market Maven