Technical Analysis Fallacy

Hello Green_David,

Allow me to recommend you a book:
"The way of the Dollar", John Percival.
When reading it you will understand because it is not advisable to trade
on the expectations of higher/lower interest rate.

An extract of the book:

You will have spotted that when interest rates are leading a currency,
the key to their effect on the currency lies in the way rate changes pan out in
relation to expectations. This does give us something to go on, because we
can often gauge expectations. And if we work on the rule of thumb that
expectations will be confounded, we shall be right much more often than
wrong. If you spot a time when everyone is expecting US interest rates to
fall, for example, buy the dollar, and you’ll make out OK. A few people
did, all the way from 1980 to 1985- when US rates did indeed fall.
So the fortunate truth is: we don’t even need to forecast interest rates.
All we have to do is monitor crowd expectations (in order to go contrary,
on occasions ). Interest rates spend their time fluctuating, and much of
the time they are confounding existing expectations. People expect rates
to fall and they don’t: they expect them to stay steady and they move
down. Rates shift, and people think they will revert to earlier levels. For
these reasons or otherwise, the fact is that when interest rates do lead
currencies, they usually do so with a long lead time. The currency movement
tends to lag by months, often 6 months or more (see chart opposite).
Once again, what we are looking for is the set-up conditions* for a
movement in a currency. The “key” lies in the background, not in the
foreground where everyone is looking. Here are some rules which seem
to govern the relationship between interest rate shifts and currency
movements.

1) Interest rate shifts prompted by domestic pressures (an over-heating
economy, for example) tend to lead currency movements. The lead time is
measured in months rather than days (e.g. the rise in the DM and SF in late
1989, and the dollar in 1981-5).
2) Interest rate shifts prompted by international (and currency) pressures
tend to follow currency movements and go in the opposite direction ( e.g.
the Yen in 1989, and the pound in 1988-9).
3) Following rule 2), a currency will tend to turn round and follow the
lead of interest rates up: a) if/when they have risen around 4 points and
especially, b) when the currency is perceived to have stabilised over several
months (e.g. sterling in Spring 1985, and in 1990).
4) In this event, interest rates will peak when the currency troughs; and
falling interest rates will coincide with a rising currency. Why? Because by
this time everyone is expecting interest rates to fall tomorrow and they
stay up longer than expected -i.e. rate cuts tend to lag expectations in these
circumstances (e.g. Pound, Can $ and Aus $ in 1990-91). In other words,
interest rates are higher than expected and this supports the currency.
5) When currencies are led by interest rates, their movement is directly
related to the unexpectedness of interest rate levels, rather than to their
rate of change (e.g. $ in 1983-4, pound and SF in 1990).
Rule 4) is an exception to rule 1) and there are others. For example
falling interest yields call for rising bond prices. The result, in the case of
the major investment currencies, can be a tug-of-war, when falling interest
rates might discourage international investors but rising bond prices attract
them -as they did in the case of the dollar in summer 1984 to spring
1985.Finally rules) is a cardinal rule. It is often the acid test of whether any
given interest rate will lead a currency: it only does so when unexpected
or unseen. When observers are ignoring an important shift in interest rates
for any reason -because they expected it to be short-lived or because they
are preoccupied with other things -you can bet it will only be a matter of
time before the currency is led inexorably in the direction of the interest
rate shift. What matters, as I say, is the background, not the foreground -
because the foreground is where everyone is looking. What matters in
financial markets -and in life? -is not what you see straight ahead but
what you glimpse out of the corner of your eye.........

By the way, I enjoy to read this thread, but it would be more understandable
if the people would not use so many metaphors and poetic images.
It is better to use trading language instead of so many
"army", "armament", "attack", "defense", and so on...

Rgs,

Textor

Hi all,

Other than those highlighted by Fti in his interpretation of AOW Chapter II, I personally find the following important as well:

2.01.01
" Knowing when to fight and when not to fight;
There are paths that he must not travel.
There are armies, which he should not attack.
There are fortified cities, which he should not besiege.
There are territories the he should not contest."

Never trade against the trend, or in volatile conditions when Market direction is unclear. When Market is trending strongly, never goes against it (ironically, many traders always commit this mistake.)


"Water shapes its course according to the nature of the ground
over which it flows;
the soldier works out his victory in relation to the foe whom he is facing.

Therefore, just as water retains no constant shape, so in warfare there are no constant conditions.

There are no constant conditions in the market and its always changing. There are no holy grail methods or systems - one size fits all method. Such method may only be short-lived. Therefore, learn to dance and go with the flow.

textor,

The reason there are so many metaphors and poetic images is because we are discussing the Art of War and its methodology. It is quite interesting how there are so many interesting tactics that can and should be applied to trading as if it a battle you are preparing to go into. I truly believe that a trader must have the bare essentials of technical analysis under his/her belt but the psychology of trading is something that never gets the attention it deserves. The methods and tactics discussed via the Art of War is an incredible mechanical preparation to ones trading, but also a psychological preparation that ones needs to have when entering into a trade. The metaphors towards war and attack have a purpose. I am not sure if you have read the thread, but would suggest it as a great read. Please join us if you like and join in the conversation. I am sure as time progresses away from the AOW "lessons", there will be much more common talk in the language of trading, but for now, I for one am thoroughly taking this all in with enjoyment, plus my trading has improved immensely.

Cheers,
NP

from what i can gather so far.

fti has stated that exposure can never be more than 10%.

if i were to plan it in such a way, where i could martingle up to 3x book value with a max exposure of 10%, i would need to...

1. Determine a level where I have to really concede that i am wrong abt the market. This is where my final battle is (or so called fight to the end) and where my 10% loss should be consumed. So i can assume that my bail out zone will be extremely HUGE(2000-3000pips), since i trade the daily and 4hr bars.

2. Divide my trades to risk 2.5%, 2.5%, 5% (using 1,1,2 model) to achieve a maximum exposure of 10%, while the ideal would be adding when scaling up, i can't negate the fact that i will need to scale down until a point where i knew that the battle is done dead.

3. Mark rally points, these rally points are the areas where i can use to either increase my positions of further push my forces forward to further kill the enemy. As written in point 2, i will be faced with 2 situation;

1. First is a situation where i have to consider putting up more forces to fight the strong wave of enemy rush
2. Second is to put up more forces to quickly finish off the weak enemy in a slew.

4. Objective, i have not decided what my victory call, is but i have a suspicion that if i am faced with the second option in point 3, my trade would be quickly done and dusted while the first scenario will require further battle management and manouvre-ing. Noting that i have only 3 legions(martingles) to risk.

will further add if i have more idea.

can you guys give durther inputs if my insights are correct. If there are faults please help correct my naivety.

Just on this point for the moment, that's going in too heavy I think. You have to look at your account/book as your entire army, you wouldn't send in 3 legions too quickly, you would be more likely to send in a recon squad to test the position then as the battle unfolds you send in troops for defense/attack as required.
Whether you are attacking or defending you need to be on your toes, take ground where you can (book profits and don't leave money on the table) in both situations, size your unit amounts as the PA/terrain allows.

When taking profits it doesn't mean closing out your position, leave the smaller units in while booking the larger ones, if PA allows, leave some of the larger ones perhaps but it depends on the terrain. It's a bit like scalping only you allways have a position. Organise and deploy your soldiers on the field to win the small battles, then go on to win the war.

The skew/W% tables are just a guide, only use them once you get a 'feel' or you are dancing well with the market. Until you get into the market rhythm, stay small and keep on your guard.

would it not be better to allow the market to rally. while planning for shorts instead?

@MickD

okay thanks, i'll work something out. but fyi, the 3rd lot(5%) usually meant that i have reached e tipping point and my reason for using the 3rd bullet/legion is to save the trade, since 1 and 2 failed. its sorta going for a breakeven or take the full brunt of a 10% loss (you know the rule where you fight to the end thing lol), why do i suddenly feel that i sounded stupid?

regards

Ok, I think I understand what your saying.
You don't need to put on any specific amount to open the trade (while in boot camp, the smaller the better), the skew is simply a method or formula if you like to calculate what you need to put in to break even when in a rescue situation.

For example, I might want to only risk 1% of my book for a typical trade. This amount is simply to calculate my initial lot size which might be 10% of the 1% say(1 unit = 10% of risk), this leaves me with 9 units to 'fight' with on a normal type of trade and then I can use the table to calc how many units I might need for the first rescue strategy, then the next if necessary.
While I used 1% to calc my ideal/safe trade size, I might need to use more risk to fight my way out, perhaps even 5 to 10% of my book - but no more!

So, if you were willing to risk 10% of your book on a trade you might start the trade with a unit of only .1% of the for one unit (or 10% of 1%), this gives you 10 times as many units to fight with as well as only little risk at the outset.

I hope that make more sense?

cheers.

MickD,

thanks i believe i got your point.
The thing is, while your reccomendation does indeed showed much relevance, i thought to myself, why would i need to save up to 9 losing positions in the market?

May be i could settle for 4x book but anymore, would it not explain that i am simply flushed with ego to accept that i am simply trading with the wrong crowd, 3 wrongs trades in a swing makes does me wrong, right? Not forgetting the stress of the managing of these positions.

What i would prefer to be ideal is proly a smaller total exposure in %, unless i believe that the market is deeemed to be going lower/higher according to the trend.

your thoughts sir?

Ahhh, you are seeing it from a different angle than I am, I only have one 'position' in the market, either long or short. It's the position size that flutuates as would the amount of soldiers you put into battle at any given time.

Thank you Northpro for your answer.
I will read the book.

Textor

mickD,

hahaha it does seems like it.
What i would mean from it is this

If i may, i would like to use Green David's chart as an example.

The size of my battlefield will not be further than the white line. Till then i will allow myself the flexibility to enter at any price where PA dictates a short signal.

By the time price crosses the white line, it would simply mean that i have lost the battle and will retreat my positions.

Hello fti and all.

What a crazy and eventful day today it was. the fed might of saved (or ruin) the day today in stocks it seems(the 1st two hours or so, so far anyways) for many ppl. :-)

fti,
enjoying the thread. I agree with what you say about many ppl here understands the general concepts of the 1st 2 chapters, but are having problems piecing it all together. Is there any chance that u can describe a running battle example here to guide us? I think it might be clearer with an example. And love to hear your thoughts in your mind (what goes through your mind or what are u saying to yourself) as you commence the battle on the charts itself or other data, such as news announcement, etc. And how you plan for a battle before hand (any routines u perform?)? [apologies, fti, if I am asking too much or the wrong questions. I'm just fascinated and interested in what a brilliant trader thinks in the heat of a battle or in "trading war". ]

Thank you.
bl

Thanks fti,

I will implement and improve my dancing and play with the skew...as a matter of fact I am doing it now..

Cheers,
NP

Hi ALL,

A Little OT.
But did anyone make a killing on the key reversal run against the USD?
It showed on all 3 kingdoms (sorry , that I haven't covered that yet.)
Was a good run, wasn't it . I think this may just be the begining. So watch your sizes. Its gonna get volatile, very volatile. Overexposure is now a dirty word. At least for the next couple of quarters.
Remember when I said that the crosses volatility was going off charts.
Those were the tell tale signs. For financial prudence , watch your size and be very nimble.
75 basis points on non scheduled announcement. Total clowns.
For any responsible manager to spook the market, like they did.
Just displays their true skills as managers. None.
I cannot remember when they have ever done this.
Reminds me of desperate traders cutting loss in panic. I think they may have done exactly that, and displayed their nakeness to the world.
Although, I think they were right in protecting the bubble from bursting, in their initial initiatives, I think this new guards have lost it. Surely a fuuny way of piercing a pin on to the bubble. Wonder what spooked them. Beware of upcoming economic figure releases. For now fear is the driver.

The damage.
1. They just screwed all the other CBs that came to their aid, in the defense of the $$ , going down the drain, just a couple weeks ago. Where friendly ( vested interest) parties used foreign reserves to help them. Sure don't think they have much friends left , after this. Surely a strategy to get all to pay the bill for the dinner that they enjoyed. A very connish strategy.

2. And to screw all the savings of the thrifty savers, to fund the exuberance of the consuming fools. Not a clever move, for them to try to devalue savings, this way. To bail out the bubble, already there is a need to spread the debt to th future unborns , and now wiping out the value, of the hard saved past $$ value?

3. Watch out for the flight to value, ie precious metals, and watch out for crazyness when black gold tries to recover from their lost value. This must get......And watch out for the other gaint economies. The last time I remembered that something like this happen, it was a call to arms.

Prudent traders should stay on the short charts, there seems no long term until the fat lady sings. Riding this roller coaster is gonna have many of us biting nails. And try not to listen to liars that will come out to calm markets down. They probably hoping for a lull to offload their holdings. So watch them , any giant institution or analyst doing this may have books that could be dead in the waters already.

For me , NOW the bubble must surely burst. And don't be foolish enough to catch falling knife. Flight to store of value is paramount for now. Could anyone recommend retail FX brokers who accept depos in other currencies. (not USD or the EUR.)

What foolish? would shoot their own foot??

regards

PS: for trader who just beging to learn rescue, you must stay the strategy in the light of the developments. There must be no rescue of badly timed positions, as there will be no badly timed positions, in the wild volatile flux. If wrong , turn on wind,and be nimble, do not overstay large positions. There will be enough range to recover by turning in high volatility. This is abnormal markets, melt downs are likely, including systemic failures of market structures. The terrain has changed. The nimble survives, some elephants will fall most will be in pain.

The best strategy for this type of volatility markets is to trade breaks and run away with the profits quickly. Be opportunist don't be hero nor sitting duck. hit & run!

Also watch if any one follows in the damage control measures similar to that implimented by citi group.

fti,
I appreciate seeing your steps as they actually help me. As I compare my steps in a given situation they are similar which helps give this new guy a little more reassurance that I'm going in the right direction. Of coarse my lot size is minimal till I develop the ability to rescue on a regular basis.
Thanks again.

Thanks for your insights on the current situation Fti, I always learn something new from them.
I think I'll sit this one out for a while as I can not nurse my trades at present and I can see that we need to be on our toes at all times...scary stuff indeed!

Thanks for your insight fti. After the action of the fed today, I also thought it demonstrated a desperate position. I would like to see the DOW continue going up so I can load shorts as I doubt it will exceed the high.

Hi fti,

My equity jumped 43% in one minute. I think this wil never happen again. The luckiest move I have ever made in my life!!

14875912 2008.01.22 13:19 buy 1.28 eurusd 1.4497 0.0000 0.0000 2008.01.22 13:20 1.4571 0.00 0.00 0.00 947.20

Look forward to hearing about the 3 kingdoms. Good trading to all of us.

Fti, could you please explain, why it was so strong move down on Euro before this stupid rate cut, and how it was seen from 3 kingdoms. And how this could be explained from the AoW aspects.
Regards
Alex

alexfot,

There you have it. The answers to your question.
In one word orchestrated.
The question is why?
Would proping up an over priced equity market solve the depreciating USD overhang?
Or Is the action used as opportunity to the DEVALUATION of the USD in a free float environment?

"Finally, David Wyss, S&P's Chief Economist, told me on Jan. 21 that a joint rate cut, or infusion of liquidity, by the U.S. Federal Reserve and the central banks of Europe and England would likely occur and offer support to the equity markets. At 8:20 am on Jan. 22, the Fed cut the Fed funds rate target by 75 basis points to 3.50% in an emergency move. Will that be enough to stem further losses? We still look for a decline in equity prices on Tuesday, and believe the markets will tell us when the worst is over, rather than the other way around.

Stovall is chief investment strategist for Standard & Poor's Equity Research Services"

http://www.businessweek.com/investor...122_626736.htm

my best guess, would be that tier 1, was in the know. And the sweep was deadly timed. Imagine the dead sitting ducks count.

regards