Up until recently he was trading on one of Dublin’s larger trading floors. However he has now quit that and is trading for himself, from home.
Roger says his trading is largely technical (i.e. based off the charts) but he keeps a close eye on the news too.
Stubborness and Head and Shoulders
Hi folks, RJ here again, still standing in for FT and after yesterday’s torrential rain, it looks like the sun might have come out. You want more good news? It might just be the luckiest day of the year today. Well it is for the Chinese anyway, where the number 8 is considered very charmed, and it is no coincidence that the Olympics open today, the 8th of the 8th, 2008. (at exactly 8.08pm local time!) I wonder how lucky the markets will be for us today? Let’s see if we can make our own fortunes!
Yesterday saw U.S. stocks slammed again, down 224 points. Boom! The financial sector was hurting from AIG’s multi-billion dollar loss, and the news that Citigroup agreed to buy back illiquid securities and pay a fine in order to settle claims they misled investors, and this could ultimately cost them $7 billion. Youch! Citigroup finished 6.2% lower. Jobless claims were disappointing, as were Wal-Mart’s sales, and with crude oil advancing again this led some analysts to question consumers health. Pow! (Ok, there was no need for the Pow, I just have Batman on the brain).
With this kind of choppiness in the markets, it is difficult to pick a direction and have the conviction to stick with some trades. However, with that Dow making such big daily moves, I will be keeping an extra close eye to see if I can spot a trend early today and try and go with it.
I have been long cable, GBPUSD, for a couple of days now, trading in and out from the buy side, and I don’t mind telling you it hasn’t been fun. I got out of this long position for a small 20 pip profit before Trichet spoke. I don’t like carrying short term trades into major economic releases. Lucky I did, as Trichet’s admission that inflation was going to remain higher than hoped for sent the euro into a tailspin, and with that, cable sold off again. Well, stubborn old me bought in again soon after, thinking it was only getting cheaper. A bit too soon as well, paying 1.9450 at 3pm and taking a 50 pip loss on it. Yarrgh!! I did manage to get some good short trades on when the Dow started collapsing, which eased the pain. Slightly.
Well, I have gone and done it again this morning – I went long cable. At 10.40 am this morning, I bought 1.9245. Fingers crossed it will improve my weekend, but part of me wonders why I am fighting the trend…Did any of you manage to get the right way on this currency trade?
In the last couple of blogs, I have been doing a bit of a Technical Analysis section. For today I want to briefly get away from momentum indicators and divergence and all that jazz. I want to discuss support and resistance, trend lines and price patterns. I don’t want to bore those of you who know all about this, but if you think I’m talking about bras and guerilla warfare, Mr. FT give a great introduction on the major technical analysis concepts.
Support and resistance are easy to define on a chart. Anyone can see the market bouncing off a certain price or line time and time again. What a lot of people tend to forget about support and resistance is that when either support or resistance is penetrated by a significant amount, they reverse their roles. Support becomes resistance and vice versa. This is important. Let’s think of the market psychology behind this. (briefly though Roger, it is Friday after all and people are trying to wind their brains down…)
Imagine a market starts to bounce off a support level and move higher. There are only three types of people in this market, those who have bought and are long, those who have sold and are short, and the people who have done nothing. Maybe they never will. (I have an ex-girlfirend who thinks I belong in the last category.)
So the market’s going up. The longs are delighted, although they wish they bought more. The shorts are getting nervous as nobody likes a position going the wrong way. Palms are starting to sweat, heart races a bit, and they are praying for a dip back to that area where they sold originally so they can get out without a loss. The longs are quite happy as everyone likes seeing profit on the screen and some of them start to sell. Why not take the cash, there are some seriously good deals on LCD tv’s these days… Now the other group, the undecided, are standing on the sidelines watching this take place and realise that prices are going up. Some of them are keen to get some of this action, and are commited to buying the next dip.
Now all participants in this market are committed to buying the next dip – greedy longs who have taken profit want in again, the stuck shorts want out and must buy, and some of the undecided have made up their minds – they want to buy as well, at the right price.
You’re still with me? Now at this point two things are significant – the longer a price trades at a certain level like this, the more significant that support or resistance becomes. Also, the more volume that it trades there, the more significant they are as well.
In this example, let’s say that instead of soaring, now prices move lower, below the support are where everyone has been buying it. Everyone who bought it realised they made a mistake. Now they want out. They hope it comes back just a little so they can get out. It was the presence of all those buy orders that created support in the first place, but now instead of buy orders people want to sell! See what’s happened? Support has become resistance! A lot of people tend to forget this when looking at charts, and it can definitely help when trying to figure out the next price objective or the next bounce.
The reason I brought this up was I briefly wanted to mention one of the most common price reversal patterns – the head and shoulders reversal pattern. It will make sense in the context of what I have been talking about in the last couple of blogs. Look at the chart below of euro/sterling.
I want to talk you through this chart.
Starting March 1st, we are beginning an uptrend and prices move higher under strong momentum. Prices rise until March 20th or so and we are now overbought (refer to previous blogs if that needs explaining), where the longs take profit or for whatever reason the market naturally breathes, and the market sells off. March 29th, prices find support and rally again, even stronger this time, making new highs with the high on about 8th April. Notice however, that the momentum of this move is not as high as it was for the first rally, even though prices went higher. Ding-a-ling!!Warning bells!! Markets can’t sustain higher highs with lower momentum, right?
Prices fall again and find support around the 20th April. The final rally, on the right shoulder up to the 26th May is smaller, slower to start (look at the couple of indecisive candletick bars) and on low momentum. No surprises that we fail to make a new high.
Earlier on we touched on the fact that any uptrend that fails to make a new higher high is probably to be questioned. Prices sell off again, and we are thinking we don’t want to be long this market. It has all the makings of a head and shoulders pattern, one of the most common reversal patterns.
The key here is the neckline, a trend line of support until now. Once price breaks that neckline, we aren’t the only ones thinking we don’t want to be long anymore, and the order of the day is sell, sell, sell. Our confirmation is the break of that neckline. If you’re long, get out. If you’re short, stay short. If you’re on the sidelines and it’s Friday like today, I dunno, think about it over a drink after work. Or not. Oh, just short it anyway. You can get a minimum price target by measuring the distance from the head to the neckline, and projecting that downwards from the breaking point downwards as shown.
Right, enough Technical Analysis. I hope that wasn’t too long winded, but getting that out of the way allows me to talk about other continuation patterns and reversal patterns another day. I’ll be briefer next time, I promise.
I managed to buy the FTSE 100 daily this morning a couple of times for quick small profits and it has been rallying nicely in a little trend channel. While writing this, it appears to have broken this channel on the downside, and I have taken a small short position, selling 5480.6 just after 12pm to test what we have discussed about support becoming resistance. I will keep a close eye on this one. I am really just trying to trade in and out for a quick raid.
Right thats it folks, I hope the trading goes well for you all today
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August 8th, 2008 at 1:22 pm
Hey RJ,
A couple of weeks ago Gazza P posted a handy print out and keep traders’ golden rule. I’ve got it pinned up on the wall in front of me. Trading against the trend can be an expensive practice.
I missed the big move in cable but managed to snatch a healthy 64 points by going short at 1.9299 just after 9 this morning then getting stopped out at 1.9235 a couple of hours later.
Reason I mention this one (apart from you asking above) is that it illustrates some of the timescale stuff that the traders have been posting in the last few days. Start with the weekly GBPUSD chart then step in the timescales. It’s pretty consistent that there’s a strong downtrend and by the time you get to the 5 min chart, the trade kinda pops out at you – the countertrend rally from 8.25 failed at 9am with the drop back through 1.9300. The bigger timescale charts show this too, but the 5 minute really lets you pinpoint the timing. Could go to an even shorter timescale but, for me, that’s too much info (and noise).
August 8th, 2008 at 1:59 pm
The 1 minute window is a waste of time and a major distraction. Thats how i have lost most of my fund. There’s much too much going on down there, to the extent where i usually forget why i entered the trade in the first place…duh. I use 10 minute, 1hr and daily windows now and trigger a huge software stopwatch just to remind myself that i have only been in the trade for a few minutes!
August 8th, 2008 at 2:01 pm
Why do you guys call it cable?
August 8th, 2008 at 2:25 pm
Coz in the early days, the only way of communicating the exchange rate between the US & the UK was via the transatlantic cable laid in the mid 1850’s I think.
There are a few other nicknames about that I am aware of, but never having traded FX professionally, I don’t know if these are correct, I’m sure some of our more seasoned operators will put me straight.
Fibre (optic cable) =EUR/USD more recent version!
Loonie=USD/CAD (some say you have to be a idiot to trade it, but I think it is a bird that appears on the $1 canadian coin.
Geppy =GBP/JPY
Gopher=USD/JPY
A recent one fired at me was Chunnel for the EUR/GBP
I’m sure there are others, and some unrepeatable ones too!!
August 8th, 2008 at 2:36 pm
hummm interesting. I was looking for chart breakouts on Cable & Wireless yesterday …i probably shouldn’t be admitting that!
August 8th, 2008 at 4:03 pm
hello all from your very smug carrot chomping correspondent.
I’ve had the best 24 hours of trading ever and have been a bit distracted watching the zeros pile up on my screen…
I’m imagining that anyone who tried to go long GBP/USD has had a pretty unhappy day…
I was very tempted to cut my long Dow when the Fannie results came out but instead I stubbornly added to it…rather pleased with that call. It was gold that did it – gold/oil didn’t spike up when the dow went down and I took that as a signal that the market wasn’t going to completely collapse, and that the dollar would hold up the US market, and thus, so far, it has proved to be.
For some reason I am ‘in the trading zone’…not sure how long it can last…
August 8th, 2008 at 4:07 pm
Nice one FlashRabbit, you should start a blog of daily picks. I cant even pick my nose at the minute. Looks like its gonna be a nice weekend for you then, dont go giving it all back in a hurry…that’s all i can say.
August 8th, 2008 at 4:29 pm
wel, I’ve got a blog, it’s a bit c**p but you’re welcome to read it! (just click the link at the top of this post)
It’s as much for me to keep a record of my mistakes/thinking as anything else. BUT as of 4pm today I am up 220% since I started in February! Not bad for a micro macro hedge fund (see title of blog)…!!! and certainly a better rate of return than average…Certainly not going to do ‘daily picks’ -setting self up for a fall, never mind what the FSA would say…
I’m very conscious that it might all yet go up in smoke…we’re certainly not out of the woods yet, what with russian tanks crossing into Georgia while the rest of the world is distracted by the Olympics. Sneaky eh?
August 9th, 2008 at 1:00 am
Hi there Jolly Roger
been reading your posts this week with interest – just had a mega week – good few quid up and so should take a weekend rest but NO…
before going to pub at 8pm – I thought f*ck it everything’s has gone totally mad!
so went long oil 115 – stop 118
long cable? no stop – go for the rebound
short dow at 11750 (major support)
short the ftse – this market should have been f*cked weeks ago!
gut feel markets can only go one way for so long
but hey… what do I know
cheers
S
August 9th, 2008 at 12:34 pm
Ahoy there! another great blog today. Well RJ looks like your small short on the FTSE worked out well. Im curious – when did you exit the position ? 5410 or earlier in the decent? – and how did you decide your exit point ?
As a newcomer to all of this i’m reading avidly – and have read in so many places how important it is to “go with the trend”, as per your blog above. Does “the trend” have a different meaning intra-day versus longer term – for example – We may all feel the markets are doomed to slide down over the month on bad news/high oil prices etc – but intra-day we may feel the trend is upwards, as per FTSE today (til middayish)?
I too was trading FTSE on 8th aug on same channel as you. I have noticed that by nature I have become a shorter (something to do with the fact that all recent market rallies in FTSE and DOW seem to fall back very quickly and my SIPP mutual funds are down 15%!) I was succesful in selling at the peaks in the FTSE channel you describe – but am musing that by going with the trend I should have been buying on the dips instead?
In terms of strategy. You mentioned yesterday about getting to know the bigger timeframe market picture before zooming to a more detailed level (say 5 min ). So before trading at start of day do you always take a snapshot of the market movement (say 7am-9am) – sketch on some lines to establish a trend and then make some decisions about support/resistance/possible direction?
Cheers
BP
August 9th, 2008 at 1:50 pm
Hi Simon,
Hope last night worked out for ya, admit it, you just wanted a position for the weekend
I have to say I do like your long oil trade. So bloody volatile though you can get stopped out, and be totally right at the same time in the bigger picture. And my heart is telling me that this U.S stockmarket is way overvalued, what with this recession we are enjoying, and Fannie and Freddie posting more horrendous figures, financials in crisis, people defaulting left right and centre on loans, I dunno why the dow lept 300 points. I mean, bonds are also rallying, with german government bonds making new highs again yesterday – this picture isn’t gonna stay like this forever. Why would anyone in their right mind have confidence in this market? I am keeping a close eye on earnings.
I got my fingers crossed for you on the short FTSE trade, I actually have a few on myself for the weekend. Gonna settle into the olympics now for the day, some golf later on, and wonder if this russian/georgian situation is going to get really serious…
Thanks for reading,
RJ
August 11th, 2008 at 2:41 pm
Hey Black Pete,
You know, after all my cable troubles this week, that FTSE trade ended up working out really well for me. It can be difficult to pin point a trade you believe in to publish to a blog, as your decision making process can send you mixed signals after publishing a report, but I am happy to say I stayed short, added to the position when it started to move, using a trailing stop MOST of the way down in that move. To answer your question I got out of half my position at 5425 and the other half at 5420. Actually managed to buy some for a bit on the way up – my FTSE trading yesterday saved my bacon. It is nice to nail one!
I am glad you are enjoying the blog, and yes you are right – it’s all about timeframes. I thing I will discuss this in a future blog, but I suppose you can say that the longer the timeframe (daily as opposed to 5min charts) the more important the trend. Of course it makes sense to go with the trend – you will take a loss when it pops and changes, but hopefully by using technicals, momentum etc., you might be ready for it. Look, trading incurs losses, and I never really minded them – as long as my winners amount to more than the losers. Maybe it sounds basic, but I try and put myself in a position as often as I can where a trade might ‘run’ and go my way. After it’s onside a bit, then I move the stop maybe to the entrance point to protect the position and try and maximise the gain.
As for selling those ‘highs’ in the FTSE channel, what can I say, you did perfectly. Great work! In fact you ended up on the right side of it, because ultimately it broke to the downside. I am glad that my discussion of support becoming resistance was borne out in this case. A lot of people thing technical analysis is a load of old cobblers, but there is real market psychology behind it. Anything that clears out the cobwebs in the brain and gives you a clear idea of a)why you are getting in b)whats the worst case scenario c)what is your ultimate goal, is a great thing.
Finally to answer your last question, yes I always have a few lines on my charts from the previous day. (or month). highs and lows, monthly, weekly highs and lows, significant support and resistance. I check out my stochastics and momentum. Are we overbought, oversold? Are we more likely to go up or down? (thats a tough one!) What are my expectations for this trade?
And a final thought, trading right now is kinda tough. Volatility is not such a bad thing, but these stockmarkets are up and down like a whore’s drawers. Some people will shoot me for saying this, but sometimes in a range bound market, I feel it doesnt matter if you buy it or sell it – you will be in profit at some stage unless you are unlucky enough to buy a high or low. Sometimes it’s not the entrance to the trade that’s important, but how you deal with the trade when you have it on! I will get some grief for that statement, but it has some logic. Half of the work is where you get into the trade. The other half is what you do when you have it on.
Glad you are enjoying the posts. I’m around all next week.