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Finally also finished Soros’ “The Alchemy of Finance” today.
At the beginning it was a difficult read, but it started to flow later on.
George has a pretty philosophical view of the market. He actually studied philosophy and his mentor even was an Austrian citizen named Karl Popper.
Having lived through the worst of times in European history in Hungary as a Jew I understand his commitment for open societies. Even though there seems to be a view of him on South African issues that doesn’t really comply with his attitude…
Part of the book is a Trading Journal of an experiment he did in the 80s. His approach is pretty much all fundamental. It seems he has the talent of interpreting happenings in the world and in economy in a way to anticipate certain movements they produce in the markets and profit from them.
I think it’s based on his “Theory of Reflexivity”, but understanding his theory is still way over my head.
The funny thing is, he even admits that he always wanted to be a big thinker like for example Einstein, so in finding a name for his theory, he definitely was a bit biased.
Takeaways are him mentioning the imperfection of markets at one point and also admitting of losing money because of more or less dumb mistakes.
Also interesting is, hearing him say, that the mere fact that he wrote down his trades for his experiment in bookform itself influenced his trade-decisions.
On the one hand he thought more meticulous about them, but on the other hand he was reluctant to correct mistakes he made in trades, because that would have meant more writing-work.
Also he says that a foggy mind at times is completely normal.
“Financial success is based on the capability of anticipating the prevailing expectations and not the developments in the real world.”
Also he points out the difference between natural science where questions can always be only answered with right or wrong and social sciences, where this is not the case and it always kinda depends on the way of thinking of the participants and that with a change in situation also the way of thinking changes.
The financial market should be seen in a way of a social science and not a natural science.
Also a very interesting thought is the following:
The pursuit after durability and perfection is only one of the methods we try to escape from death. But that’s a self-deception. Instead of trying to escape the thought of death, we should use it:
Durability and perfection – this is death.
This type of durability and perfection thinking is definitely one of the things that hold me back!
Funnily he mentions Robert Prechter at one point. Seems this guy had such a guru status in the 80s, that he literally could move markets. His Elliot-waves book is the next on my list.
I think my understanding gets a bit better.
We have the primary movement/trend, which is the bull or bear-market.
Then we have the secondary reaction/trend, which I still think is my pink trend.
And then we have the “daily fluctuations”. It seems according to Dow Theorists, they are to a good degree random. One might even could manipulate them (probably not in futures, but in stocks).
What I also thought lately: What if there’s still way more randomness and noise than I think there is?
Meaning what if I try to find an edge, where there is just none?
What I didn’t thought about is, that back in the day, the Dow-Jones-Index wasn’t even tradable, it really was just an average of the largest companies.
So they had the Industrial-Average and also another one, which was the Railroad-Average.
And basically if those two averages confirmed themselves, I think meaning, for example they are both in an uptrend, that was a sign they used to actually trade long in the underlying stocks!
Without those averages, they didn’t even really knew if the market generally was “in a good mood or depressed”.
That also led me back to Livermore’s book. Actually the “holy, miraculous” (at least Richard Smitten makes them appear as such) Pivotal Points are just plain and simple Highs and Lows.
In the “Livermore Secret Market Key” he’s talking about Natural Rallies and Reactions and Secondary Rallies and Reactions, which makes me think that he documented the Primary and Secondary trend of the stocks he was observing there…. Not really that much secretive about that.
I guess to a degree I’m suffering of confirmation bias but on top of that all, reading from the advanced members today here in the FIO Full Time Traders Thread things that point in the same direction,
it makes me think if I’m still digging myself too much into merely random movements, that are just not worth trading.
The larger the time-frame, the larger the volume behind the moves, the more significant the signals.
What if the degree of randomness in the movements increases in a degree that trading the “same distance on the chart” equals the same results or produces even worse results plus on top more commission trading it on a low timeframe than trading it on the large timeframe?!
It’s that “work mentality” that is very counterproductive in the market!
Over a certain period of time, I rather make many trades with many small risks taken, than one big trade with one bigger risk taken, but in the end, the latter would be likely the smarter way to trade.
It appears as losing less if I lose it piece by piece than in one chunk, but maybe that’s a thinking mistake with which I kinda try to compensate my lack of trust in the market.
"Thou hast been faithful over a few things, I will make thee ruler over many things"
Can you help answer these questions from other members on NexusFi?
Digged deeper again. Actually Robert Rhea's book is better understandable.
The nice thing is, in the "Barometer" are the daily closing prices for almost 30 years for the industrials and the railroads, and in Rhea's book he has tables with exact numbers and dates for what he considers a primary swing and a secondary reaction and what a rally and what a decline.
1897-1899
I've just quickly drawn 3 years, but from my perspective it not always makes sense how he classifies the areas on the chart, but anyways I have to come to my own conclusions and use it more as a guideline.
Unfortunately like I see it he only focuses on the primary trend and neglects the secondary trend. The "secondary reaction" is just a pullback of the primary trend.
However, one idea would be to reconstruct the about 30 years I have and try to figure out what "the industrial average and the railroad average confirm" exactly mean. I could try to get also historical closing prices from the underlying stocks of the industrial average and look if I can find somehow an edge combined with the averages and then test that out with current data.
From a fundamental perspective it makes sense that industry and transportation have to confirm. Kinda like a self re-enforcing cycle. The industry produces more goods, the transport has to trasport the raw materials and the goods.
The question is, if that's today still the same or if the huge tech-sector has altered something in that equation?!
Quoted from Robert Rhea's book:
"With the exception of such a situation, however, inferences drawn from the day to day movement are almost certain to be misleading."
"The stock market is not logical in its movements from day to day."
"There is a certain encouragement about the daily fluctuation occasionally."
"Dow theory generally disregards the one-day price movement."
"No one but a floor trader can speculate successfully on the minor rallies and declines which are constantly taking place in every market."
Of course, this book is 90 years old and they had no computers back then, but what if that's the truth? What if there are maybe 3-4 entries a month per uncorrelated market, that can be successfully traded on an intraday basis, because they fit the big picture and the vast majority of moves is just completely random and it's just not possible to get an edge there?!
Hence the reason why Hamilton called his book the Stock-market Barometer.
It's like forecasting the weather. An expert can say that there is a high probability for heavy snowfall on the weekend within a certain area, but he can't tell the exact minute it will start and certainly not exactly how many inches it will snow. And any weather man who claims that, would be seen as a fool and as untrustworthy.
In the old days Daniel Drew and the like had their sneaky tactics to lure the public into the market if they needed liquidity to dump their shares. It would not be that unthinkable that today the tactics of the big boys out there have adjusted to our new tech environment and luring the public into "easy looking short term trading" for providing liquidity for them, sounds kinda reasonable. The brokers also win.
If I were a Billion Dollar Fund, with tons of highly specialized people, whose biggest problem is finding enough sellers in a certain market if they want to build their big positions, I would buy with some type of algo, that grabs all the available shares in the price area I want in but in a pattern that gives the least edge to my counterparty in a way that the price moves the least into my direction.... I don't know if that makes sense.....
Of course you could say "the big boys can't trade short term because of their liquidity issues", but nevertheless, until now I've not came across a trustworthy very short term focused scalper/daytrader.
The people I know who definitely, verifyable make consistent money are trading in a longer time-horizon.
However.... I tend more and more into expanding my trading time-horizon and trying to find my edge that way.
It's not the very perfect best scenario, but in essence it's what I'm looking for, so either it drops below the low, then it's gone, and if it goes above the high, I'll open a position
Bob Prechter’s book actually is more of that type I expected from the Dow Theory books.
And also brings more light into my numerous, nested trends. Exactly what I’m looking for.
What I call primary, secondary trend etc. he calls Nano-Cycle, Micro-Cycle and so on.
The first big takeaway is, that Elliot says that every motive-phase-cycle (I’ve designated that as the progression-arm) consists of 5 waves. All the time! 3 into trend direction and 2 pullbacks.
In my way of thinking the number of waves was infinite, always hoping for as much waves as possible.
Also very interesting is, that he states wave #3 is oftentimes the most extended.
Maybe if I would switch in seeing it as always 5 waves it could help.
Maybe start thinking in terms of waves instead of trends in general would be an option.
It is a bit contradictory: In the beginning I always thought “It can’t possibly go higher”, of course a typical beginner mistake, but nowadays I always want it to go to the moon and beyond, which is also unrealistic.
Generally it is a pretty advanced concept, but it kinda merges into a type of socioeconomic direction I think and the golden ratio plays a role, which makes it to a good degree a concept of viewing the market I can see myself possibly believe in.
For now I have 5 ideas of, I’d say “concepts” of how to go on in the market:
a)
Completley figuring out the Dow-Theory. I assume that it worked in the early 1900’s because I trust Dow and Hamilton and it’s highly unlikely that there was something scammy about them. Question is if it still works today.
b)
Completely figuring out the Elliot-Wave-Principle. Elliot specialized at re-organizing companies, worked later in the U.S. State Department and started his market-studies later in life, when he had to take a step back healthwise. I consider this person trustworthy.
Prechter had Guru-Status at one point, but that was in the 80’s where it was a different
story I would say and it seems, he was very widely known and skimming over his bio, I consider him trustworthy as well. Also on youtube he appears to be pretty decent.
c)
I’ll dig a bit into Point & Figure Charts again. I like them and the big plus is, that they can be easily drawn by oneself, which I think gets through the act of actually drawing it, into a different part of the brain, for a deeper understanding if done often enough.
The downside is, that I feel like trading basic P&F patterns alone appears almost too easy for getting an dependable edge like I have it in mind.
I’ll go through Tom Dorsey’s book and then look what I think, if it makes sense or not.
d)
Going into the Wyckoff-method. Problem here is, that I don’t think there’s a book from
Wyckoff himself out there which would be a good starting point. It seems that there are
just those general market wisdom books from him, but nothing specifically graspable to get a real hold on his specific method.
I guess the book from Ruben Villahermosa is “the” Wyckoff book, but since there’s a part 2 of his book that goes into topics like HFT, footprint and that type of stuff, which can have nothing to do with the trading how Wyckoff did it, I get trust issues if he’s not just using his name for selling his own (questionable?) methods.
e)
Going into agricultural commodities, trying to figure out the seasonal cycles, how spreads work, crop reports etc. and take that mostly from a fundamental perspective. But that’s the least likely, since it would feel like starting from almost zero again.
One interesting point is, there is a man called Richard Russel who seems to be a bridge between the Dow-Theory and the Elliot Waves, which could be interesting to figure out what’s that about.
So maybe one approach can also merge to a degree into the other, but one concept has to be the undisputed basis which is the fundament where hopefully a profitable trading will start to thrive on in the future.
By now one thing is clear: I have to become an expert in one field and know that inside out. Otherwise I’ll never become stable profitable and “be at ease with the market”!
The philosphical question of today is, am I a trader or am I a speculator? What is the difference?
If I think of a trader I think of a huge room with dozens of people and even more computer-screens, hammering out one trade after the next.
A trader for me kinda has the implication of “chopping wood in the market”. Execute, execute, execute.
Being a speculator implies more of forming an opinion on solid, thoughtful facts and then making an educated guess if the market confirms that opinion.
Maybe that type of trader(s) I’m thinking of, are more of executors of large educated guesses that require a lot of time to so to speak “get into and out of the market” and they actually are chopping down the educated guesses wood.
If that is so, I should see myself as a speculator, since my educated guesses aren’t of that size that they have to get “chopped into the market”.
Tried to make the past movements a bit in Elliot's way, but really just in a guessing way.
5min
Yesterday's order got not reached. I saw the small uptrend in the green rectangle in the morning, but thought it not significant enough for a trade. Was a good decision.
For now it seems that there won't come a trade for a longer time.
If I had to guess, I would wait for the red trend to pull back and then go short in the blue trend, but for now the red-trend would still be in a non-trend phase, which prohibits a trade in the blue trend.
I'm curious, but I do think that we crack 4300. Then my pink/secondary trend is officially from a non-trend phase in a downtrend.
Started to go into a pullback today. Ideally it drops to around 50%. Then I'd look for a trade in the red/blue trend. It appears to me that they are the same. Either there's something off in my perspective, or oil is a bit different than the MES here.
Tertiary Trend
Ideally another leg down and then if it goes into an uptrend, I'd by the first breakout
"Thou hast been faithful over a few things, I will make thee ruler over many things"
Finished the book today.
I like the concept and it appears to be learnable, but definitely not an easy thing to do.
The good and bad thing at the same time is, that it only works reliably in indexes. Bad because it's not applicable to oil or other commodities. It likely works in Gold, but Gold is not a market for me. Partially in very liquid stocks, but it's already difficult enough, so I have to know that what I'm looking for is actually reliably there.
The reason why it's also a good thing is, that it speaks for its credibility. The wave patterns develop because of human mass-psychology. Mass psychology on a really large scale. An entire economy type of scale, because it involves practically "everything". A sole stock for example involves only the people and their biases trading in this certain stock which seems to be not diversified enough.
Commodities I think are subject to other laws, probably more influenced through weather and so on, but the Elliot waves develop basically because of the emotions the current zeitgeist produces in the masses like I understand it.
I guess the smallest time frame for reasonable trades is probably the 60min chart. Prechter and Elliot and the book puts more focus on very large cycles like the beginning or end of major bull- or bear-markets.
But definitely there is still a lot of literature on the topic out there, and I think even digging into stuff like cycles of social behavior, which is not a 100% trading related could be of use to "prime the brain for a cyclical way of thinking".
Anyways, next on the list is Thomas Dorsey's Point & Figure Charting book.
Decided that the pullback is enough and I look for an entry in the blue trend, BUT the pullback as in the green rectangle was not clear enough, kinda too tight stacked together, so I decided to not take the trade.
Maybe I'm lucky and it falls lower and I can enter then into a better looking pullback. If not...bad luck.
"Thou hast been faithful over a few things, I will make thee ruler over many things"
I like them. It’s relieving to cut things down to their essence. They represent supply & demand in a way where I not tend to drift apart. Also it’s not possible to interpret things into the chart that aren’t there. They are just straightforward.
Dorsey only uses 3 Box-Reversals and this on daily charts. A few months ago I tried to fool around with 1 Box-Reversals intraday. But I gravitate more and more away from very short time-frames / tight moves.
I start to see the market more in they way of a “mass-psychologic-economy-barometer”, which correctly interpreted and acted upon can make you money, but you have to learn the interpretation-skills. For me I see no real way anymore to get something completely rigid, if A and B then C type of methodology, that could work. There are just too many factors to take into consideration.
He also shows how to construct a relative-strength indicator for the stock you’re watching in a separate P&F chart, which I think is a valuable tool.
The patterns are in essence forms of breakouts, but because of the 3-Box-Reversal, there gets taken out a lot of noise and it basically blurrs the price action, where on a candlestick-chart I would be tempted me to interpret a 1000 things into the markets behavior.
He has some winning-statistics about the patterns, but I overlook these things nowadays.
Interesting is the holding period for a trade, which can go from around 3 months up to almost a year.
Thinking back of my prom-queen-trades, which played out between 1 week and 2 months at max, and how much noise and unnecessary stop-outs there were, this time-span with wider risk appears to be more realistic.
A bit of a concept starts to form in my head of how I could try to get those new discoveries into action, but I still try to be careful to not jump too quickly into the next grail-type of thing, just to walk away disappointed again after a month or so.
If the market is one huge mass-psychological event, how can we participate in that event but not fall into mass-thinking?
I once read in a book about mass-psychology, that it really doesn’t matter of which type of people a mass consists, the mass itself always behaves in the same way.
If you have a group of highly accomplished academics, when they come together as a mass, their behavior would not be the sum of their individual ways of behaving, but exactly the same as a group of more uneducated people or even savage barbarians behave.
Masses in themselves are pretty naive. They tend to believe the bluntest lies and react best to exaggerated claims.
Thinking for oneself, being aware of one’s own thinking and how it influences one’s own behavior seems to be a trait that’s necessary in the market.
Also in real life: Recognizing when in a group of people, to which degree one gets sucked into group thinking and tends to abandon one’s own values for the sake of acceptance of the group, or fear of being rejected by the group.
Red trend now in a downtrend. If it can pullback and gives me something in the blue trend, I'll enter, speculating that also the 4300 low of the secondary/pink trend breaks.
5min
Hopefully goes up a bit further, and then gives me something significant to enter at the short side.
Finished Dorsey's book and also watched a recorded seminar on youtube of his.
Interestingly good old Charles Dow invented the Point & Figure Charts. Before the X and O came, he used to write the numbers up and down how the price fluctuated.
I totally wasn't aware of that, but Dow was a genius back in the day and he basically build the foundation for the entire industry how we know it today.
Next thing is to start to work some things out from the book. I intend to start observing the 30 DIA stocks via P&F charts for the beginning and build P&F Relative-Strength indicators for them.
Also try to dig into the "NYSE Bullish Percent Index". As I get more used to the technique, I also intend to build charts for sector-behaviour.
As well as observing the Industrial- and the Transportation-Average for getting a better feeling for what that they "have to confirm" means.
One thing I start to realize, where my prom-queen experience has helped me,is that the stocks really for the most part move with the overall market. That's just a fact if I like it or not. The other huge factor should be the sector they are in. That's what I'm trying to better understand in the next time.
Pink/secondary trend is now officially in a downtrend.
Red trend currently does a perfect pullback.
5min
If the blue trend turns before it breaks the red trend's high and gives me an entry, that could be the perfect trade I've been waiting for an eternety now.
This would mean all 3 trends are pointing downwards, which should giveme good odds for the trde to work out.
Below that's a traditional 3-Box-Reversal chart.
It takes a lot of noise out of the candlestick-chart. Over $100 one box represents a $2 movement. If in an upwards column, you make an X everytime price reaches the price of a new box. If it goes down, you ignore the downwards movement until it drops at least 3 boxes.
There are a few different buy and sell signals, basically all breakouts which should have different probabilities of working. For example if it got rejected 3 times in the same box, the breakout should work stronger than just rejected twice.
However I think the most valuable thing is, that when I've worked out a routine which type of futures or stocks I'll observe this way, after a few months I expect to get hopefully into the flow of them.
It should work well in commodities, but the problem here are the large risk-level I'd have to take, since that's all on a daily basis.
In stocks it probably only works satisfying when trading the signals in stocks in a strong sector.
P&F
Daily
The P&F represents the time from the red line until today.
"Thou hast been faithful over a few things, I will make thee ruler over many things"
Constructed some more charts and worked out the various patterns on a sheet for a better overview.
Tomorrow on the plan:
- Finish the sheets
- Start to construct 2 or 3 relative strength charts
- Look into NYSE Bullish-Percent Index
- Observe MES closely for a possible short trade
Some of the patterns I'll be looking for
"Thou hast been faithful over a few things, I will make thee ruler over many things"
This can only be positive or negative. Interestingly this switched to positive right at the beginning of 2021 when the trend started after prolonged chopping around period.
Ideally it switched within the last 6-12 months and at max 2 1/2 years before making a trade in the stock.
Then also built the NYSE-Bullish-Percent-Index. This tells me how much % of all NYSE stocks are on a P&F buy-signal currently.
It has its own chart formations that have to be interpreted differently.
Currently we are in a pretty fresh Bear-Confirmed market, which feels right considering also the S&P downtrend that seems to have a chance to continue.
These are two of the additional "Barometer gauges" that should help me judging the market condition and condition of the stock I'm interested in, in relation to the market.
Tomorrow I'll dig into another very important part of the concept, which are the Sector-Percent Indices.
Dorsey constantly reiterates that 75% of the risk in the stock actually lie in the general market and in the sector. And I totally believe that, thinking of my prom-queen experience. Choosing ten random stocks that are in an uptrend is almost as going with 10 times size in one stock. That's not diversified at all.
I've noticed that there were about 3 stocks from all those trades, which were just very strong, consolidated when others dropped, and when they spiked, they had steam behind them.
So maybe I can figure out, through meticulous analysis which stocks have a good chance to be of such nature.
The idea of the "Barometer" takes more and more foot. It's like having different gauges that I have to read and judge properly and then act accordingly.
My theory is, that markets consist out of various nested trends, the blue or 4th trend being the smallest tradeable trend in the MES and for my account size and psychological state also the only tradeable one.
Also is my theory, that masses that are in motion, tend to continue their motion in the current direction and I think the market also follows this principle.
In this particular situation the secondary (pink) trend is pointing downwards, the tertiary (red) trend is pointing downwards and the 4th (blue) trend started to begin its downward movement with my entry.
So I think this transaction has a higher probability to work than not.
How will I manage the trade?
I think it’s maybe possible to crack below 4260, but since I have no idea if it could maybe even accelerate then or if it will bottom out and reverse, I’ll trail my stop down every lower high as always and take whatever the market gives me.
Should the blue trend turn upwards again, significantly and clear recognizeable, I exit as soon as the uptrend establishes.
at entry
Actually the initial signal came in the middle of the night. Luckily it got back up to this point.
Otherwise I would have entered into the next trend-leg down.
Built my Sector-Bullish-%-Indices today.
I have 9 sectors now. Next thing is picking the two most volatile stocks out of every sector, draw charts and Relative-Strength-Indexes for them.
My "Barometer" consists by now out of:
- NYSE Bullish-%-Index
- Sector-Bullish-Percent-Index
- Relative-Strength-Chart
- Entry signal on the actual stock chart
There are two additional other interesting indicators, but I don't want to overload me for the beginning.
I'll also observe if the "degree of confirmation" of the Dow Jones Industrial and Transportation Averges can tell me something.
Healthcare
For example what I've noticed here is, that the index gave the first Bear-Confirmed sell signal in mid July down from the 70% area which is pretty favorable.
AMGN
At the same time Amgen formed a very solid triangle, which ended up breaking down and giving me a sell signal in August.
I don't know if the other indicators would have supported that trade, but that type of scenarios I'll be looking for.
I start to notice more and more difference to the MES. There's basically no trend in between pink and blue. It also tends to make not so many clear pullbacks, but consolidates sideway for a long time and then does its next leg up pretty quick.
"Thou hast been faithful over a few things, I will make thee ruler over many things"
