Why I hate Mondays…and you should too
I typically trade about 10 days per month to a schedule laid out as much as 6 or even 12 months in advance. Some friends asked me recently how I decide upon my trading schedule. What is the formula? How did I arrive at it?
So I agreed to write an article explaining all of the ins and outs of a subject which is more important than many traders realise. Here it is, the answer, the formula and the logic underlying it…
The premise
We can’t physically trade every hour that the markets are open, so we need to decide how much of the available market time we are actually going to trade. We also shouldn’t want to trade every available hour. Aside from being intensive work that is tiring, the reason we are in this business is to provide flexibility for a better work / life balance. It is all too easy to lose sight of that fact!
So we need to set a plan that suits our personal needs as well as having us concentrate on the most productive trading days as far as possible, or at least those days that are most likely to be the best trading days over the long run.
My answer
First I will give you my own answer to this riddle and then work back through how this is arrived at. My conclusion is to trade no more than 12 days per month and no fewer than 8. These days must be selected and planned well in advance and not just drifted into based on how you feel when you wake up each morning!
That is why I know my trading schedule months in advance. I then stick to that schedule with cast iron discipline. There is no point having a well thought out plan if you don’t then stick to it, is there? The only deviations, which are extremely rare, are due to unexpected events.
As an example, here is my own schedule…click here
The formula
There are three items that go into this formula each of which results in eliminating certain days from the annual calendar and what we are left with is our personal trading schedule for the year. The three items that lead to days being eliminated are as follows:
- The days of the year that are least likely to be productive in general
- The days which statistically are less reliable for our own trading strategy
- The need to take regular breaks from trading, to rest as well as to enjoy life
Step 1
So first we eliminate the days each year when the odds do not favour success, or at best when profits can be expected to be below average making these days poor use of our valuable time. These tend to be days when we know ahead of time that volume is likely to be light. This is the list I like to use:
- The day of and the day preceding: Martin Luther King Day, Presidents Day, Memorial Day, Labor Day.
- The day of: Good Friday, Easter Monday, Columbus Day, Veterans Day.
- The day of and the day after: Independence Day.
- The day of, the day preceding and the day after: Thanksgiving.
- The whole period between and including Christmas Eve and New Years Day.
Step 2
The second step is to examine our own trading strategy to see if there are any statistical tendencies that we should be aware of and hence respond to. Some years ago I analysed no less than 5 years worth of short-term trading results to look for clues, somewhere of the order of 1000 days of data. I discovered something interesting.
When I broke the profit over the 5 years down by days of the week I found that profits were distributed approximately as follows:
- Monday -10%
- Tuesday +35%
- Wednesday +30%
- Thursday +30%
- Friday +15%
There is some powerful ammunition here. Until I did the analysis I had no idea that Monday’s were so bad. There were plenty of great Monday’s in the sample, clearly enough of them to disguise the long-term reality from me! Guess what – I never trade on Monday’s today and haven’t done for several years!
Friday’s are still profitable, but far less productive in terms of “earnings per hour” than the remaining three days of the week. Therefore as a general rule I tend not to trade on Fridays either. This is not as absolute as my hatred of Monday’s and I do trade a few Fridays each year – usually the first Friday of the month (Payrolls Friday). Fridays for me are used primarily to backfill my calendar to ensure I am able to trade enough days during months that are shortened by other factors.
Interestingly Mondays and Fridays also tend to be the lower volume days of the week, hence the findings here were consistent with the same logic for eliminating the set of days in Step 1.
Step 3
The final factor to consider is the need to take regular short breaks from trading. Quite apart from the importance of having a family life outside of the very intensive career we choose, it is extremely important to switch off, relax and recharge the batteries at regular intervals. Trading is extraordinarily tiring compared to any other occupation that involves sitting at a desk, staring at computer screens and swearing at them occasionally!
If you don’t get regular rest from this you slowly but surely lose your effectiveness. You can prove this to yourself by literally taking a week off and seeing how much more alert and attentive you are on your first day back. So this isn’t being lazy. This is a critical element in a long term and successful trading career. Yet you would be surprised how many traders try desperately hard NOT to take time off! We are brought up to believe that the harder we work, the better we will succeed. Well in my experience quite the opposite is true when it comes to trading. You need a razor sharp mind, absolute concentration and unshakable discipline – all things that start to be eroded as you tire from working too many days without a decent rest.
So my personal recommendation is to take off a good 7 to 10 days at least once per quarter, but ideally more like every other month.
Discipline
This formula is simple enough, logical and makes sense. But another value to having a schedule to work to is that it brings another element of discipline into your work. Unlike following a trading plan, avoiding over trading etc. this is a discipline that is much easier to stick too. Discipline in everything improves the more you are able to be disciplined in a few things. It becomes more of a habit and slowly becomes easier to be more disciplined in general. So it is constructive to have a few plans to follow that are easy! Working to a well thought out schedule each year is a simple plan to follow as well as having real value in improving trading performance.
Is my plan the right one for you? Maybe, maybe not. If you like the logic and it sits well with your view of life and your personal circumstances, by all means copy it. If not modify it to better suit your own needs. But I do urge every trader to have his or her own plan and to follow it. This is a serious business and the days you choose to trade deserve more thought than just how you feel each morning when the alarm clock goes off!
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Copyright © Simon Townshend Ltd 2012, all rights reserved
Confucius was right…but forgot to factor in time!
“Feed a man a fish and you’ll feed him for a day. Teach a man to fish and you’ll feed him for a lifetime.”
We all know the Chinese proverb and we all know it to be true. But what if it takes a year to learn to fish? Or 3 years, or 5 years?
That’s the chink in the armour and the reality is that learning to trade successfully takes that sort of time. It’s not like a quick fishing lesson and hey presto you can feed yourself, despite what all of those classified ads would have us believe!
As a result so many would be and could be traders never quite make it. Before they reach the point where they can feed themselves, they run out of time or run out of money (sometimes both!).
The solution is simple of course – feed that man a fish each day until he develops into a competent fisherman!
Then time ceases to be his enemy. He can take as much time as he needs to learn to be not just any old fisherman but a fishing expert.
The Trading Den
For about 3 years people have been asking me to put together a service providing low risk, short term trades using my highly profitable, time proven strategy. Well now I can reveal that over the last year I have secretly been running such a service, quietly providing a fish a day to a dozen other traders.
Interestingly all of these great people are professionals, mainly career traders, successful in their own rights. They are already fishermen and fisherwomen (is that a real word or one I just invented?). But they have been enjoying the Trading Den trades in addition to their own trading as a means of boosting profits without increasing leverage. So even though the idea is to feed a man a fish to buy the time needed to become an expert fisherman, that doesn’t mean it can’t also benefit veterans seeking to increase their earnings without increasing risk!
During this year we have honed this service to the point it is now running like a Swiss timepiece. It is about as good now as we can ever hope to make it. So now I am ready to invite up to 10 newcomers into this secret little club to join us in landing typically around $7,000 per month trading only half time and with no overnight risk.
If that sounds like it would help you in your own trading evolution, novice or veteran, 1-lot trader or 10-lot trader, then you can read the whole story at…
What John thinks about it…
“I have been a member of Simon’s Trading Den since the inception and have witnessed first-hand, on a daily basis, Simon’s keen abilities trading the futures markets. The posted results are genuine, as is Simon himself. Finding someone with Simon’s skills and integrity in the trading arena is like finding a needle in a haystack, and I consider myself very fortunate indeed to have met him and to be trading with him.
Besides the trading profits, the other big benefit to the Trading Den is being able to watch Simon enter, manage and exit trades live. Every day trading in the Den is an enjoyable learning experience that adds greatly to my own trading skills.”
John, San Francisco
You can meet John and the rest of gang, in my private Trading Den this week. All you need to do is to read about the service, make sure it fits within your current trading portfolio and grab one of these 10 new seats. We look forward to seeing you next time we convene in the Den to wage war on the markets once again!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
This is what you asked me for…and its on its way!
For two and half years now I have been trading a strategy that has also been made available to a tiny group of professional traders. Many of these people have made big money in this time, where big means 6-figures for some of them – in addition to their own trading returns.
However, this has one particular limitation and that is the fact that the signals are taken off daily charts and actioned in the most part at the end of the day. This was deliberate as it made it ideal for more passive traders and investors who had lives outside of trading and who did not want to follow the markets during the day.
But daily charts by definition mean a relatively small number of trades and relatively large initial risk per trade. This is perfect for those more “passive types” but during this 2-3 year period many more active traders have asked me…
“Isn’t there a way to trade this intra-day, off smaller charts, with lower risk trades?”
There wasn’t.
A moment of madness!
But more and more people asked which got me thinking. Then one day, in the summer of 2010, I woke up one morning and decided to do something completely crazy. I decided to start trading the same strategy intra-day off much smaller charts.
What’s crazy about that you might ask? Well nothing in principle. The bit that was a bit off the wall was doing the whole thing before a live audience!
Yeah that’s right, no quiet development in the basement late at night. Just straight in at the deep end in the live market with my most loyal and closest clients watching every damn trade in real time!
OK, lets be honest, I didn’t take that leap of faith without a pretty good idea that it would work. But it wasn’t perfect. It took a bit of refining and developing as we went along.
A little help from my friends?
We have been quietly trundling along making about $7,000 a month with this. Then last month with the help of some of the gang also watching out for the sort of things I look for on my charts, we increased our number of trades and our profit on the month exploded to $15,248!
I should point out that we are not scalping for a handful of ticks here and there, but seeking 2 to 3 high probability trades per day each worth a decent chunk of cash. Oh and we only trade 2 to 3 days per week too, so this is about as low key laid back day trading as you can find!
Well a year down the road, with a tidy old profit under our belts and having really found the groove in our weekly activities, I have decided to admit just 10 new members to this exclusive group. This is the chance for those who have been asking for such a service to finally receive exactly what they have been looking for.
Work is underway finalizing everything and I hope to release those 10 new spaces in early October. So if this sounds like your kinda thing, watch this space and I’ll let you know the moment those places become available.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Beware of news…but be aware of what it can tell you
The stock market was potentially in big trouble from the day they caught bin Laden.
No I’m not joking here, I’m actually being very serious. For over a decade now it has been accepted wisdom that the most bullish news that could hit the market would be catching the worlds most wanted man.
“The day THAT happens the market will just explode north and never look back.” I cant remember how many times I have heard those or similar words, since the atrocities of 9/11. And lets face it 9/11 did have quite the opposite effect, sending markets spiraling into the abyss.
So on Monday May 2nd we hear the news that conventional thinking said would trigger this rocket in equity values. We buckle up ready for the ride and watch with amazement as…
Nothing happens!
True the market was up briefly for a few hours that Monday morning before it closed down on the day.
So the next day, on Tuesday, there I am asking the traders in my group…”Where is the Osama rally then?” No one knew.
With hindsight this was the short signal of the year. But sadly we cant trade hindsight, even though bizarrely from that Tuesday onwards we had all been openly talking about the “Osama Top”.
Well now we can see from the chart above that the capture of bin Laden nailed the top in the stock market to the absolute very day. How stupid not to have just shorted it right there and then. Why didn’t we?
Well because we didn’t actually have a sell signal from our normal trading strategy and we are always fighting to follow our rules. That is true but also makes good cover for the other truth that secretly we were scared that the “rally of a lifetime” might just come about as all the experts had foretold for the prior ten years!
There can be no doubt that this was one heck of a missed opportunity. If I am honest we should have been bold and just stepped right in when the market failed to rally. No we didn’t have a sell signal in the normal sense. But we did have the biggest tip-off of all…
The fact that a market failed to rally in the face of the most bullish news it could possibly have received.
Now THAT is a sign of a market in serious trouble. Failing to respond positively when it had every reason to do so spelled the end of this cycle’s irrational exuberance!
This recent sell off didn’t just appear out of nowhere a month ago. It is purely a continuation of the new trend that started the day the market signaled that the bull market was done for, by failing to gain any ground at all when it should have exploded.
The market was telling us that the game was over. We just weren’t smart enough listen. Or to be precise we were smart enough to listen, which is why 24 hours later we were already talking about the Osama Top. But we weren’t smart enough, on this occasion, to react to what the market was telling us. This was an expensive mistake, even though we were following our trading rules by not taking any action.
The moral of the story therefore is simple…
A market that fails to rally in the face of exceptionally bullish news, is in serious trouble and has run out of steam. A market that fails to fall on exceptionally bad news, is in fact very strong and is likely to be turning up very soon. This strength or weakness is hidden from view but the LACK of reacting in the way it really should be in extreme circumstances is without doubt a genuine tipoff about what is about to take place.
Remember though a missed opportunity is only a missed opportunity if we fail to profit from it OR fail to learn from it. In this case we’ll treat this as an educational expense rather than a disaster!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
The power of the close…worth waiting for?
Most of my trading signals are triggered at the close of a bar. I have also noticed that the close is an important factor that many successful traders insist upon before entering a trade.
Yet for most of us there is a real temptation to want to jump is as quickly as possible when we see a setup forming. This seems like the natural thing to do. After all we have been waiting all day perhaps for this moment, so we don’t want to miss it and why wait to enter at what will probably be a less good price by the time the bar actually closes. So let’s just jump straight in!
But hold on a minute. If the bar close is the official trigger to enter the trade, that was probably selected for very good reason, wasn’t it? If so than we need to be patient and control our urge to just get in.
What’s the big deal?
Instinctively we know about the importance of the bar close after years of observation. So what is it about the close that is such a big deal?
Well there are several reasons to consider using the bar close as an entry trigger. These include – noise, stops and sometimes volume.
Markets are full of noise these days. Quick sharp spikes that spontaneously reverse as price gets straight back to where is was a few minutes earlier. These can be caused by all sorts of factors – big orders exceeding available liquidity, reactions to news or rumours etc.
Think of stops as food!
Markets also thrive on volume. That is what they are always hunting for. That is what the industry relies upon. Obvious areas where people place stops are therefore targets. If the market can probe such an area stops get triggered and, well, that creates volume doesn’t it? Volume is how the market feeds itself!
So when traders always say that “they” are gunning for our stops, there is a degree of truth in that statement! It is also a reason why in my trading own I try to (a) identify those areas where the market is likely to be stop hunting and (b) not to place my own stops in obvious locations!
Gaining another little edge
Now if trade rules require entry on the close of a bar rather than just at an entry price, to some degree it is possible to avoid getting trapped by such spikes. For example imagine a quick spike that lasts for say one minute. By entering on the close of a five minute bar, rather than at a price level, the risk of entering on a spike rather than a valid trade is reduced. It is not eliminated, but the chance is reduced from 100% to 20% in this example. Its not perfect but if the price of avoiding 4 out of 5 such traps is a little patience, that might be a virtue worth developing?
In the case of daily bars there is an additional factor to consider. If a market is able to hold onto a price level attained during the day, after the heaviest volume of the day has already been transacted, the likelihood that that price level is significant is greatly increased, and this is important information (whether most traders are aware of it or not!).
These are just a few of the reasons why professionals often utilise bar closes when developing trading strategies. It isn’t some earth shattering revelation, but just one of the many tricks a trader can use when seeking an edge in the markets. Ultimately in a business where there is no certainty, no right and no wrong, gaining an edge in any and every way we can is a route to better performance.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Head & shoulders top…achieves minimum objective
Well it took a long time to form, but when it triggered boy did it run! Hmmm, but maybe there is more than just one force at work here?
George and I have been following the weekly chart of the S&P over the last few weeks, watching that classic head and shoulders pattern form. Yesterday the minimum downside objective was achieved. Pretty cool reaching a target of that magnitude within 2 bars eh?
Now classical chart patterns are not something I would claim to be any great expert in. But George likes the head and shoulders for the simple reason that it is about the most reliable of the “old school” pre-computer age setups.
The spice I would throw into the mix here, is my observation that the down move is a 1-sided market. Those who joined us for the seminar in Santa Monica a few weeks ago or who have worked with my behind the charts technique will know exactly what this means and its implication on the future.
So here is a great example unfolding where an age old technique and a modern day discovery are working hand in hand to create a really powerful combination.
If ever there was a certainty in trading it is this: After the dullest of dull starts to the year, exciting times lie ahead! Just remember that expanding volatility means much larger swings, which means much larger stops and much larger targets. In turn that means much smaller size so as not to increase your dollar risk per trade!
It is true that higher volatility means greater opportunity. But that greater opportunity should come from a greater number of trades and NOT from trading the same unit size with increased dollar risk per trade. Remember money management rules always take precedent over trading rules. So enjoy the great times ahead but keep a level head at all times!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
The hidden power of writing…don’t underestimate it!
After my “Evolve or Die” webinar in March with Linda Raschke and FuturePath Trading, Linda mentioned something really interesting. She said that she often finds a real benefit of running such events is that it forces you (the speaker) to gather your thoughts and reinforces concepts for you personally as well as helping others with the insight provided.
I have long been a believer in writing things down, as I have always found this does exactly the same thing that Linda was alluding to. It forces you to think things through in a very structured and rigorous fashion. It also makes you think through the finer details very carefully of what you are trying to communicate and these can often contain surprising revelations. Finally, the act of writing things down somehow seems to help commit them to memory much more fully than not doing so.
So you could say I am a believer in committing things to paper as there are often much deeper benefits to be had as a result, over and above the obvious purpose of simply capturing information.
My Eureka moment
Well this week something startling happened that I had never anticipated. I was working on my slides for our summer seminar. In one of my sessions I will be revealing all 6 of the trades in my behind the chart strategy. Previously I taught just 2 of these setups.
Anyway there I was marking up some charts with the entry points, initial stops etc. Suddenly something amazing just hit me as I was drawing on those charts. For years I have followed these trades and simply never noticed it before. Yet the simple act of preparing some slides suddenly opened my eyes to something quite incredible.
What did I discover?
Well, have you ever noticed how you always seem have your biggest positions on losing trades and conversely never seem to have enough on the best winners? For many traders this is in fact the case. But even for others who use a fixed unit size – this still feels like it is true!
OK so how would you like to turn that on its head? How about having only half as much on the losing trades as you have on the winners? Wouldn’t that be quite something?
Impossible you say? I hear you. In most cases I would agree with you. However what I discovered quite by accident really does allow you to have twice as many contracts on the good trades as you have on the bad ones!
I shared this with Professor Quinto later that day. He was stunned.
I shared this with some of the traders in my chat room this week and they thought this was really cool. We watched a real trade unfold in real time as I talked them through the strategy. It was spectacular.
Just to be clear what this profit magnifying technique does is to provide 2 units of your chosen trade size on the best winning trades, yet never to lose more than 1 unit on the losing trades!
I am really excited by this as it makes a massive difference to the overall performance of any system. You only need 33% winners like this to breakeven and let’s be honest even the crappiest of strategies can do better than that. We will be teaching setups that often deliver 70% to 80% winners where this can be applied. The only drawback is that I can’t apply this trick to every setup in my toolkit. But you can be sure from now on I will be applying it to every trade where it can be used.
Join in the fun
If you would like to take my newly discovered profit magnifier and apply it to all the setups I will be teaching or to apply it to many of your own trade setups, then do join me at the Century Of Trading seminar on June 25th.
This profit magnifier was never planned for the seminar, so I am really excited to be adding yet another amazing technique to the already bursting agenda. I am really excited to be sharing all of this, period. I do hope you can join us for what will be a spectacular event – the first live appearance I have made in 4½ years!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Expect the unexpected…as it will definitely arrive!
What are the odds of this?
I recently decided to change banks for a total of four business accounts. All went very smoothly until a week ago when one day four debit cards arrived. The following day four PIN codes arrived. As always the PIN’s were random numbers which I wanted to change to numbers I can remember. For obvious security reasons the PIN codes cannot be cross referenced to the debit cards. Not even the bank had a means of identifying which PIN was for which debit card. Their advice was to just guess and take my chance with fate!
Each card could be tried with a maximum of 3 PINs before being deactivated. So with the first card trying each of the 4 PIN’s at random would have a 75% chance of success before the card would be deactivated. If the first PIN did not work, I could try 2 more and at the end of the process I would know which one was correct for that first card – the only question was would I get lucky and pick the right code within the first 3 attempts?
After the first card there was a 100% certainty that the remaining 3 cards would be married up to the right PIN within 3 attempts.
So here’s what actually happened when I tried this morning…
- I put the first card in the machine and entered a randomly chosen PIN. I had a 1 in 4 chance of selecting the right one – and I did! The first attempt was right. Phew!
- Now I knew I could get through all of the other 3 cards without any being deactivated. So with the second card I had a 1 in 3 chance of picking the correct PIN on the first attempt – and I did! I couldn’t believe it.
- For the third card I now had a 1 in 2 chance of pick the right PIN from the remaining 2 on the first attempt. It happened again!
- The final card had just one remaining PIN and so that was 100% certain I would get that one right on the first attempt.
I was stunned to have been right on each one very much against the odds. Just to be clear the chances of getting all of these right on the first attempt was only 1 chance in 24 (4x3x2x1 = 24). In other words there was a 96% chance this would not happen.
What has this to do with trading you might ask? Well nothing really. Except it serves as a reminder that outliers DO happen however unlikely the statistics say they are. They do happen, therefore we have to plan for them and know how we are going to handle them when they occasionally show up.
The main outliers we have to be alert for in trading are:
- Exceptional losers – where we think we are risking $X for Y% of our capital and something goes wrong and we actually lose 2 or 3 times as much as intended. This might be an order placement error or maybe a series of locked limit moves, etc.
- Exceptional losing runs – if we have a 67% winning rate ideally we would have a nice simple sequence of 2 winners, 1 loser, 2 winners, 1 loser etc. But that doesn’t happen in real life. Long winning runs come around frequently as do losing runs.
Yes it is true that an exceptional winner and an exceptional winning run are the other type of outliers. But we DON’T have to concern ourselves with these. It is the negative outliers that have to condition our behaviour as these events can determine our ability to come back from the outlier or not.
This is why logical and realistic money management is essential to long term success. Get this right and you can guarantee you will be in the business for as long as you wish – however rough a time you have to endure. Get this wrong (as the majority of the rubbish published on the internet would lead you to) then you are guaranteed to blow out – its just a question of when!
It is also true that over the years I have been criticised in the past for being too conservative. Maybe, but I’m still here and have ridden out many a storm during my trading career. Whereas my critics are ancient history. Yes they had their great times outperforming me many times over. But when the outlier materialised – boom they blew up and were bust.
This is why the second of my two topics at Century Of Trading will be on this critical subject of money management. Most people spend their whole time developing entries and exits for their trading, even trying to take the subjectivity out of their trading by developing mechanical systems – which sadly always fail. Intriguingly money management can deliver much more long term profit than any system yet it CAN be implemented mechanically!
So do some research, read some books, better still join me in Los Angeles on June 25th. But whatever you do – please put money management at the heart of your trading plan and guarantee yourself a long term career in this business.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
Bubbles always burst eventually
That bubbles eventually burst is as certain as the sun rising every morning. However timing the blowup is rather less easy than timing dawn breaking. But there are telltale signs to be on the lookout for.
Following yesterday’s article in which I included that rather hair raising chart of Silver’s recent collapse, I was reminded by a friend of an article I wrote a year or so back in which I spelt out the precursor to many such dramatic reversals. Therefore I decided to reprint that same article for you below.
First of all here is yesterday’s Silver chart overlaid with the same indicator discussed in the article below. Look familiar?
Spontaneous Reversals – Impossible to Predict?
In theory if something is spontaneous then by definition it is impossible to predict. But that doesn’t mean that we cannot spot the telltale signs that often precede “the unpredictable”. As always with the markets the key is in understanding what lies behind that which is visible on the surface.
So let’s look at a spontaneous reversal, or as most people refer to them – the V-reversal.
In Financial Physics we specify 3 ways in which a new trend may be born. Of these the least common (by far) is the V-reversal – where a market just spontaneously turns ending one trend and instantly starting a new one in the opposite direction.
As well as being rare such new trends are extremely difficult to anticipate. Difficult yes, but not totally impossible 
. That is why a few days ago I included the following excerpt in my daily update sent to members of my S-I-R service:
So we were all on notice that the stage was set for one of these unusual events and hence in our shorter term trading to switch to playing the short side of the market. I also promised to write an article explaining more about this situation. So, here I am going to show you how we knew to switch to the short side days in advance of this rather impressive, and theoretically unpredictable, spontaneous reversal:
The What, the Why and the How
I don’t have room here to explain why this works, but I will show you exactly what to look for – the telltale signs, so that you will know in future what to watch out for. My suggestion for how you might use this insight is mainly as a filter rather than as a trade setup. So next time you see this you will know NOT to consider buying pullbacks etc.
As well as knowing when not to buy pullbacks, there is also a way to use this to trade against the prevailing trend – shorting in this case. But this is only for those who are highly experienced with this technique and I am not able to share that here. It is extremely aggressive and you have to know exactly how to play it.
But if this insight just keeps you out of one losing trade in future than I will regard it as being worth my time writing this. (For my S-I-R members I will elaborate further next weekend on both why this works and how to actually trade it, as I promised you previously.)
Right. What we need to look for is a market (any market and any timeframe) where a trend is underway that meets these criteria:
- A low volatility trend (lots of small overlapping bars moving strongly in one direction)
- No swings within the trend (just a single, painfully slow straight line crawl)
- The whole trend taking place displaced from its mean (see chart below)
Here we can see a simple Keltner channel added to the same S&P daily chart. (The parameters are largely irrelevant but as I know I will get asked – 21 period exponential moving average and 2.25 ATRs are the settings used here.)
Notice how this trend consisted of a single low volatility crawl along the outer band. This is not the usual series of swings and waves, but one single move. Note that moving along an outer band is critical here – this means that the move is displaced from its mean. If it was just a crawl along the moving average the situation would be totally different.
This action is rare, yet whenever you see it you will find that it very frequently ends with the hitherto totally unpredictable V-reversal – hence you don’t want to go buying pullbacks!
Have a rummage through your charts – look at different markets, various timeframes, etc. You won’t find many examples but you will be amazed at just how many of them end in a spontaneous reversal.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2010, all rights reserved
Great days ahead, but bide your time!
Did you watch the events of yesterday unfold in disbelief? Spectacular wasn’t it?
- Crude dropped almost $12 in one day to close back in double digits once again
- The Dollar Index made its biggest one day gain in months
- Silver extended its losses to close the week down a whopping 30%…
Dramatic moves, but this is wonderful news for traders as these events act as a stimulus to get things moving again, for new trends and new cycles of trade setup to develop. It is no secret that the start of 2011 has been marked by lots of chop and instant changes in sentiment. This is not uncommon at the end of trends and is a tricky environment to navigate.
But from this sort of action new trends can be born that provide new opportunities for many weeks and months to follow. So look forward to easier times ahead.
However, be careful for the next few days. We all have the urge to jump right in and want to make up for lost ground. It is difficult to be watching from the sidelines at these times. But there is no hurry! The opportunities will be abundant for a long time after the initial shock kick starts flaky markets. So there is no need to be in there fighting on day one.
The first 2 or 3 days after such an impulse can provide huge opportunity. But they are extremely difficult to navigate. New volatility levels have to be adjusted to and the markets always over react making short term sharp reversals likely. So the chances of getting into trouble are also much higher.
My advice is to let the dust settle before getting too actively involved. Play the long game. Make great use of the new cycle of clean swings that will unfold over the coming weeks and months and remember that Rome wasn’t built in a day! We have waited all year from some sort of impulse, so another day or two of playing it cautiously isnt going to hurt at all.
Then once the dust has settled that is the time to really set to work.
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