Did you know that exits are more important than entries?

*** Meet David in London this Saturday*** David’s seminar at Round-the-Clock-Trader LIVE! starts at 3pm in the DAX Theatre.  Use code RTC001 for your free ticket to the show – http://www.roundtheclocktrader.live

Over the past week the forecast sell off in the UK market that I have been writing about in this column got underway. The VectorVest UK Composite which is an equally weighted index of all the shares that we follow on the LSE and AIM fell marginally. The lows of the past three days were made by the order flow at two previous highs made on the 15th of August and 23rd September 2016. This concept of where former resistance becomes support is a fundamental law of chart analysis. This is a vitally important level.

On the VectorVest composite the level is 370p and on the FT100 the level is 6925. Watch these levels closely.

On my chart the Composite has closed below the trendline defining the upmove from the Brexit low and is sandwiched between this trendline and the horizontal support line mentioned in the last paragraph. The long and very marked bearish divergence between the MTI and the Composite makes me feel that more downside is highly possible. I note that on Friday the composite ticked up and it was a positive day. Even under the most bearish situation this is normal. Invariably when an important trendline is broken the market will go back and “kiss” the former support. It’s an excellent entry tool that I have been using in short term trading for many years. Please do not allow a single positive day to take your focus from managing the positions that you have.

The short term daily chart of the UK Composite is shown below with the important support lines easily seen.

david

On VectorVest the Primary Wave is down while all other more conservative measures of the trend are still positive for the stock bulls. The advice on the front page says all there needs to be said. VectorVest does not advocate buying stocks at this time. In VectorVest speak the trend situation is Down/Up. This means the short term trend is down while the underlying trend is still positive for the bulls.

Last week I mentioned a bullish flag on Hill and Smith. Unfortunately the support from the trendline defining the lower boundary of the flag failed and the share hit its stop. I would suspect that the professionals will have their next batch of orders at the last old high which occurred in the first week of May 2016. This level is 1000p. The level is also a 50% retracement of the last range.

I would now like to discuss exits and will use Hill and Smith as an example. Exits are the most difficult aspect of trading at least for me. There is NO hard and fast and rule here but rather the exit process is a philosophy that has been thought through and committed to paper within a trading plan. There are dozens of ways of exiting a position and here I will review a few that have worked for me over the years and that I currently use.

The simplest is just use the automatically calculated stop loss on VectorVest. Once you see red beside the share just get out. If this is the exit you have chosen in your trading plan then Hill and Smith would have been sold a few days ago.

My first and still favorite exit strategy was taught by my first mentor in the early 1980ies. It is simply a 25% trailing stop loss. The old man reckoned that anything less would not hold the position through the normal ebb and flow of the market. Every weekend I would look at the highest tick made by the share and calculate this level. For example in Hill and Smith the highest tick was 1245, reached on the 12th September. The trailing stop on the share at 934 hasn’t changed since this date. The tool is simple and takes little maintenance and in this day and age with ft350 stocks can be placed on a trading platform and executed automatically. The tool also rides high momentum moves in undervalued stocks that are growing earnings aggressively and safely. The advantage is staying within a big move and ignoring the noise. The disadvantage is giving back a lot if the market fails to hold the 25% pullback. The latter, in my view, rules out this method of exit in leveraged positions.

If I trade with a leveraged position using a spread bet or a CFD then it’s important (again in my view) to be only in the market in the high upward momentum move.  This means selling into strength prior to the end of this move. To accomplish this a knowledge of FIB is required. It’s quite simple to calculate and VectorVest does the sums for you. The technique will also be useful for those who just cannot handle the pullback even with an unleveraged position. FIB analysis is used to calculate retracements and extensions of a trading range. To calculate a target we extend the last pullback by the Golden Section 1.618. Fundamental analysts normally shake their head at me when I speak about this at seminars but it invariably stops the market in its tracks. On Hill and Smith observe the Brexit pullback which took place between the 19th May and the 27th June 2016. The range is calculated by subtracting the highest tick on the 19th May from the lowest tick on the 27th June. Take that number and multiply it by 1.618 and add the resultant figure to the low of the 27th June. You have just calculated a 1.618 extension of the last range. In the case of Hill and Smith that level was 1163. That was the level that swing traders and leveraged traders should have been selling into. On VectorVest the calculation is done automatically within the “drawing tools” drop down. If you struggle then please call support at 0800 014 8974 in the UK and 0800 981 891 in SA. I have been advising swing traders to exit Hill and Smith at the 1.618 extension for many weeks in the bi weekly webcasts that I do.

In a very strong market the move can easily continue to a 2.618 extension of the last pullback and even in extreme cases to a 4.23 extension. If missing this potential upsets, then with a little creativity you should be able to invent a rule to take partial profits at the 1.618 extension and let some of the position run.  These are your rules, in your plan. They need to make intuitive sense to you.

At our Oxford User Group we have a very experienced trader who uses a weekly chart for both entries and exits. As you know the weekly chart is the basis of the Weekly Zone Trade that I have detailed in this column at length. The trader uses a 3 and 8 week exponential moving average cross to confirm both entry and exit. This method is robust and would have got us out of Hill and Smith a few weeks ago. It is an excellent and mechanical process that just needs to be monitored once a week. Again if you struggle to apply the averages to the weekly chart and even find the weekly chart then please call support.

Finally in lesson 2 of the “Successful Investing Quick Start Course” there are a variety of exit rules discussed. The lesson is a must and should be retaken once a month until deep within the subconscious. The course is situated within the training tab on the VectorVest program.

Please don’t be upset if I haven’t discussed your favorite exit criteria. My objective here is to stimulate thought and to get everyone on the path to a technique that’s correct and intuitive for themselves. I have three exits plans. The first is for unleveraged positions and here use the 25% trailing stop. For leveraged positions and intraday /2 day trades I use FIB to predict exit levels as above. The third is the standard VectorVest stop which is part and parcel of the Worry Free Investment technique (WFI).

Over the past 15 years most of my trading has been relatively short term, holding positions for a few days to 5 weeks at most. In this time it was the FIB exits that were used exclusively. I am now trying to become more long term in my outlook with a portion of my capital and find the pullbacks difficult. I would find it impossible with leverage.

We don’t know with any certainty what the market is going to do next but we can pre plan what we will do in any potential market move up, down or nowhere.

Please commit your exit technique to paper.

On a tangent the Worry Free Investment portfolios that I started on my birthday (three months ago) are both doing well in the UK and SA. They are both well ahead of their respective market as measured by the VectorVest Composite. In these as per the WFI rules the stop loss used is the standard VectorVest stop. So far in both countries there has been no activity since the entries on the 19th July.

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David Paul

October 28th 2016

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Should you use indicators?

***Meet Charlie***  Attend Charlie’s live seminar this Saturday in London at 3pm at Round-the-Clock-Trader LIVE! at the Grand Connaught Rooms near Covent Garden – His seminar starts at 3pm, but doors open at 8.30am for the 31 other seminars going on – use code RTC001 for your free ticket – http://www,roundtheclocktrader.live

When I first started trading, there were much fewer indicators available within my charting software. MACD, RSI, Bollinger and a couple of others and that was about it. Nowadays it’s a different story. There are a great many more indicators plus of course the EA’s that are in ample supply in MT4.

Do we need all these indicators in order to be successful? Are they really the holy grail we are led to believe?

There’s a strong argument that all you need as a technical trader is a price chart and the ability to draw support/resistance and trend-lines. It certainly keeps your charts cleaner and at its core it encourages traders to look at the most important indicator of all; price. Do we really need indicators to tell us what’s already there within the price action? Remember indicator building is a good source of income for the people that create them…

However there is another factor at play here which gives a strong counter argument for why many traders should use indicators. As traders, we are all constantly striving to be able to trade within our own comfort zone. What is comfortable for one trader won’t be for another and that’s what makes the markets so unique – we are all different.

For one person, adding a couple of indicators to a chart would bring little value whatsoever as they are comfortable just looking at price. But for another trader, it can make the difference between trading and not trading at all. I was chatting to a futures trader who relies heavily on seeing the order flow and says they couldn’t possibly trade without it. After a long conversation, that trader confessed that it probably didn’t give them any more of an edge than using a simple indicator because there are times when the book is manipulated to such an extent that they just get chopped. However, the trader has become comfortable with using the order book and therefore believes in its value.

Ultimately then, using indicators is more about our mindset than anything else. If using them gives a trader confidence in what they are doing, that’s much more important than any inherent defects with the indicator itself. I’m a huge believer that what makes a trader successful is much more than the technique they’re using. It’s the confidence they have to trade with that technique that makes them successful or not. So, if you want to use indicators they will have a lot of value for you because that’s what your mindset needs. If you don’t want them, they would hold no value at all….

Moving over to the markets, the AUDUSD has a rising trendline below price currently so we are either going to see that hold as support or a technical break. If it holds as support, look for a breakout of the 77.50 area for confirmation of another upside leg, if that trendline breaks, look for a test of the September lows…
simonaud

Have a great week

Charlie Burton

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Why did the pound flash crash?





Why did the pound “flash crash”?


Why did the pound “flash crash”?



Several theories have emerged about why the British pound tumbled from about $1.26 against the US dollar to about $1.18 in just two minutes on Friday morning, but we may never know the precise reason despite the Bank of England looking into the cause. Foreign exchange markets are complex. There are many trading systems operating in the market across time zones and there’s no single collector or provider information.



The crash happened just after midnight London time, when liquidity in forex markets is typically low. Forex trading in Asia is spread across many key centres like Tokyo, Hong Kong, Singapore and Sydney. But low liquidity itself isn’t a cause for a so-called “flash crash”.



It could be down to a so-called “fat-finger” trade where a person types in a wrong number in an order. In a market increasingly dominated by algorithmic trading done by computers it could also have been caused by a glitch in a programme (‘algo’ for short). These sorts of glitches have happened before, notably in 2010 in the US stock market. If it was a fat finger by a person at a bank, we should have found out fairly quickly as counterparties acknowledge the error and wipe the trades out. If it’s an algo glitch, then we may never find out.



There are other possible explanations that are often trotted out when market moves can’t be explained, including a build up of stop loss orders at a certain point and when those are triggered there’s a large subsequent move.



There’s not a lot traders can do about flash crashes. They can’t be predicted, and thankfully they’re rare. But sterling markets have been highly volatile ever since the UK voted to exit the EU, and traders need to consider mechanisms like guaranteed stops. It also pays to use common sense – the pound is now highly susceptible to the kind of surprise headlines (‘tape bombs’ to use the lingo) that can cause rapid movements in prices. As well as using guaranteed stops, it makes sense from both a financial and a psychological approach, to use smaller position sizes. FX markets are volatile at the best of times, but now newsflow is combining with low liquidity (compared to previous years) to make this asset an even more volatile place.


Trade GBP/USD with IG


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The trade of the year…

Although we still have two months to year end, most of us can reflect back on this year and identify the periods that were good and the periods that weren’t so good.

Within the context of the good periods will undoubtedly be some really nice trades. I’m a firm believer that if you’re a swing trader, it’s usually just a handful of standout trades that are responsible for much of your performance over 12 months. Likewise for day traders, a few trades often give the bulk of those monthly returns.

If you do some detailed analysis of your trading journal it may well surprise you how few trades it takes to deliver so much of your performance. Does this mean you shouldn’t trade as much? Well there could be an argument for some traders in relation to that but I like to think those other trades (our bread and butter trades) are those that we try with the view that they could end up being those bigger winners as we don’t always know in advance.

So what about those bigger trades that make our month or even our quarter? These to me come as part and parcel of being ‘in the markets’ enough to be there when the opportunity arises. What’s the old saying? ‘Luck is when opportunity meets preparation’.

Personally, my trade of the year so far was back in January running into February. It’s not about total number of points made, more about how well it was executed, added to and therefore became highly profitable. I won’t go into the reasons for the trade, but it was a long on Euro in January which I closed out of right at the peak in February. You rarely exit right at the high of a move but this one did with the full position.

There have been other very good trades but this one stands out most, especially as it was so early on. So what’s your trade of the year? What were your key trades that have defined your trading over this past 10 months? It doesn’t have to be a huge number of points, but just a trade that you felt was executed well and ran according to the plan.

By doing regular reviews of your trade journal, it helps to both see what you’ve achieved, plus what type of trader you are and which suits your personality…

Moving over to the markets, after some choppy back and forth activity of late, the USDCAD is breaking out to the upside. Unless it breaks below 1.3150, it looks primed for more follow through to come…

simon-cad

Have a great week

Charlie Burton

Ezeetrader

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The Stock Market marks time

The LSE drifted sideways in the last week with the trends on VectorVest still positive for the bulls. Constrictions in volatility as in the past two weeks invariably precede a high momentum move.

Both the Primary Wave (short term trend) and the underlying trend of the VectorVest Composite UK are Up. The underlying trend has been confirmed by price action with the most long term measure of the trend on VectorVest (Confirmed call), positive since February 2016.

I note that there is a green light in the price column of the Color Guard. This shows that the price of the VectorVest Composite is higher day over day and week over week. This is an aggressive Buy signal.

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The lows of the week were defined by a trendline joining the lows since the Brexit low in June. The chart of the Composite and this trendline which has many touches is shown below. Also evident is the bearish normal divergence between the MTI and the Composite which I have fully discussed over the past two weekends. This is a leading bearish signal which joins the “butterfly” harmonic pattern. Both patterns make me wary of the future of the trend but for the moment it is still intact and I am sitting.david1

Once again, a bearish signal from the Composite which is preceded by such a divergence, while the MTI is in an overbought position, would lead to an increase in the probability of a move down. For the moment this is pure conjecture as the trends are intact right down to the Primary Wave.

The shares I have been holding have done well since Brexit but over the past few weeks have moved sideways with the index. Hill and Smith is a good example of this. The share remains undervalued and EPS is growing strongly. The share price has moved sideways, charting in the process a text book five wave “flag” pattern. The chart is shown below with the 5th wave of the pattern complete. The target from the pattern will be the flag pole otherwise known as the last impulsive up move added to the low of the flag. Roughly, the flagpole is 400 and added to the low that equates to a 1500 target if the support holds. The calculation is commonplace in technical analysis and is known as a measured move. I will hold the share and add to the position if and when I observe the price breaking upwards through the top trendline defining the resistance within the flag pattern. If this occurs then I would suspect that my divergence on the Composite gets blown away and the trends persist and continue.

JD Sports is similarly charting a continuation pattern although it’s not as marked and text book perfect the Hill and Smith.

The general market is 80% of the exercise. If the Composite continues upwards then all will prosper. Keep your eyes carefully peeled on the front page of VectorVest and if you have the time cast your attention over the chart of the Composite each evening. A break of the trendline defining the lows would mean a significant deterioration of the technical picture. I know I seem to have been saying that for weeks.

david2

A futher slump in the pound dollar exchange rate cannot be ruled out amid expectations that the Bank of England will remain in easing mode in case the UK economy struggles from the so called “hard Brexit”. My first FIB target from the monthly chart,that I have been presenting for years, was 1.25. This has been reached and exceeded in some style after the Conservative party conference. The next target of 1.12 remains stubbernly in place. A fall in Sterling may be the catalyst that pushes the Composite to the resistance defined by the top trend line defining the rising wedge in the chart of the Composite above.

During the year the Ft100 which is made up of blue chip companies with large foreign operations is up 13% but down in dollar terms. The mid cap ft250 is down 14% in dollar terms.

David Paul

October 22nd 2016

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The crescendo trade…

If you’ve ever watched the program ‘air crash investigation’ on the National Geographic channel, you may see similarities with some accidents with trading errors too.

When watching this program, it becomes apparent that a great deal of accidents were preventable at the time. The problem appears to be a sequence of events which take place before the inevitable crash occurs. If just one of these events were prevented from happening, often it would be enough to save the plane from disaster.

With trading disasters, it’s very similar in that there’s often a sequence of events that take place before an account takes that big loss, not just a single mistake. Let me give you a very real example. This took place just a few weeks ago from when this trader told me what happened. I’m going on memory of what took place so small details could be wrong, but the main story is correct…

He was in the middle of changing his baby’s nappy when a trade he had been looking at set up for him to buy. It was on the GBPAUD at the time I believe. He took the trade but forgot to place his stop because of the distraction of looking after his baby.

It was a day later that he realised he had not placed a stop because he was now considerably underwater beyond where he would have been had a stop been in place. Rather than accepting he had made the mistake and cutting the position immediately, he decided to wait and see if the market would still come back up for him. It didn’t. A few days passed and he was now down 250 pips on a position that should have had a stop at 80 pips.

Again he still could have closed the position but instead he decided to add to bring his average price down. Hoping now that his new entry would save the day if the GBP rallied, he sat and waited over the next several days and then the flash crash took place overnight. He was literally a few pips from having a margin call during that night but fortunately the pound did bounce back, but only enough so that his entire account wasn’t wiped out.

He got in touch with me that following day for advice because he was now vastly underwater due to adding to the loser and without a stop. The best advice I could give is for him to accept the huge loss, close the position and be thankful his entire account wasn’t wiped out, even if 70% still was.

I haven’t heard back from this gentleman so don’t know if he did indeed close his position or not. But just like in so many plane crashes, there were plenty of opportunities for this trader to have not got into this situation. What started out as placing a simple trade whilst changing a nappy climaxed into a potential account killer as a result of a stream of poor choices. This true story is the type of thing that happens around the world daily with traders. I call these the crescendo trade because of how it builds out of nothing into something so big, and yet just like in air crash investigation, it is entirely preventable….

Moving over to the markets, there’s nothing of great interest for me this week so I will re-iterate the view from last week’s that the USDJPY still looks good for more upside and that a solid pullback is what I’m continuing to look for in order to establish a long…

simonjpy-1

Charlie Burton

Ezeetrader

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USA Stocks have a poor week while London hangs in.

The VectorVest Composite of the entire US market charted the most long term (and bearish signal) on VectorVest during the last trading week. The US markets have now been within a Confirmed Down signal for the past four trading days. There was a lot of warning of the reversal as the Primary Wave and the DEW market timing systems had given sell signals in the previous week. These signals arrive in a very predictable order on VectorVest, reversal after reversal, and it’s vitally important that all reading understand this sequence.

First of all the short term trend or Primary Wave turns from Up to Down. At that point we are in a Down/Up trend. Next a red light appears in the price column of the Color Guard which indicates that the price has fallen day over day and week over week. Further weakness will be noted when a black star is spotted within the red light. The black star shows that the turn down is supported by momentum increasing to the downside. Next the DEW market timing system prints a sell signal. Finally if the reversal continues the most conservative and long term system (a confirmed call) is printed. All of these timing systems can be applied to the VectorVest Composite by clicking on the drop down below the chart. Please call support on 0800 014 8974 in the UK and 0800 981 891 in SA if you cannot locate or apply these signals to your charts.

A reversal from down to up is a mirror image of what I have written above.

A cocktail of a stronger oil price, commodity strength and a weaker pound has caused the London market to present a totally different picture to that of the USA. In London not that much has changed since I analyzed the situation last weekend. The trends are positive with both short term and underlying trends upwards. The UK market has been within a confirmed up technical scenario since the last weeks of February 2016.

On the VectorVest Composite UK the lows of the week were determined by support arriving based on a trend line drawn from the Brexit low. This trendline has now four major touches. The highs of the last week were defined by a 1.27 expansion of the last range. The very bearish “butterfly” pattern I described in detail last weekend is still present. The bearish normal divergence between the MTI and the price of the Composite is still in play with the divergence becoming more marked since I last wrote about the pattern.

The chart of the VectorVest Composite UK is shown below. The trends are positive but the divergence still worries me. In my portfolio I will continue to follow the advice on the front page of VectorVest and hold. Please watch carefully for any reversal as defined by the sequence that I detailed above. Also a close below the trendline shown in the chart would be a serious deterioration of the technical picture. Any sell signal from the Composite that is preceded by bearish normal divergence has a high probability of turning into a strong selloff.

david

Be very careful with open profits.

Thanks to all who came and supported us at the Investors show in London yesterday.

David Paul

October 15th 2016

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Want A New Career? Make Your Trading Last

Who wouldn’t want a career that sustained a comfortable lifestyle – sometimes more than comfortable – and yet didn’t mean that you had to out every morning to the same boring job to work the same eight hours to make the same hellish commute back home again? Can anyone really enjoy doing that? Sure, we make the money to pay for the nice house and car, but we barely ever have the time to use them. We’re always working. But if you can make your trading last, you’ll have a full time salary on part time hours, and you’ll get the most out of every day.

Sounds pretty good.

Are You Sure?

Sure we’re sure. That’s the point of trading. Once you’ve got your excellent and workable strategy in place – the ‘hard part’ – you can basically just set it and forget it when it comes to the trades themselves. As long as you have the right mind-set. And that could mean changing long-held beliefs about what trading means and how you go about it. But that’s okay. That’s more than okay. If those beliefs aren’t quite right, they need to be changed – and so does your life.

Changing The Way You Think

So if you want to make your trading last, you need to have a fresh approach to it. This is not just a hobby anymore – this is your career, and as such you need to take it seriously. You also need to remember that losing is part of the game. You simply cannot win 100% of the time, it’s just not possible. Even what you might think of as a ‘winning streak’ is going to end due to the balance of probabilities. That’s just how these things work. Going into trading with your eyes open is essential. Never trade with more than you can afford to lose.

Remember, when we say, for example, there is a 70% winning percentage, do you know what that means? Really understand it? You need to. It doesn’t mean that one particular trade has a 70% chance of winning. It means that, altogether, you will win 70% of the time. Which leaves 30% as a loss.

This is why it is essential that you shouldn’t put any emotion into a trade. Don’t get excited about it (although we’ll allow a little smile if it wins. If) because this will cloud your judgement. If it looks pretty good and you could make a ton on it but it doesn’t quite match your strategy, leave it alone. Even if it’s within touching distance of your plan. Unless it matches directly, don’t force it. You’ll only regret it.

Avoid The Emotion

As we’ve mentioned above, avoiding any emotion when it comes to a trade is how to make your trading last. Put emotion into it and it becomes something more than it is, and losing becomes more than it is. Losing suddenly gets you right in the heart, and trading isn’t fun anymore. You’ll want to stop. And you’ll never reach your true potential. Well, here’s the secret – trading isn’t meant to be fun. It’s not about fun. You want to spend your money in a fun way that has a chance of you never seeing it again (a big chance, as it happens)? Try online slots. Trading is for those who are serious about what they’re doing and have worked hard to get their strategy just right.

One trade, win or lose, shouldn’t be allowed to affect you.

Cut Out The Mistakes

If only it were that easy, right? Just say to yourself you’re not going to be making any more mistakes and bam! No more mistakes are made… Unfortunately, it’s not that easy. But it is something to focus on if you want to make your trading last. The best way to stop making mistakes is to stick to the plan. We’ve said it a number of times now; stay with your strategy and never waver. And we’ve said it a number of times for one reason only; it works. If you lose – which you will – don’t suddenly start putting money you can’t afford to lose onto any old trade in an effort to recoup your losses. That’s a big error. Go into a trade with the knowledge that, win or lose, you will simply keep calm and carry on, and things will go a lot more smoothly for you.

Rob Colville aka The Lazy Trader

Click here

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Overbought and Divergent

The divergence between the price of the VectorVest Composite UK and the Market Timing Indicator (MTI) on the VectorVest program continues. The trends on the Composite are Up/Up which indicates that the short term trend or Primary Wave is Up while the underlying trend is Up. There is a green light in the price column of the color guard which shows that price is up both day over day and week over week. From a trend following perspective this is a very positive situation. The Ft100 especially was boosted by a rise in the price of oil to a 4 month high and pound weakness. The Ft100 rose above the 7000 level on Tuesday for the first time in more than a year. The Bank of England has continued with its bond purchases and in the week bought some 500 million pounds worth of corporate bonds. This is much in advance of the 130 million forecast.

However, there are black clouds in the sky. These clouds may not amount to anything but I have an umbrella packed in my gym bag.

The chart of the Composite is shown below and the divergence can be clearly observed over the past 6 weeks. Prices rising and making a higher top while momentum is falling and charting a falling top is a powerful leading indicator of a change in trend. If this divergence is confirmed by a Confirmed Down signal or a DEW signal, then those signals need to be taken very seriously. Both signals can be automatically displayed by selecting each from the drop down menu below the chart window on VectorVest. If you haven’t found this dropdown then please call support on 0800 0148974 in the UK and on 0800 981891 in SA. The red triangle in January and the green triangle in February are the confirmed calls in 2016. The UK market has been enjoying a confirmed call upwards since the third week of February 2016.

david1

Those versed in harmonic patterns should have noted the bearish “butterfly” pattern on the Composite that has set up over the past two months. This pattern is shown below and along with the divergence on the Composite in a much overbought area concerns me.

On the Composite, note the selloff in price between the high on the 15th August and the low on the 12th September. After this the market rallies in an AB=CD pattern to a 1.27 extension of the selloff. This is the butterfly pattern and when it works precedes a very strong and high momentum move. A 3 month chart of the Composite illustrates the pattern.david2

Over the next few days please observe and keep careful tabs on the Composite. A close below the trendline defining the rise from the Brexit low would be an important sign of trouble ahead. This trendline is drawn on both charts included here.

In the last few days the markets have been most kind to me with strong advances in JD Sports, Trifast and Hill and Smith. Although I am worried about the overall market there is still a strong possibility of a run upwards towards the top trendline defining the rising wedge on the longer term chart above. Technically I like the picture in Cranswick which looks highly probable to break up from an “ascending triangle” pattern.

I am sitting tight and will try and trade what I see and not what I think and feel. For the moment I will sit and watch carefully. It’s not a time for a long fishing trip.

I will leave the discussions around the collapse of the Pound in the Asian session on Friday 7th October to your weekend newspapers. The UK Prime Minister has been given a short and sharp forex trading lesson. Those attending my bi weekly webcasts should not be that surprised. In these webcasts my first target for Cable (pound/dollar pair) was 1.25 and it has been on every chart that I have presented over the past 6 months. If this level is broken then the next level is 1.12. This fall in Cable (imho) the last wave down in a 5 wave sequence which started prior to the financial crisis. This fall in the currency pair started on the 1st November 2007. From an Elliott Wave perspective the move down is becoming mature and although the time scale on the charts is measured in months the worst may soon be nearly over. Unfortunately 1.12 again the dollar is a real possibility first.

David Paul

7th October 2016.

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The challenges facing traders Part 2…

When transitioning from a small account to a larger one, invariably position size has to be increased and herein lies a potential stumbling block.

Much like reaching a given account balance level like I mentioned last week, increasing position size can act as a psychological barrier too. Traders increase position size for two main reasons; one is they have grown their account to a level which dictates an increase; or two, they have proven to be successful with a certain amount of capital so decided to add more funds to their account.

Of the above two scenarios, I suspect the first is the easiest to deal with from an emotional perspective because you are growing your account to such an extent that you have to increase the size of your trades. When I did my $10k to $100k challenge, I tended to increase position size every 6 to 12 months but the main thing was it was not by a huge amount. Always increase in small increments rather than in one big hit.

Traders that add funds to an account are more likely to struggle if they increase the position size by too much. Take for example a trader that has been happily trading with £5k in their account trading with £1 and £2 stakes. They are happy with their progress and so decide to put the rest of the funds they had available for trading in which is an additional £45k (this is not uncommon).

If, based on the new amount of capital, they decided to increase their positions by tenfold, most would struggle to adapt in the short term. The reason being that although their risk per trade relative to size of account hasn’t changed, the new position size would simply be too big a jump for their emotions to handle when seeing the size of the wins and losses.

What then happens is the trader starts placing stops just a little bit too tight and thus sees more stop outs than they used to or they start banking profits too early simply to bag those gains when they are on the table.

When trading on a fund once, I saw a trader doing just these things. He hadn’t mentally prepared himself for trading fund money and started having more small losses but the winners weren’t making up for them as he banked them too early.

As you can see, this problem can impact on traders at all levels but the best advice I can give is only increase in small steps (there’s plenty of time) and try not to look at the money!

Moving over to the markets, the USDJPY had a nice breakout last week as I discussed. It hit the 100dma in the 104 area and on the back on a slightly underperforming Non Farm Payrolls on Friday, it backed off. However, the fundamentals are in place for more dollar appreciation against the yen to come so I will be looking for short term weakness on the pair to be getting long USD.

simon

Charlie Burton

Ezeetrader

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