Guestpost: Is the trend really your friend? From @EvreuxFX #fx #forex #btc #trading #oott

I’d like to thank Charlie hugely for writing this.

This is a really important article and actually has some connotations with the article that I recently wrote for him about heuristics and biases.

Give Charlie a follow on Twitter and visit his site for more expert info.


‘The trend is your friend’.

You’ve heard this before, haven’t you? You just need to start trend trading! Your broker, your guru, your moving average, Babypips, even your parents are telling you – just go with the trend!

Is it really that easy? Is this the forex trading holy grail?

We are going to find out.

This is the next installment of my series on trading clichés, diving deeper into the soundbite phrases we hear all too often. I’m very proud that David has allowed me to traverse the waters between DavidBelleFX.com and TradingProbability.com to write for him.

Which timeframe?

A natural problem of people announcing that the trend is your friend: which timeframe do you base this off of? Are you trend trading off of the timeframe above, below, or the same?

Look at this chart of GBPUSD for example, is it in an uptrend or downtrend?

I have outlined the three most obvious ways we could look at the trend. They’re completely conflicting. Long term we have an uptrend, medium term could be seen as a downtrend, short term is uptrend again.

Let’s look at a lower timeframe of the above chart:

We see more conflicting evidence. This chart says uptrend in medium term, the 4-hour chart was saying down in the medium term. This is yet another obstacle to trend trading.

For now, let’s stick to one timeframe.

How do you define a market trend?

Is it a purely visual thing? That doesn’t sound very robust.

Everyone can look at a chart and tell if it’s trending though, just look and see if it’s going up or down. Is the chart going from bottom left to top right? Uptrend.

I’m not as convinced.

Let’s use trendlines

They seem like a good idea.

Trendlines.

The clue is in the name, of course they can define a trend well. We’ll draw a trendline and that can tell us which direction to trade!

I’m being facetious, but this how some people think. There is absolutely no rhyme nor reason to how I drew those trendlines. I would wager that many trend traders do the same.

If you draw trendlines as a part of your strategy, do you have rules for them? 

Leave a comment below if you do, there is more than one way to skin a cat and we’re curious to know how other people do it.

One simple way would be to look at the structure of highs and lows in the market.

The swing high/low structure of markets

On this chart, I’ve highlighted the swing points which I perceive to be the most prominent.

Ignoring the first third of the chart, these were relatively easy to spot (the first third was pretty much a straight line move, admittedly a downfall of using swing structure).

If we go one step further and label these swing points, we get more clues about the context of the market. Let’s look at them contextually, compared to the previous high or low. We will label them as ‘higher’ or ‘lower’ than the previous high/low. Perhaps then we can get more insight into trend trading.

(Note that the first low and first high are single-lettered, as there is nothing to compare them to). Now that we have some market structure in place, we can potentially use this to define trends, perhaps even to help make trendlines rules-based.

It’s commonly thought of that an uptrend is defined by a market making both higher highs and high lows. We can see this in the most recent state of play. By these rules, the last 4 labels have defined us as currently being in an uptrend.

Let’s use this to draw our trendlines!

Now that we can define swings in the marketplace, we can use this to define trendlines. If we take our ‘base’ to be the first point in the new structure, we can connect swings to draw trendlines!

You may think: ‘that doesn’t look much like one of my trendlines’ – and you may be correct. But it is well-defined.

The ‘LL’ label is the base. The ‘HL’ led to a break of a prior swing point (the LH label) – the move which starts our definition of an uptrend. Every time we break to new highs we can move our trendline along the lows. This is one simple way to define both trendlines and an uptrend.

The trend is your friend, until the end, when it bends

Then there is this part.

What about when it bends? The start of a different trend, or a period of confusion and sideways action.

We can define this too. Remember how to draw those trendlines? Let’s have a look at a way to use those trendlines to define a change in market trend. If we rewind to the previous defined trend, we can get hints as to when a trend will change. These hints come as we make a breakout, through the trendline.

We were in a downtrend, and got early indications of a change in trend. Oftentimes, this is an important area to look for a retest and can often form an area to enter market, once this happens you could start trend trading to the upside. This particular breakout occurred in conjunction with my favoured horizontal support and resistance.

What makes a trend continue?

Without going too far into the dynamics of supply and demand in a trending market – an excess of demand, lack of supply, or both together, is what causes markets to move up.

We can see this for really sustained periods, such as the S&P500:

Clearly, the trend is up. I don’t even need to draw trendlines or high/low structure for you to know that. This is a trend that has been sustained over months and even years, due to the excess of demand (central banks mainly).

The trend is the path of least resistance though?

For a time, yes. You’d be a fool not to buy in that market. There is seemingly a magnet at the top of the screen.

However, this kind of sustained move cannot last forever. Supply and demand mechanics simply will not allow it. If demand has dried up, when supply (read: selling) finally comes into the market, there can be consequences (see: fat tails and skewness). Perhaps the best micro example is what we’ve seen over the last few weeks in the S&P500:

Trend traders: does this mean the riskier trade is trend trading to the upside or the reversal trade to the downside? The slow grind or the fast unwind?

Genuine question.

We have seen this time and time again. The vacuum below the people trend trading sucks them in, shattering days and weeks of gains in a fraction of the time. Although not quite as sustained a rally, let’s look at bitcoin:

The rapid unwind of the prevailing trend – it happens time and time again.

Wrapping up

Hopefully this article has inspired you to think more closely about forex trend trading. I hope I’ve helped to add some structural definition to trends and trendlines, as well as helping people to think more critically about the trend being a friend to you.

Don’t forget that the path of least resistance is only the path of least resistance for a time. Unwinds of long-term trends can be dangerous if you’re a sitting duck.

I just want to say a massive thanks to David for allowing me to contribute to his site – don’t forget to head over to TradingProbability.com for more from me!

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$AUDJPY: Can an FX pair signify recession?

I wrote this last June:

Source

AUDJPY: Are We Heading For An Extended Period Of Risk Off Behavior?

Jun. 15, 2017 3:45 PM

Summary

• AUDJPY, if it hits the target I have outlined, signifies that we would likely be in recession.

• Japanese yields steepening putting downside pressure on the pair in the long run.

• China slowing down affects the Aussie hugely.

I use AUDJPY heavily to assess risk sentiment, since AUD is very sensitive to economic conditions surrounding production (more demand for iron ore, copper, etc., means higher GDP, construction indicators, overall happiness) while yen is bid during periods of uncertainty. I have been watching and waiting to see what price does around the ¥80-86 mark.

For me, the future looks quite bleak for the pair.

Take a look at the monthly chart below.

As I said in previous articles, I only consider head and shoulders patterns significant on the weekly and monthly – and looking at the technical context of the pair, this head and shoulders is hugely significant as it provides a target to past the price we have seen during recessionary periods.

Firstly, note the top blue rectangle. Price has tested and retested the financial crisis high and has fallen off pretty harshly. This supply has been consumed, and for me, this indicates that the upside of the overall structure is exhausted. From my experience, the probability of the support structure breaking and heading lower is very high.

Secondly, let’s consider this support structure (middle blue zone) at approximately ¥75.

We’ll look at this on the below candlestick chart.

The blue zone has been touched 5 times now with no price breakthrough.

The 2010 low of the range ¥71.91) is still very much intact. What is vital to understand here is that longer term traders are likely to still have stops under this support level.

The market is going to want to target these if we start to probe around ¥72-75. If the conditions would allow, then we could see a slip to ¥68-¥69 and an upside retest of that ¥70 level.

Now, speaking of conditions, Japan’s monetary policy has been relatively unwavering – there has been stability from the BoJ and in terms of being a risk off currency, this is hugely attractive to traders looking for safety or a long term position trade (the only problem with shorting this is that carry will be paid when holding a position overnight).

One aspect that you can add to being bearish AUDJPY is that the Japanese 10YY is pushing to above 0% again.

Chart from Bloomberg

The BoJ are also looking to steepen the long end of the yield curve in order to satisfy Japanese financial institutions.

It is also mentioned that the Japanese may pursue ‘stealth tapering’ so as not to affect the financial markets akin to the US in 2013.

This can provide certain confidence to traders being long yen vs. commodity backed currencies such as the Aussie.

Consider also the Chinese situation.

Below is Chinese GDP.

Chart from Trading Economics

Remember previously I said that the Aussie is heavily affected by productive demand? China is a huge importer of Aussie copper, gold and iron ore.

China is Australia’s best customer with $45bn being exported there annually. China is currently experiencing a slowdown and I do not believe the full effects are yet apparent, not just in the Aussie, but globally (Chinese credit bubble in the shadow banking sector has been named one of the biggest tail risks to the financial system).

If the Chinese slowdown proliferates, then I’d expect certain effects on the Aussie long term.

Note the first chart again. I think it’s important to note what occurs to AUDJPY during downturns.

I have noted 1 (early 90s recession), 2 (Asian crisis – yen bid in risk off environment) and 3 (financial crisis of 2008 – again, yen bid in risk off climate).

The head and shoulders target measure of taking the length of the neckline to head, and mirroring that from the neckline to the downside identifies that ¥50 is a potential target if the support at ¥70 breaks.

I’d be almost certain to argue that we would be in a recession if this were to occur if we examine history, and history, in the end, does repeat itself especially in the financial markets.

Image result for its happening gif

In FX, simplicity is best… #fx #btc #audjpy

K I S S

Keep It Simple Stupid

Probably what you hear about everything.

In trading, it’s genuinely hard to keep things simple.

First, you pick up bad habits.

Next, you try to create a fantastically amazingly filtered strategy with loads of different variables, because you’ve been told you should be able to measure your hypothesis, and science normally says to filter until you get a valid conclusion, right?

After that, you become frustrated and feel pain.

Emotions get the better of you and you lose your head.

You lose money…

Then you repeat the process when you’ve calmed down.

It’s a vicious circle.

The issue with many comes down to the lack of understanding of price and the interpretation of it, which transfers into the understanding of risk.

Slight tangent re: risk. I saw a tweet describing spotting valid risk parameters as being an executable entry with ‘positively asymmetric’ risk:reward.

I’d never heard it be described with that phrase but I like it.

Technical analysis only works when you can interpret price.

The best FX traders are able to understand that TA and FA alone are limiting in their nature.

There’s a reason why interbank dealers make money – they can see the market… and well, they are the market.

We have to interpret price as we see it on our trading platforms to have a best guess as to what these guys are doing (well that’s what I do anyway).

One way recently that I have further simplified my trading is to just look at Heikin Ashi candles (and I mentioned this in my ‘What I have learnt after 7 years of trading‘ article the other day).

This has made my life easy.

Previously, I’d have to determine where the valid zone is that I’d expect a bounce from and then place up to 10 orders across the whole zone.

Heikin Ashi has changed that… and I can’t believe that it’s taken 7 years to find this out.

This is how simple it’s made my strategy…

I ask myself, ‘where was the last supply before it broke the low? Where is the untested demand that broke a prior high?’

Then I place my orders.

Below is AUDJPY and I mentioned I was selling it here.

That’s how simple it is, or at least how simple I personally find it.

There are other nuances as to whether I want to take it or not (I’m not going to say them all), but that’s the barebones – and Heikin Ashi has made where I want to do business so obvious it’s scary.

Arguably, it’s irrelevant as to what your filter is, but I’d say find something that makes it as obvious as possible. I have found it after seven years… seven years of thinking a chart display was a broker’s trick…

As I said, you learn something new everyday, so thanks @ForexCobain

I am adding to my short AUDJPY position

I’ve been short AUDJPY for a fair while now since 86.80.

This was based on deteriorating Chinese conditions, which affect demand for Aussie commodities such as iron and copper, and the evident risk off situation we faced through January and February, and arguably are still facing.

For this trade I’m just looking at taking some cash and covering the rest of my position that I have running – this is pretty high probability in my view, so I’m confident about changing my stop loss criteria and upping risk to 3%.

Let’s see how this plays out.

Cryptos vs Small Cap Equities: the same, but different

I’ve asked myself two things recently.

1) Why the hell aren’t cryptos bullish again?

And

2) Why is the interest in cryptos when micro cap and small cap equities have been about for years?

Before I go further, I just want to put a disclaimer: I believe that cryptocurrencies and blockchain are going to be vitally important over the coming decades as we moved towards an even more digitised form of information and money transfer.

However, we have to overcome the primitive nature of the industry first – I believe that investors make their own luck through correct due diligence and own research, however, many of the crypto firms are just downright dodgy.

Notwithstanding Bitconnect, because that was just plain stupid and so easy to see that it was a Ponzi scheme, we’ve had a fair few ICOs popping up that have been fraudulent.

You tend to not have any fraudulent IPOs or equities listings where your money will be in effect, stolen. You might make a crap investment decision, but the company balance sheet, business plan, and overall health is available for all to see.

But this comes down to regulation – something that I am not sure that I or anyone wants.

The reason being is that, by doing your own research, you should come to a valid conclusion as to the business and investment risks. I don’t necessarily want a government department telling me what is good for me – if you’re stupid enough, for example, to join Bitconnect, then you deserve to lose your money (if you live in a country with adequate investment education).

For what reason would an investor choose to buy Dogecoin as an example? Are there any fundamentals behind it? Well, no, apart from ‘moon!’. On which planet is that a valid investment case? If you make money then fantastic, but someone else is always losing in this case, since there is no value being added.

And it’s the same for many others.

People seemingly go headfirst into a nice sounding white paper, where, if one were to approach a seed investor for regular backing, you’d get maybe 0.1% the total capital at that stage due to there being no actual product and the angel/VC not wanting the undue risks.

The AIM market for example can act like a mini crypto market, just with possibly lesser gains on average – but that’s simply due to the fact that the market isn’t on major steroids.

You can put forward the idea that there have been many crypto millionaires made, but they are in a small minority compared to the rest (and the amount of losers probably outnumber the winners, the losers just don’t tell you about it) – there are similarly many AIM investors who have made a lot of money through simply buying and holding a select few good companies, or even day trading (except with no leverage).

I just find it odd that a huge bull market in AIM and small/microcaps to the same extent as crypto hadn’t really occurred, but you could say that it’s really due to the differences in the assets… but I mean, buying ultra low on any asset and making 70-100% pretty quickly (as occurs on AIM relatively frequently) is nothing to be unhappy about… unless you compare it to crypto.

This I’d argue, comes down to the demographics of those involved in the two markets.

I reckon we’re going to see larger gains over the next year or two in cryptos. When Fintechs start pushing for them to become more mainstream and the payments use cases are made even more viable, this is when regulators will get involved though.

But the good aspect is the nature of the beast… it’s pretty hard to regulate post ICO stage, the same as fiat currency markets, which are OTC and largely unregulated, and for good reason too.

I am totally here for what the developments in blockchain and crypto tech can bring, but providing credibility through weeding out the fraudulent ICOs will benefit this 10-fold in my view, and this will be a huge contention over the next 2-5 years (and probably a lot of money involved if a private solution could be found for weeding out the crap with total impartiality – thinking caps on).

How to stop procrastinating with one phrase.

Yesterday I shared what I’ve learnt over the last 7 years of trading.

There’s honestly so much more, but I’m not here to do a biography, partly because Jaegermeister would have caused periods of severe amnesia – it would be rather disjointed.

There was one element that I spoke about yesterday that I’ve been trying to employ for a few years now, with some success, but abject failure in other areas, purely because of willpower & poor time management, but I think I will get there in the end.

‘Practice choosing discomfort.’

I think I mentioned ‘front loading pain’ yesterday in the piece I wrote.

That’s it.

The brain works by finding the most ‘comfortable’ route to completing tasks.

There’s been so many times where I’ve done 2/3 of the easier tasks on a to-do list, felt accomplished, then thought that because I had completed those then the bigger task needn’t be done…

Then the next day comes…

And you repeat…

Until your deadline hits and you’re in a worried and rushed mess.

Do the hard tasks first.

In trading for example, many don’t write down their thoughts on the market at the starts of the week, the key levels etc. It’s almost like pre-planning is ancillary and they can’t be bothered.

Arguably that’s the most important part because when the time comes to deal, you’re prepared and do not second guess yourself.

The feeling you get when you frontload pain is the anticipation of going into a cold shower; so the best way to get used to the feeling is to have a cold shower for a month in the mornings.

Then apply the same feelings from that to everyday tasks.

It really does work.

7 years of trading: what have I learnt?

Today I learnt two things.

Mixing sweet potato and normal potato is one of the greatest things ever.

And secondly, Heikin Ashi candles are almost a cheat code for how I trade one of my strategies.

I’d never thought to really change my chart configuration from standard candlesticks before.

The furthest I’ve ventured is to use a line chart for simple, unbiased highs and lows.

But Heikin Ashi has given me a totally different perspective that I’m obviously going to have to test with over the next few weeks, but instantly makes sense as to why it would work with my strategy.

But this is just one example of what I have learnt after 7 years (the first two were just pissing about in all reality though, thinking I’d cracked it but being a million miles away multiple times).

You genuinely learn something new everyday when trading…

You know that saying ‘in the long run we’re all dead’?

I want to change it to ‘in the long run we’re all dead comfortable’.

Looking back, I’ve noticed that any short term discomfort has been lessened each time, the longer that I have traded.

I’ve learnt to embrace the discomfort of a loss or taking a position because I understand that the short run is entirely irrelevant to conducive trading.

What’s more important is that this has probably translated into life.

Planning for a few months and years at a time has become enjoyable, and even though there might be hiccups along the way, it smooths out when you have one eye on 6 months, 1 year, 3 years etc.

You learn to adapt; I don’t think I would have developed this resilience without facing millions of other people daily looking to tear me a new one with the click of a few buttons and a horizontal line drawn across their screens.

More practically, trading makes you aware of risk – it’s everywhere and in everything you do. I always think back to my favourite paper ‘Prospect Theory‘ when making a decision based on the future and remember that I’m most probably going to be irrational and so I keep that in mind.

The reason I never sports bet is because the odds aren’t in my favour, firstly because the bookies are just as crooked as market making retail firms, but secondly because I don’t have an edge.

By participating in sports betting, in the long run I won’t make anything. So what’s the point? Sometimes not trying something if you know you’re crap can save you time and energy – especially if you focus on the things you are good at instead.

Having studied economics at university, I can tell you one thing.

90% of it is absolute rubbish and doesn’t apply whatsoever to the real world, how markets move or how people actually act, whether rationally or irrationally.

Econometrics was useful – but having to look at market dynamics everyday and update my fundamental view every few weeks is what taught me real economics.

For example, you note that some fundamental activities bear more weight sometimes than others – then others this will be flipped. See the US Dollar currently weakening even with the base rate increasing.

My economics professors would have told me that the dollar should rally…

I don’t think I’ll be doing this forever, but I am so glad I did because trading is one of the hardest things you can do and it’ll teach you so much about yourself – more than the majority of other ‘jobs’ (or degenerate capitalist addictions – however you want to frame it).

I’d actually recommend everyone to try it just to see how hard it is, and if you want to, I’m more than willing to help you begin, but prepare to be humbled time and time again.

‘Volume in FX is redundant because it’s decentralised.’ Bollocks.

I hear this time and time again.

‘Why would you be analysing volume? It doesn’t matter in FX.’

This is just completely wrong for most cases.

First let’s get some things out of the way – trades volume and tick volume (which we will look at) are two slightly different things.

Traded volume shows actual order size in any given price spread period.

Tick volume shows the amount of different price movements in a given price spread – or how many times price moves up or down.

It’s been noted many times that FX futures traders have been at a disadvantage to spot traders – one is exchange based and you face centralised volumes and the other as explained above isn’t, its over the counter.

When looking over an hourly time-period, with data comparisons of traded volume in futures markets and tick volume from EBS inputted, you can input variables into a Pearson product moment equation to solve R and find a correlation between datasets.

It was found that (on an hourly basis), USDJPY’s tick volume vs traded correlation volume is 0.918, EURUSD 0.936, GBPUSD 0.979 and EURCHF 0.94.

These correlations are pretty high when you consider that for years, people have said that you can’t derive valid conclusions as to volume on the OTC market!

You do have to assume a few things though – you’re not trading via a market maker, and that the correlation can change.

But in the end, I see absolutely no reason as to why you can’t use volume when trading FX, and actually, I think it’s under-utilised.