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Thursday, October 14, 2010

TIMING IS EVERYTHING



John you had asked some interesting questions in your comments yesterday, so I thought I would try and address some of them today. Of course as most of us know, it is not as important to be right or wrong on something, as it is to have that view at the correct time. There were many people right about the housing market crash, yet were 5 years early and left millions of dollars on the table. It was hardly worth much being bearish on housing in 2000, but was worth quite a bit to have had that same view at the end of 2005 like I did, when I sold my real estate trying to time the wipeout that ensued. That was a seven figure difference in my case.

As far as the questions on how to protect yourself best against a significant devaluation in the dollar, I am probably not the best person to comment on that for a couple of reasons. First, I do not share the view that is going to occur even though at the moment the world looks like it is ending with the DX. I do certainly understand the reasoning behind your views on this and you may well be right. However, I am a trader with a shorter viewpoint than you have, and I see an incredibly over extended market move right now that appears to be to be setting up a base for a reversal. My indicators are diverging very sharply now against this move.

I do get concerned at times that people get a little too cute with things like this. For example, it appears to me that the better use of sideline money at the moment would be to go long stocks on the next pullback we get if it occurs in the next 2 weeks. If it is not until March, that is a different story. Getting tied up in a lot of vagaries of exchange rates and all of that just to protect principal does not seem prudent to me. I would like to bet against Barry and I think that is prudent, but it is starting to appear that the public has finally realized what a terrible mistake they made, and are about to begin to remedy that. If someone could guarantee me he would be re-elected and have a democratic house and senate, yes I would say to bet the farm against the US Dollar. However, it does not appear now his agenda is going to get advanced much further, which should mean things will begin to get better for the US.

With all of this in mind, today I am going to cover how to enter trades once you have a bias, or at least a few ways of doing it. On the Euro chart above I have marked all the correct entries that could have been done here. In real life nobody would get every single one of these perfect, but I did do some of these trades that are marked. First at the low, is my favorite type of pattern, what I call a trap. These are quick moves out of consolidations that quickly stall and reverse. I do not have the stats, but I would be willing to bet that a good percentage of my profits come on trades like this. You are generally completely against the public view on these types of things because the reversals happen out of the blue just after the last person enters on the wrong side of this. I am hoping for something like this to setup in the DX on this move down. There are alot of different variations on this general theme, which is to look for an immediate reversal of what appears to be a breakout move. You then go with that reversal.

The next several entries are very simple just retracements against a trend that last 2 to 5 days. These quick ones are best, the ones that meander around for a couple of weeks, are not as reliable. Here you can either just buy at the market once you get a couple of days down, or wait for a prior days high to get taken out indicating the underlying trend is resuming. It has been written that these are the highest probability trades win to loss percentage wise. My own research does not confirm this, but it does confirm these are good trades to take. They are very easy to spot. I know that Linda Bradford Raschke has written in her books about these types of setups calling them the holy grail trades. That has to carry some weight since she is one of the all time great traders.

The next setup, the sell at the top there is your basic divergence in an oscillator type of trade. You can use any indicator you like to do these, alot of folks like the MACD. I am not a big fan of that, but I suppose it must have some value. These trades are more tricky. Often in trend moves, you get these types of looks over and over, and they are false indications of turning points. The Aussie Dollar has had this look now for a couple of months, and it is just skyrocketing. It is my opinion that when trying to do these types of trades you should also try and combine it with a trap type of bar pattern, like the first example. Also, the British Pound right now has this type of setup developing. It also could be some other type of price pattern that has an "edge" in predicting future price direction. This should help keep you out of trouble. The biggest difficulty with these is that the good ones are do darn good, that they lure you in and you wind up chasing a bunch of marginal ones getting your ass handed to you in the process, hunting for the next home run trade. For beginners I would suggest not to try and do these types of trades. If you choose to do them, look for huge divergences and not small ones like the one I have marked on this chart. This one worked, but is really not an ideal example of these.

In summary, these are just some general types of ways to get into positions, and I hope this is of some help to you John and other readers as well. I have noticed some new readers from countries all over the world, so thanks for checking in.

3 comments:

John said...

Chris,

Thanks for your thoughts, they are much appreciated.

Best regards

John

John said...

Chris,

One additional comment. Fundamentally I do not see how the dollar cannot get worse with all of the paper dollars that have been printed, and are still going to be printed with additional quantitative easing by the Fed. It appears dilution (and possibly devaluation) are inevitable.

Obviously, I could be wrong, but as additionation dollars are created, present dollars can do nothing but be worth less. Just my opinion.

Thanks

John

Calvin Thompson said...

Part of the issue of achievement is to be able to set realistic goals, but that's one of the hardest things to do because you don't always know exactly where you're going, and you shouldn't.